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Matthew Lau: We should let some universities fail

Guaranteed money isn't good for any institution. Ontario's government should eliminate its tuition controls and let universities compete

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In a recent interview, famed 95-year-old economist Thomas Sowell explained, “The big problem with universities is that you very seldom, almost never, find a university going out of business. No matter how bad they are, the money keeps coming in.”

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The money is coming in from the government, of course. Case in point: the Ontario government, which already spends $13 billion annually on the post-secondary sector, a sum equivalent to almost half of what it collects in corporate taxes, has just announced $6.4 billion in additional funding over four years.

To be fair to Ontario’s universities, a major reason they need more government funding is that whether they are good, bad or somewhere in between, they are restricted in how much money they can take from students. For seven years, the provincial government imposed a tuition freeze on universities and colleges. Even now, as the government is lifting the freeze, it is capping annual increases at the lower of two per cent or the three-year average inflation rate. In other words, the Ford government will continue making the post-secondary sector more socialist: students who actually use the services will pay less in real terms, while government control and funding go up.

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This is a calamity for all involved, except bad universities. Good universities are harmed by tuition controls that prevent them from reaping the financial benefits of delivering a higher quality of education. Just as the best restaurants, factories, financial institutions, clothing retailers, bookstores, software companies and so on would suffer under a more socialist system that did not allow them to profit from improvements in service or efficiency, well-operated universities that deliver the best education also suffer from greater socialism. Meanwhile, institutions that do not serve their students as well stay in business as government money keeps coming in.

Students themselves are also badly served by a more socialist post-secondary sector, even if they benefit in the short run by paying less out-of-pocket when universities are more heavily taxpayer-funded. A system that punishes good universities and rewards bad ones does not help students. And if universities get more of their money from government than from students, then their real customers are politicians, not students. A more socialist system encourages universities to do what makes politicians happy, not what’s in the best interest of students.

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A more socialist post-secondary sector is also a calamity for taxpayers. The standard economic argument against government funding for universities is the same as the argument against government handouts for corporations. If an activity is not worthwhile, meaning its costs exceed its benefits, it should not be encouraged through subsidies. But if something is worthwhile, it does not need a subsidy. This is true whether that activity is building a new factory, developing a new product, purchasing new machinery or investing in four years of school. True, sometimes people do not have the funds at hand to make even worthwhile investments, but in a well-functioning market, the money can be borrowed or raised without taxpayer support.

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Although some university activities, such as medical research, may deliver benefits to society as a whole, and so justify some public funding, it does not seem university activities have positive effects overall. The stifling of free thought and the scourge of antisemitism on many campuses have increased in recent years. Race-based discrimination in university hiring persists. These are not things that should subsidized.

Citing Milton Friedman, Sowell explains how the free market is not just a profit system, but a profit-and-loss system, and the losses are as important as the profits, perhaps even more so. That’s because the losses stop uneconomic activity. “If one or two Ivy League universities went bankrupt,” Sowell said, “I think it would be a very good thing for the other universities that survived to understand that they don’t get the taxpayers’ money just because they’re used to getting it.”

In the same way, Ontario should let universities charge what they want, remove taxpayer funding, and see which universities can stand on their own. One or two might go bankrupt, but the post-secondary sector would be greatly improved. The quality of post-secondary education would go up, and students and taxpayers would benefit. The current path of making the sector more socialist helps no one — except bad universities that keep getting taxpayers’ money.

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