have often been asked whether my academic background in economics serves me well in carrying out my presidential duties at Chapman University.
My knowledge of economics has been instrumental in how I think about things and the decisions I’ve made as a university president. I may not always be conscious of it, but economics rears its head in many telling ways.
Comparative Advantage
In the early 1800s, millionaire stockholder David Ricardo showed how the law of comparative advantage can be used to explain the gains of trade. I use the same law in helping lead Chapman forward, but I apply it in a somewhat different way.
In strategic planning for a university, we are often confronted with many proposals for new academic programs. Making choices is difficult, but choose we must since resource constraints limit what we can do. About 10 years ago, we had to decide at Chapman whether to significantly expand our small department of film production or focus on alternative programs with great promise.
In the end, we concluded that Chapman had a comparative advantage in film compared with other universities because of our location in Southern California and because of a team of leaders in our nascent program who shared a compelling academic vision. That small department has since grown to become the Dodge College of Film and Media Arts.
Incentives
Any discussion about the workings of a market economy ultimately falls back on the power of incentives. And any discussion about the workings of a vibrant academic community ultimately falls back on attracting and retaining the best and brightest faculty members and students.
For that to happen, we must use an arsenal of incentives. The fact that people respond to rewards is understood even by those who are not economists. But economists tend to be obsessed with the connection between incentives and results.
Salaries and scholarships are certainly among the carrots we offer. But the market economy has been unfairly pilloried for dealing only with monetary rewards. Incentives can and do take many other forms.
For example, realizing how much faculty members value endowed chairs and professorships, we began a major fundraising initiative almost 20 years ago to create more of them. As a result, the number of en-dowed positions at Chapman has grown from one in 1991 to 33 chairs and 19 professorships today.
Some would argue that incentives work only as long as economic conditions are good enough to provide the resources to make them economically viable. In tough economic times like today, when financial resources are constrained, the arsenal of monetary incentives will be limited.
But market incentives can be as simple yet powerful as giving praise and public recognition to professors, staff members, students and alumni. Indeed, those kinds of incentives may have a more powerful positive impact on one’s team than monetary rewards.
Sunk Costs
Those are expenditures that, once incurred, cannot be recovered. Sounds simple enough, but those costs are oh so powerful in administrative decision making.
Recently, in evaluating an academic program created several years ago, we reached a point where it became clear we had a failure on our hands. Students and faculty weren’t engaged or interested. The program lurched forward but had few prospects for real success.
When our discussion turned to the possibility of ending the program, someone argued, “Yes, but what about all the money we’ve invested in this?”
That person was referring to sunk costs. But since these costs are “sunk,” they should not be considered in evaluating whether to continue a program. Only its future prospects,both pro and con,are relevant. Hence, the program was eliminated.
Price Discrimination
Private colleges and universities are price discriminators. That is, they use tuition rates and grants as pricing tools to achieve certain quantitative and qualitative objectives. Tuition grants in the form of financial aid, for example, can be used to make a college experience more affordable. They can also be used in the form of academic or athletic scholarships to attract better-prepared students or star athletes.
Economic theory informs us that more-selective institutions will be better able to use tuition pricing to achieve its strategic goals than less-selective colleges where demand is more sensitive to tuition rates.
At Chapman, recognition of that relationship helped us to significantly increase student selectivity. Not only would the recruitment of better-prepared students improve the intellectual life on campus, but it would also place us in a stronger market position.
We altered our admission criteria so that we moved up steadily from a “student selectivity” rank in U.S. News & World Report of 92 out of 112 Western master’s universities in 1991 to a rank of 2 out of 127 campuses in 2008. This greater selectivity resulted in our having more ability to use tuition pricing and scholarships to more strategically share our academic profile.
These are but a few examples relating to how economics is used to inform senior-level decision-making in academe. I could go on. But there is something else I know about economics, and that is the law of diminishing returns.
Among many other implications, that law also suggests that the human mind is capable of absorbing only so much economics at one time. So let us end this discussion before the dismal science becomes even more dismal.
Doti is president of Chapman University in Orange.
