On May 31, 2024, in a quiet suburb of Birmingham, a 168-year legacy of higher education came to an unceremonious end. Birmingham-Southern College, once a thriving liberal arts institution, closed its doors, joining a growing list of American colleges and universities that have succumbed to financial pressures and shifting educational landscapes. The college’s board of trustees voted to shutter the historic institution after exhausting all possible avenues for survival, including a controversial push for a legislative bailout.
Although this farewell evokes genuine sadness and deserves respectful reflection, it also represents a necessary recalibration of priorities. However sorrowful for its community, the demise of Birmingham-Southern indicates a market correction in an industry that has expanded beyond sustainable boundaries.
Over the decades, the United States has become overcrowded with colleges and universities whose economic foundations have grown increasingly precarious and whose distinctive missions have blurred. In higher education, as in other sectors, organizational viability requires ready adaptation to shifting demographics, inconstant consumer preferences, and evolving fiscal realities.
These closures, while undeniably difficult for those directly affected, may ultimately lead to a more robust and focused system that concentrates resources in enterprises with workable models for delivering both value and quality learning during challenging times.
Richard K. Vedder certainly thinks so. His new book, “Let Colleges Fail,” argues that the education sector faces significant market distortions. He demonstrates how private enterprise funds low-productivity institutions through compulsory taxation, thereby protecting higher education from competitive market corrections.
The fundamental benefit of the free market lies in its ability to channel individual human wants toward the general social good. A business pursuing profit must simultaneously satisfy consumer needs or face extinction.
No such imperative exists in our university system. Too many colleges receive guaranteed subsidies regardless of their performance, effectively disconnecting payment from the quality of service. Even private colleges, which are often assumed to operate independently of public support, rely heavily on federal funds, especially through Pell Grants, student loans, and research subsidies, tying their survival to politics rather than markets.
The predictable result is what we observe: an educational establishment largely immune to the competitive pressures driving innovation, cost efficiency, and responsiveness to consumer preferences in the marketplace. While private firms must constantly reinvent themselves to survive, universities operate in a protected environment that breeds complacency and resists necessary change.
The government’s proper role is not to subsidize institutions but to provide a stable framework within which voluntary exchanges can occur. When education becomes dependent on coercive funding rather than voluntary patronage, it grows increasingly detached from the actual needs of students and society.
Each taxpayer dollar directed at universities represents resources taken by force from individuals who had their own purposes for that money. This involuntary transfer cannot be justified on grounds of either justice or utility when the institutions receiving these funds flaunt such persistent resistance to the market signals that might otherwise guide them toward greater effectiveness.
Vedder’s meticulous analysis presents an indictment that any serious economist must acknowledge. For over a decade, universities have experienced declining enrollments – the most fundamental market signal of consumer dissatisfaction – while simultaneously experiencing a plummet in public confidence to historic lows.
These universities have effectively created an intellectual cartel that restricts the competition of ideas, particularly conservative perspectives, preventing the very discovery process that free inquiry requires. Rather than functioning as marketplaces where diverse viewpoints engage in productive rivalry – the mechanism through which knowledge advances – they have constructed ideological monopolies that standardize thought instead of testing it through vigorous debate.
Despite their privileged position, these institutions demonstrate remarkable inefficiency. Their pricing structure bears little rational relationship to the value delivered, with costs escalating far beyond any measurable improvement in educational outcomes.
Students emerge from this system showing negligible intellectual growth despite their substantial investment. Meanwhile, administrative bureaucracies expand relentlessly, consuming resources that might otherwise serve educational purposes – a textbook example of rent-seeking behavior protected from market discipline.
Most damning is the failure of higher education to fulfill its purported social mission. Far from increasing opportunity for the disadvantaged, the system has erected barriers that disproportionately exclude the poor and working class. The promised return on educational investment has steadily diminished, revealing the hollowness of claims that these subsidized institutions serve the greater good.
Instead, colleges exhibit a persistent pattern of resource misallocation that would promptly bankrupt any enterprise operating without government protection. This is a case of government failure, not market failure, and it’s the predictable consequence when institutions are shielded from the disciplinary forces that compel efficiency, innovation and responsiveness to consumer needs.
Vedder closes on a hopeful note: since universities shape the ideas that ripple through society, they remain vital institutions; however, any national renewal should focus only on those that prove their worth through self-sustaining efficiency and real value, rather than propping up failing ones.
I couldn’t agree more.
Allen Mendenhall is a Senior Analyst with the Capital Markets Initiative at the Heritage Foundation. A lawyer with a Ph.D. in English from Auburn University, he has taught at multiple colleges and universities across Alabama and is the author or editor of nine books. Learn more at AllenMendenhall.com.