Prestigious colleges have limited supply and infinite subsidized demand, just like hospitals; and an ideology of aristocratic appearances that forgives them to simply take the profits and pay it to barons, unlike Elsevier. The money has to be wasted somehow, given that the cost of education/healthcare has to skyrocket somehow, to balance demand with the constrained supply, since nobody is allowed to just pocket all of that money as a profit unless they can appear to spend most of it on good-appearance college/hospital expenses.
The slow forces of entropy, of internal costs rising when there’s no competition to drive you out of business and nobody with the power to fix anything loses their job about the increased costs, are sufficient to the task, in education and healthcare. If you started shrinking the course catalog and expanding the classes again, there would need to be some other way to balance the hugely subsidized demand with the sharply bounded supply. The money has to be wasted somehow.
But first, the supply isn’t as bounded as it appears—college tuitions have been going up in state schools and schools which expanded, and their costs have also risen. And many of those state schools are growing, and are relatively prestigious. Notice that UCLA and UC Berkeley are each top 25, with 30k students each, but out of state tuition is still >$40k. And there is competition both within and between those schools—they could spend the money on research, which the professors want money for, or give the staff raises instead of wasting the money on class sizes. So there is something left to explain—why are they wasting money in this particular way, instead of wasting it on things the people putatively in charge of the schools want?
Note that elite colleges are not revenue or profit maximizers. For the normal laws of economics to apply, a school needs to be either in a competitive field where there is a risk of the school going bankrupt, or there have to be people at the school who are acting as if that is the case. But at elite colleges like Princeton or Harvard, neither of those are the case.
This happens because although there is infinite demand to be a student, the limiting factor is not price. In a normal market, the price would rises until demand equals price. At Princeton or Harvard, this price would probably be something like a million dollars per student-year or something like that. But at elite colleges, there is a different algorithm used to allocate slots: the admissions office. The admissions offices are Harvard and Princeton are not told how much the applicants can afford, breaking the loop. Not only that, they explicitly allocate by looking for applicants who can’t traditionally afford it even at the average price.
You may think that loans explain this, letting anyone pay the highest price and then deal with the consequences later. However, Princeton and Harvard do not ask any of their students to take out loans, instead subsidizing the cost of the lower income students with alumni donations and higher income students. If you are a student whose family working wt minimum wage jobs, you will pay $0 to go, assuming you’re smart enough.
Obviously this means that richer applicants will start competing on non-monetary accomplishments, using their money as leverage, but this is only so effective. Admissions offices are well aware that this happens and take this type of signaling as a negative sign. Some of it still works, but it only works very ineffectively.
Elite colleges have also considered a system where all the slots are allocated randomly to applicants who meet a certain minimum bar. There would be competition to get over the bar, but the bar is already low enough that many many students get over it by spending $0.
Beyond all that, Princeton and Harvard have enough reputation, alumni goodwill, and saved money that they could choose to act essentially however they want and they would still have enough money to operate as normal. Because of that, they do not face any pressure to raise tuition.
Overall, modeling elite nonprofit colleges like this as rational agents in the economic system is fundamentally flawed. When demand is infinite but supply is constrained, and the allocation method is not monetary, the normal rules of economics no longer apply.
Admission is need-blind for all applicants, including international students.
Princeton financial aid is awarded solely based on need; there are no merit scholarships. (If you are good enough to get in, they will ensure that you will be able to afford it)
The full need of every admitted student is met through grants.
The link also has a breakdown of how much aid is provided depending on the student’s gross family income.
In terms of economics, such elite and wealthy institutions are playing a different game—Their endowments are on the orders of tens of Billions of US Dollars, and so they are not trying to make money off their students, but instead trying to admit students that they think will be promising and capable enough to boost the institution’s prestige and network much later down the line. This means that the focus is on the admissions office (instead of the finance office), which you can also guess is subject to no small amount of scrutiny and drama as well.
That’s true at the prestigious four year colleges. But there are hundreds of private four year colleges. Their supply of students is stagnant and beginning to backslide. If you talk to private four year college admissions officers, many are afraid of the coming great contraction in school aged people. Only Texas isn’t having a contraction.
In any case, in John’s model, that coming contraction should result in a decrease in number of specialized courses. We’ll see. Courses might be somewhat sticky though.
Also, you are assuming the money is wasted, no matter what. (Amount wasted relative to those paying being held constant (or the circumstances creating constraints that provide a lower bound) is probably the relevant consideration in this model.)
since nobody is allowed to just pocket allof that money as a profit
Is this because they are non-profits? For-profit enterprises like Apple seem to have no trouble capturing 40% of revenue as profit, so somebody is allowed to. What is the rule?
A major difference with Apple is they aren’t asking any 3rd party to fund loans (e.g. Dept. of Edu. & Colleges) or pay for service (Med insurance), so zero organized pushback on price. And in the case of Apple’s luxury products the absurd price tag and unaffordability to the masses is part of the status symbol they’re selling.
