In a tulipmania, there are still gardeners who want to plant flowers.  So, too, might be the case with higher education, where a bubble in the subprime sector coexists with genuine demand for something.  That something, however, has not developed in a market environment.
I do observe that education and medical care are the two large sectors in which the private market did not have a strong presence a century ago and are also the two large sectors where market competition does not seem to produce lower prices. And I feel that there must be some connection.
Has there ever been market competition, or has market competition always been tamed by accreditation and licensing? (There's a summer project ... what would a higher education Staggers Act look like?)  There are consequences for writing the wrong policy prescription.
American universities really are the best in the world, and the European model of taxpayer financing of higher education really is going through a massive and inevitable restructuring. This makes figuring out what to do about higher-education cost inflation harder, to my mind, than figuring out what to do about health insurance. There don't seem to be alternative models that sustainably deliver equivalent value at lower cost.
Somewhere, the parallel to railroading breaks down.  In the years before Amtrak, the western and southern carriers that were more successful at ridding themselves of passenger trains fared better than the carriers that continued to serve passengers.  These carriers, however, sought commercial freedom to deliver premium services at prices that were mutually beneficial to carrier and to shipper.  (The old Interstate Commerce Commission had all sorts of powers to obstruct shipper-specific contracts for unit trains or intermodal service.)  There were no bottom-feeding carriers going after the low value traffic the way the proprietary universities are going after unprepared students.  Lexington's Notebook reports an intriguing observation by Berkeley's W. Norton Grubb.
Now, it may be that higher education has become too expensive for some people - working-class/moderate income - and they will not be able to afford it. Many of these potential students now go to community colleges, but they may be squeezed out when regional universities cut back on their slots, and community colleges can't expand to accept more students. But this is a problem of undercapacity, not overcapacity. It may be that fly-by-night privates have over-expanded - the U of Phoenixes of the world - but it would be a good thing to get rid of them. In California ... everyone is worried about how to accommodate all those who want/need higher ed, and I haven't heard any fears of over-capacity. Look at the Pubic Policy Institute of CA - they have been screaming about under-capacity for a long time. So the over-capacity argument in general is absurd, though it might apply to specific niches.
Shorter form: the excess capacity is in access-assessment-remediation-retention, and community colleges and regional universities are in the same business as Harvard or Berkeley and ought to be guided accordingly.  And supply curves slope upward, the pessimisim of Howard Hotson in the London Review of Books notwithstanding.
Wherever a small and strictly limited supply of a highly desirable commodity – such as places at Harvard – is introduced into a genuinely open market, the wealthiest cohort in society will drive its price up to levels only they can afford. This is essentially what has been happening at the upper levels of the US university league since the income gap began to open up in the 1980s. For several decades, tuition fees have been rising at double, triple and even quadruple the rate of cost-of-living inflation, first at the most exclusive universities, and then throughout the private sector, so that there are now more than a hundred private colleges and universities in the US charging students at least $50,000 annually for fees, room and board.
That's Richard Vedder's create-excess demand hypothesis, but where dollars or pounds chase goods, there are opportunities to provide the goods.  The applicant rejected by Harvard or Berkeley or Madison isn't presumptively not good enough for that university; likewise the professor interviewed but not hired by such a place isn't presumptively incapable of competing for the same journal space or grant money.
Oxford and Cambridge have a 600-year head start on their English rivals. Many of the advantages they enjoy are the product of their long histories: their architectural settings, their libraries and archives; their unique systems of tutorial teaching, collegiate organisation and self-government; and the academic prestige accumulated by two dozen generations of scholars, philosophers, scientists, poets and prime ministers. Their competitors cannot produce these things at any price, much less one that undercuts theirs. And because the ‘student experience’ they offer is one that many find uniquely attractive, they could, if freed from the constraints of government legislation, charge as high a price for this experience as the market would bear, without the risk of being undercut by anyone but each other.
Once upon a time Harvard and Yale and Princeton thought of Duke and Chicago and Stanford (the horror: heavy industry money) as the upstarts.  I'd be surprised if the emergence of UCLA (motto: On! Wisconsin) and San Diego didn't prompt some hand-wringing in the Bay Area.  And Urbana is just not secure enough in its prairie for any of the cardinal compass point universities in Illinois to get too good.  But we persevere in spite of those difficulties.

