Higher Education, Meet Creative Destruction

March 9, 2015

Creative destruction is one of those eloquent phrases that concisely conveys so much information. In coining the term in 1942, Austrian economist Joseph Schumpeter described it as “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

Productivity and overall economic growth, so critical to boosting living standards, thrive on creative destruction. New ideas and their new opportunities draw people, capital, and other resources away from the old. Globalization benefits countries mainly because connectivity to the world induces a country to reallocate its finite resources from struggling companies and sectors to bustling ones.

Silicon Valley notwithstanding, one of the worrisome trends in the United States and many other countries has been the ebbing of some of the dynamism that drives creative destruction. A recent study documented this for new-business startups. In the early to mid-1980s, about 13 percent of all U.S. firms were newly started annually. Starting in the late 1980s, however, this startup rate began to decline. This decline long predates the World Financial Crisis, but its pace has quickened recently. Today, only about 7 percent of all U.S. companies are startups. As a consequence of this drop in the rate of new-business startups, the share of the overall U.S. economy accounted for by young firms has been steadily declining. Defining young firms as those aged five or less, in the early 1980s nearly 50 percent of all U.S. companies were young. Today that share is down to only about 39 percent.

But in at least one industry the forces of creative destruction appear to be gathering, not waning: higher education. Consider two recent harbingers—one shut-down and one merger.

Last Tuesday, Sweet Briar College, a women’s liberal arts college founded in 1901 near Virginia’s idyllic Blue Ridge Mountains, announced it will cease operations on August 25. Paul G. Rice, chairman of the college’s board of directors, explained that “the board closely examined the college’s financial situation and weighed it against our obligations to current and prospective students, parents, faculty and staff, alumnae, donors, and friends. We voted to act now to cease academic operations responsibly.” A major force compelling this decision was falling demand. Sweet Briar’s enrollment of 760 students in 2010 slid to 700 last fall—even as the college was discounting the $47,000 tuition by a reported average of 60 percent.

Elsewhere, two law schools in St. Paul, Minnesota, Hamline University School of Law and William Mitchell School of Law, recently announced they will merge operations in fall 2016. Here, too, crumbling demand is a driving force. William Mitchell’s first-year-class enrollment slid 45 percent in just the past three years. At Hamline the comparable tumble was 56 percent.

In law schools, at least, this demand-supply mismatch is nationwide, not just Minnesotan. Last fall, 37,924 J.D. candidates started at U.S. law schools (no doubt lugging inspiring copies of “The Paper Chase” and “One L” in their backpacks). This number of One Ls was 28 percent lower than the peak in 2010, and about equivalent to the number way back in 1973. During this period, the supply of American law schools accredited by the American Bar Association has risen from 151 to 204. The number of students per law school has fallen from 262 in 2010 to just 186 today.

We acknowledge that two data points need not a trend make. We also acknowledge that, if we think of each higher-education institution as a company, a rate of one company transition per week in an industry of about 4,600 Title IV degree-granting institutions is far less creative destruction than in almost all other industries. For decades, in U.S. manufacturing an average of over 10 percent of plants close each year. U.S. higher education is far from having upwards of 500 schools closing each year.

All that said, higher education will surely face more creative destruction in the years ahead, not less. Escalating tuition in the face of falling real incomes for so many higher-education graduates is already fostering the changes that the rest of the global economy has seen for centuries. Shutdowns and mergers of incumbent suppliers, like the two cited above. Disruptive innovations from new startups, like the MOOCs (Massively Open Online Courses) of entities like Coursera and EdX. And scrutiny from policy makers, like President Obama’s comments a little over a year ago that perhaps law-school degrees could be earned in two years rather than three.

For all of us connected to higher education, these times are bracing. For those of us in higher education eager to thrive, we can find these times invigorating as we craft ways to supply new creations. The alternative—Schumpeter’s destruction—is looming.

Articles © 2015 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2015 Trustees of Dartmouth College. All rights reserved.