• Covid-19 is exposing the fundamentally unsound nature of the policy of successive governments and of the entire array of Higher Education (HE) institutions;
• Many universities were in a weak financial position prior to the pandemic. They are now facing a “massive cashflow crisis”;
• The present difficulties could lead to a permanent fall in demand for places in HE;
• UK policy has been heading in the wrong direction since the mid-1980s. The government is using the current interruption for a fundamental rethink;
• However, the evidence is that the political class has not yet fully grasped the extent of both the problem and the opportunity that the pandemic represents;
• There is no evidence that the UK’s economic performance has been elevated by the expansion in the number of graduates;
• The good being supplied by HE institutions is the signal a degree will send to prospective employers. The sort of competition that we see in other markets – of price competition, product variation and price differentiation – has therefore been significantly impaired;
• This has led to overextension, increasing financial fragility and a system which fails to meet labour market needs;
• These problems cannot be resolved by a continuation or expansion of previous policies. Instead, wholesale reform may be required.

A new briefing paper from the Institute of Economic Affairs, authored by IEA Head of Education Dr Stephen Davies, argues that Covid-19 has exposed the “fundamentally unsound” nature of Higher Education (HE) policy and of the entire array of HE institutions.

The pandemic has accelerated a number of pre-existing trends, revealing those sectors already in trouble. Universities are taking a big hit: overseas students have been unable to travel and study; income from other sources over the vacations has vanished; and many institutions were in a weak financial position before this crisis.

These difficulties have crystallised a feeling on the part of many people that there is something “fundamentally wrong and misguided” with the HE policy of successive British governments, with the kind of product and service that universities offer, and the way the whole system is run and financed.

UK policy has been heading in the wrong direction since the mid 1980s. While the government is using the current interruption for a rethink, it appears that the political class has not yet fully grasped the extent of the problem or opportunity that the pandemic represents. Instead, they remain fixated on the idea that graduates are the driver of economic growth. Their concern is simply that we have the wrong kind of graduate.

However, while graduates historically enjoy an income premium, there is a lot of evidence to counter the belief that having a degree makes a graduate more productive than a non-graduate. The good being supplied by HE institutions is not more productive workers but the signal a degree will send to prospective employers.

The sort of competition that we see in other markets – of price competition, product variation and price differentiation – has therefore been significantly impaired. None of these helps when the good being supplied to the actual primary customers (employers) and secondary customers (students) is the nearly homogeneous one of a signal.

It has led to overextension, increasing financial fragility and a system which “fails to meet labour market needs”. The present issues cannot therefore be resolved by a continuation or expansion of previous policies. We should resist pressure to bailout distressed and overextended institutions so that they can continue as before.

“To a Radical Degree” argues that the current crisis offers the opportunity to completely rethink HE and the good it provides, making a number of recommendations:

• Instead of having one kind of institution, modelled ultimately on the ancient universities but with most being cut-price versions, we could have several;
• There is a need to distinguish, separate and expand the genuinely human capital enhancing subjects and courses such as medicine, engineering and other STEM subjects, and vocational and trade education and training;
• We should look to move away from funding institutions out of current government spending and, by doing this, to give them greater independence and responsibility;
• The artificially inflated cost of higher education should be reduced. In particular we could look to move away from the distinctively English practice of the residential university;
• We could also consider reviving a range of different forms of attendance (which would go along with the wider range of funding methods for students);
• We should stop using HE as a certification device, and develop ways of measuring the kinds of things that a degree signals (qualities of aptitude or character and foundational ability) that do not require a three-year degree course. HE should be thought of as a good that can be valuable at any stage in life, and not for a (often spurious) supposed financial benefit.

Dr Stephen Davies, Head of Education at the Institute of Economic Affairs and author of “To a Radical Degree: Reshaping the UK’s Higher Education for the post-pandemic world,” said:

“Covid-19 has caused a short term funding crisis in UK universities. This has produced the inevitable calls for a bailout but these should be resisted, because it has also highlighted the structural problems of the way Higher Education has developed in response to government policies since the mid-1980s. This has damaged the true mission of HE and has not benefitted graduates, employers, or the wider economy.

“We should not look to either put Humpty-Dumpty back together or to slim him down and have a smaller sector but one still run on the same lines. Instead we should seize the opportunity for a radical rethink of the nature and purpose of HE and look to move to a system that is far more varied and pluralistic.”