He's on sounder ground arguing about competition in student amenities and big time sports rather than on academics.
To judge from the American experience, comfortable accommodation, a rich programme of social events and state of the art athletic facilities are what most 18-year-olds want when they choose their ‘student experience’; and when student choice becomes the engine for driving up standards, these are the standards that are going to be driven up.
I fear, though, that Mr Hotson is drawing inferences from too small a sample.
What they forget is that the dilapidated state of so many English university buildings is the product, not of a lack of academic competitiveness, but of deliberate government policy these last 20 years. By holding university income firmly down, raising student numbers and prioritising research through the RAE, they have attempted to push up academic performance at the expense of teaching and the maintenance of existing buildings, not to mention the construction of new ones.
Sounds like the misnamed Priorities, Quality and Productivity initiative in Illinois, in which the classroom buildings are crumbling and the few sections downsized departments can offer are oversubscribed.

On the other hand, there is material for a more careful investigation.
The wealthiest private universities at the top of the league table – including the whole of the Ivy League – are concentrated on the northeastern seaboard of the United States, from Massachusetts in the north to North Carolina in the south. If proximity to the energising influence of private universities drives up standards, as [British education tsar David] Willetts seemed to imply, we would expect to find the great public universities clustered in this same area. But the opposite is the case: the more distance between them and the rich private universities, it seems, the higher their level of achievement. Overwhelmingly, the best-represented state university system is California’s, with two universities in the top ten and a total of nine in the top 100. This seems impressive, but we should bear in mind that California’s GDP is almost as large as that of the UK, which boasts 14 public universities in the top 100. A striking contrast is provided by New York, California’s economic and intellectual counterweight. One might imagine it would benefit from market competition with Columbia, Cornell, NYU and the Ivy League institutions to its north and south, yet although New York State’s economy is fully half the size of the UK’s, its top-ranked public university – the State University of New York at Stony Brook – slots in at a humble 78 in the global rankings. Of the 14 other US public universities in the top 100, ten are located in southern, midwestern and western states that don’t have large private universities: Michigan (joint 15th), Washington (23rd), Georgia Tech (27th), Wisconsin-Madison (joint 43rd), Minnesota (52nd), Ohio State (66th), Colorado-Boulder (67th), Virginia (72nd), Utah (joint 83rd) and Arizona (joint 95th).
New York imports human capital: upper-middle-class Coasties enroll at Wisconsin or Michigan at a smaller cash outlay than Columbia or Harvard involves, and the state university system there is relatively recent.  Michigan or Wisconsin, however, recognize that they are in the same business as Harvard or Columbia, and in both states there is a political conflict over appropriating tax money for a university that admits relatively few students from in-state.  Michigan State and Wisconsin-Milwaukee admit more state residents than Michigan or Wisconsin do.
The great private universities in the US do not provide the competition needed to energise lethargic public institutions. Instead, they hoover up a hugely disproportionate share of the resources in the system, thereby impoverishing their neighbours. They have the money to build the best labs, stock the best libraries and buy up the most high-profile professors. Their facilities attract the best and the wealthiest students, cornering the market in social as well as intellectual prestige. They drain the area around them of all the resources needed to sustain good public universities. Most of the public universities that break into the top 100 operate as far away from the Ivy League as America’s vast landmass allows. Outside the top 100, American performance falls sharply to a low level.
The lethargy of the public institutions, as Mr Hotson puts it, is the consequence of several things:  legislatures that view higher education as a source of waste, abuse, and fraud, administrators that have differing views about what the mission of a public institution is, faculty that balance their career aspirations against their loyalty to the institution's mission, whatever that might be this week, and students sometimes sold on the institution's attributes as a party school and sometimes disappointed that the thick envelope from their first choice didn't come.  Tellingly, though, the columnist suggests that there's a fixed stock of resources available to higher education.  Supply curves slope upward.  Otherwise, gas stations would have never been able to displace watering troughs and collieries.

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