Economic exchange

June 25, 1999

Steve Fleetwood (Letters, THES, June 18) responds to my debate with Neil Kay by rubbishing economists for viewing firms as profit maximisers.

A merit of economics is that it formulates theories with sufficient precision to allow informative testing. For example, my research suggests that unrealistic optimism leads to systematic departures from profit maximisation. Still, bankruptcy and banks' refusal to lend, among other constraints, limit the magnitude of deviations. So it is worth examining Kay's critique of the Dearing report's rate of return calculation on its own terms. Kay does not dispute that if the purpose is to decide on student numbers, all is well. That leaves the issue of who should pay. There is no doubt that were higher education banned, those who would otherwise have graduated would not be the only losers. Dearing's calculations shed no light on the distribution of gains and losses. But I can see no ethical justification for wanting to charge non-graduates some costs of higher education.

Though Kay seems to think that profit recipients would be the main losers, this is far from clear. Profits depend on the intensity of competition, which is not very obviously affected by the number of graduates. Were there no graduates, it may well turn out that it is the productivity and hence wages of the least productive workers that falls. Should they really pay the tuition costs of graduates?

David de Meza

London School of Economics and University of Exeter

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