University fee changes will hurt the STEM disciplines

Richard Holden, professor of economics at UNSW Business School.

It is ironic that economics degrees are going to cost more under last Friday’s changes to university funding, announced by Education Minister Dan Tehan at the National Press Club. Because arguably one really needs an economics degree to unpack and understand the implications of the changes.

The bottom line is this. The government’s plan will mean less money per student to universities for engineering and science students. It will make it harder for STEM disciplines to attract world class educators and researchers. And it will do so because of an attempt to put not such much a thumb but a clumsily-placed fist on the scale of relative prices for students and universities.

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But first, the background. To educate domestic undergraduates, Australian universities are funded by a combination of contributions from students (under the HELP income-contingent deferred loan scheme) and from the Commonwealth government. It is the total of those two amounts that matter for universities.

So, while Tehan’s announcement focused on the changes to student contributions, the overall change is what will affect university funding. If universities were a business, this would be the “price” they charge for their product. But for universities, students pay part of it and the government pays the rest.

Now, the first lesson economics students learn is that it is relative prices that determine how much somebody demands of different goods or services. If the price of orange juice goes up compared to the price of pineapple juice, then people will tend to consume less orange juice and more pineapple juice.

And so a 113 per cent increase in what students pay for philosophy or political science degrees compared to a 62 per cent reduction in mathematics, a 46 per cent reduction in English or foreign languages, or a 21 per cent reduction in engineering or IT, is going to make those latter subjects more attractive to students than they were.

Since student contributions are made through the income-contingent HELP scheme there is some question about how powerful these price signals are. The architect of the then HECS scheme Bruce Chapman — for whom I have great respect and admiration — thinks the price signals are largely blunted because of deferred payment. I’m not so sure, and there is little compelling evidence on the matter. Looking at past student fee changes and what happened to enrolments after that says something about what courses are trending more popular, not the causal effect of price changes on enrolments.

Indeed, if students are largely insensitive to fees so long as they are covered by HECS-HELP then universities could be much better funded by a large overall increase in domestic student fees. Moreover, even if the income-contingent nature of the scheme means students are less sensitive to the level of fees (which is a good thing) surely they still care about the relative cost of different degrees just like in other markets.

In any case, the student side of things is only part of the puzzle. There is also the matter of what incentives are given to universities by these changes.

That is easy to understand. Universities will want more students in the subjects for which they get more per student overall. Those include law, economics, philosophy and English. And universities will, all else equal, want fewer students in the areas for which they will receive less overall funding: engineering ($4,758 per student per year less), math ($3,513 less), agriculture ($3,444 less), the physical sciences ($1,864 less), and education ($1,066 less).

If universities were run by cold, calculating types then they would just close down science, engineering, agriculture, and education faculties. Or, if they wanted to be more subtle about it, they would offer inducements like free iPads to students to do English, philosophy and law instead of STEM subjects.

Now, the vice-chancellors I know aren’t like that, and they won’t do that. But the inescapable logic of economic incentives mean they will want fewer STEM students — quite the opposite of the government’s stated intention. That means some universities will have no choice but to cut back in STEM. Others might abandon the fields altogether.

And for the culture warriors in parliament and the commentariat who want to defund the study of certain “postmodern” subjects or “three years reading Foucault and dreaming about vandalising Captain Cook statues” — as one put it — there are a couple of points to note. First, the price of courses in literary criticism for students has roughly halved, making them more not less attractive. Second, universities will find philosophy students (who will likely study Foucault among other important thinkers like Plato, Aristotle, and Mill) more attractive.

Oh, and in the process you’ve encouraged “reforms” that put the study of science, engineering, and mathematics in this country in even graver danger than they were.

Richard Holden is professor of economics at UNSW Business School. He is expressing these views in his personal capacity. Twitter: @profholden