The wisdom of economics

Economics rarely gets a good press. This is probably because of the regrettable tendency among economists to pose as modern soothsayers: predicting (usually wrongly) the long-term direction of the stock markets, which countries will go bankrupt, and which economies will prosper. But there is great wisdom in economics, which should be known more widely. Here are three concepts from economics, which, if applied, would make British universities far more effective.

The first concept is marginal cost. This means the additional cost incurred in producing one extra item on a product line. A related concept is marginal income, or the additional income received from selling this one extra item. As a general rule, therefore, firms should expand production as long as the marginal income they receive for doing so exceeds the marginal cost. This seems obvious, but it is not how many organisations (let alone universities) operate. I have had very frustrating discussions in which decisions on whether to expand student numbers on a course have been based on average cost/student rather than the (usually very low) marginal cost of adding one extra student to a course that is already in operation. To make matters worse, the government penalises financially those universities which do expand student numbers beyond the ‘planned’ targets that have been set centrally.

The second concept is comparative advantage. This was originally developed to explain how trade can produce additional wealth if each trading partner specialises in producing those goods which it can produce at the lowest cost compared with the cost of producing the same type of goods elsewhere. Comparative advantage can be adapted to analyse the kind of ‘trading’ of activities within an organisation. Suppose an academic department has two members of staff: Cain is an excellent researcher and a mediocre teacher; Abel is a mediocre researcher and a mediocre teacher. What usually happens is that both are required to do their share of research and teaching. As a result, all the teaching in the department is mediocre, while half the research is excellent. If, however, the university applies the wisdom of economics, then they will specialise their staff. In that case, all the teaching will remain mediocre, but all the research will now be excellent. Of course, it would be even better if Abel had been an excellent teacher. But who knows - the more he specialises, the better he might get.

The third economic concept is satisficing. This involves seeking a solution to a problem that is adequate and costs the least. Satisficing is therefore an alternative to seeking a ‘rational’ solution (which would involve comparing all possible alternatives whatever the cost), and to plumping for the ‘excellent’ solution (which involves selecting the best possible  outcome irrespective of cost). Satisficing is what most people probably do most of the time when they come to make decisions about where to live, who to marry, which university to attend and so on. But universities are temples to rationality and excellence: the greatest contributions to knowledge have often come about because academics have taken infinite pains to collect data and have considered radically new ways in which the world and the cosmos can be explained. Such commitment, essential as it may be in scholarship, can have a damaging effect on how academic committees function. Every committee-member thinks up ways in which the outcome of a decision could be even more excellent, and deliberates whether there might be options no-one has yet thought of. It is hardly surprising that university leadership becomes exasperated and takes decisions without discussion or just hands things over to the administrators.