Prestigious colleges have limited supply and infinite subsidized demand, just like hospitals; and an ideology of aristocratic appearances that forgives them to simply take the profits and pay it to barons, unlike Elsevier. The money has to be wasted somehow, given that the cost of education/healthcare has to skyrocket somehow, to balance demand with the constrained supply, since nobody is allowed to just pocket all of that money as a profit unless they can appear to spend most of it on good-appearance college/hospital expenses.
The slow forces of entropy, of internal costs rising when there’s no competition to drive you out of business and nobody with the power to fix anything loses their job about the increased costs, are sufficient to the task, in education and healthcare. If you started shrinking the course catalog and expanding the classes again, there would need to be some other way to balance the hugely subsidized demand with the sharply bounded supply. The money has to be wasted somehow.
Economics is king here.
But first, the supply isn’t as bounded as it appears—college tuitions have been going up in state schools and schools which expanded, and their costs have also risen. And many of those state schools are growing, and are relatively prestigious. Notice that UCLA and UC Berkeley are each top 25, with 30k students each, but out of state tuition is still >$40k. And there is competition both within and between those schools—they could spend the money on research, which the professors want money for, or give the staff raises instead of wasting the money on class sizes. So there is something left to explain—why are they wasting money in this particular way, instead of wasting it on things the people putatively in charge of the schools want?
Note that elite colleges are not revenue or profit maximizers. For the normal laws of economics to apply, a school needs to be either in a competitive field where there is a risk of the school going bankrupt, or there have to be people at the school who are acting as if that is the case. But at elite colleges like Princeton or Harvard, neither of those are the case.
This happens because although there is infinite demand to be a student, the limiting factor is not price. In a normal market, the price would rises until demand equals price. At Princeton or Harvard, this price would probably be something like a million dollars per student-year or something like that. But at elite colleges, there is a different algorithm used to allocate slots: the admissions office. The admissions offices are Harvard and Princeton are not told how much the applicants can afford, breaking the loop. Not only that, they explicitly allocate by looking for applicants who can’t traditionally afford it even at the average price.
You may think that loans explain this, letting anyone pay the highest price and then deal with the consequences later. However, Princeton and Harvard do not ask any of their students to take out loans, instead subsidizing the cost of the lower income students with alumni donations and higher income students. If you are a student whose family working wt minimum wage jobs, you will pay $0 to go, assuming you’re smart enough.
Obviously this means that richer applicants will start competing on non-monetary accomplishments, using their money as leverage, but this is only so effective. Admissions offices are well aware that this happens and take this type of signaling as a negative sign. Some of it still works, but it only works very ineffectively.
Elite colleges have also considered a system where all the slots are allocated randomly to applicants who meet a certain minimum bar. There would be competition to get over the bar, but the bar is already low enough that many many students get over it by spending $0.
Beyond all that, Princeton and Harvard have enough reputation, alumni goodwill, and saved money that they could choose to act essentially however they want and they would still have enough money to operate as normal. Because of that, they do not face any pressure to raise tuition.
Overall, modeling elite nonprofit colleges like this as rational agents in the economic system is fundamentally flawed. When demand is infinite but supply is constrained, and the allocation method is not monetary, the normal rules of economics no longer apply.
I wanted to substantiate and boost this comment with some data from the Princeton’s admissions office article on its aid program :
Admission is need-blind for all applicants, including international students.
Princeton financial aid is awarded solely based on need; there are no merit scholarships. (If you are good enough to get in, they will ensure that you will be able to afford it)
The full need of every admitted student is met through grants.
The link also has a breakdown of how much aid is provided depending on the student’s gross family income.
In terms of economics, such elite and wealthy institutions are playing a different game—Their endowments are on the orders of tens of Billions of US Dollars, and so they are not trying to make money off their students, but instead trying to admit students that they think will be promising and capable enough to boost the institution’s prestige and network much later down the line. This means that the focus is on the admissions office (instead of the finance office), which you can also guess is subject to no small amount of scrutiny and drama as well.
That’s true at the prestigious four year colleges. But there are hundreds of private four year colleges. Their supply of students is stagnant and beginning to backslide. If you talk to private four year college admissions officers, many are afraid of the coming great contraction in school aged people. Only Texas isn’t having a contraction.
In any case, in John’s model, that coming contraction should result in a decrease in number of specialized courses. We’ll see. Courses might be somewhat sticky though.
That tells us the why, but not the how.
Also, you are assuming the money is wasted, no matter what. (Amount wasted relative to those paying being held constant (or the circumstances creating constraints that provide a lower bound) is probably the relevant consideration in this model.)
Is this because they are non-profits? For-profit enterprises like Apple seem to have no trouble capturing 40% of revenue as profit, so somebody is allowed to. What is the rule?
A major difference with Apple is they aren’t asking any 3rd party to fund loans (e.g. Dept. of Edu. & Colleges) or pay for service (Med insurance), so zero organized pushback on price. And in the case of Apple’s luxury products the absurd price tag and unaffordability to the masses is part of the status symbol they’re selling.