The price of everything and the value of nothing

According to London Economics, a consulting firm, Australia's Group of Eight research universities contributed $66.4 billion to the national economy in a year. Other Australian universities have similar claims. James Cook once claimed to be good for $800 million, while the Regional Universities Network contributes $1.8 billion. Deloitte Access Economics says that for every extra 50,000 university graduates, an additional $1.8 billion of economic activity is generated annually.

Universities offer these so-called economic impact studies as proof that they are engines of economic growth. However, a peek below the surface of these studies uncovers a shaky foundation of assumptions, assertions, and guesses. One problem lies in the use of ready-made statistical models. Consulting firms create or purchase the right to use these models and then sell their services to clients. The models are so general that they can be applied to just about anything. Studies have claimed that the Eiffel Tower contributed €344 billion to the French economy, while the Sydney Opera House supposedly contributed $1.2 billion to the Australian economy over five years.

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When applied to higher education, the models require consultants to make assumptions about the number of jobs universities create, the amount of money students and staff will spend, and the 'multiplier' effect of these expenditures as they make their way around the economy. Including multiplier effects in impact studies is particularly problematic. It assumes governments, students, and investors would not spend their money elsewhere if universities did not exist. Or, if they did spend, there would be no multiplier effect. Some impact studies have used the proportion of the population holding degrees as a multiplicative input. According to the Australian Productivity Commission, "At the extreme, [this] implies that Australia's GDP would be zero if all workers with tertiary qualifications did not have those qualifications."

From a policy viewpoint, the biggest problem with economic impact studies is their failure to consider opportunity costs - the potential benefits that are forgone when choosing one investment over another. Because resources are limited, there are always trade-offs when deciding where to allocate funds. Investing taxpayer funds in a university diverts resources from other investment opportunities that may have a greater effect on the economy. The relative costs and benefits of an investment in higher education versus putting money into a new airport, research laboratory, or another project are not normally considered by most economic impact studies. This is why these studies almost always produce 'positive' findings. After all, spending on anything will produce some economic effect.

Note that economic impact studies are also potentially subject to bias or conflicts of interest. Universities commission consultants to conduct such studies to justify their requests for funding. No university will pay high consulting fees for a report that says they are minor drivers of productivity. In the understated words of the Australian Productivity Commission, economic impact studies "(when paid for by parties with a vested interest) need to be interpreted with caution."

Perhaps the saddest aspect of economic impact studies is their undervaluing of the moral purpose of higher education. Assessing the value of universities by their contribution to the GDP is what philosophers call a "category error." Of course, universities contribute to the economy; so does Shakespeare. Tourists to Stratford-upon-Avon spend millions per year on hotel rooms, meals, and coffee mugs decorated with quotes from Hamlet. Thousands of people are employed printing Shakespeare's plays, selling copies of his sonnets and acting in Shakespearian productions. Should we conclude that Shakespeare is valuable because he helps to sell books, coffee mugs and wine? It has been said before, but Oscar Wilde's words bear repeating: economic analysts seem to know the price of everything and the value of nothing.