Principles of MOOConomics, part I

Submitted for homework to Microeconomics Principles.

MOOCs are fast, cheap, and out of control. They’re the future, and they’re now. They’re the revolution, the new power generation. MOOCs would die 4 U.

Well, they’re certainly cheap. Students pay nothing to take MOOCs (though Coursera’s signature track is a paid option), and in fact, MOOCs have a remarkably low average total cost, mere dollars per student. If higher learning is indeed a product, then MOOCs can deliver it more cheaply than any other means.

MOOCs’ greatest fixed cost is the computer hardware it takes to deliver the course content to students. Powerful computing is expensive. The most powerful computers today cost a hundred or a thousand times more than the fastest computers of the 1990s, but they are one billion times faster. So despite the great cost of high-end computing, its power is enormous. This technology and the growth of the internet have made MOOCs possible. Information transfer is incredibly cheap today, compared with any previous time in human history.

Coursera has so far received $16m in venture capital; its rival MOOC provider, edX, was started with $60m. Their multimillion dollar fixed costs, though, are spread out over Coursera’s millions of students. Within a few years, the fixed cost per student will fall to less than one dollar.

Coursera’s greatest variable costs are labor (its small staff) and the electrical power to run its servers. That’s it. Universities provide the teachers, expertise, content, and interviews with local bar and grill proprietors. The marginal cost of one additional student in a course is minimal for Coursera and negligible for universities. The average total cost of a MOOC is low and flat.

The same cannot be said for the costs of educating students at a traditional university. For the fiscal year ending June 30, 2011, the University of Illinois at Urbana-Champaign held capital assets–buildings, land, library materials, equipment–worth $3.5b. (All data on UIUC from IPEDS, US Department of Education.) Even spread across every student who has ever attended UIUC (it has more than 400,000 living alumni), or ever will attend the university, those fixed costs will never fall below even $1,000 per student.

UIUC’s variable costs are similarly high, compared with Coursera’s. In 2011, the total cost of instruction at UIUC (note: this does not even include academic support, facilities, or student services) was $557m, about $11,500 per (full-time equivalent) student. The overall budget for UIUC exceeds $2b annually.

So it’s safe to say that, given the tremendous cost of educating students in “meatspace,” the traditional university must change radically or die, right? Not necessarily.

First, to be completely fair to UIUC, we should reduce its per-student expenses by a factor of 4 or 5, because students typically enroll in that many courses at once. There have been millions of enrollments in Coursera courses, but not millions of individual students, since many students take several courses at once (I’m taking three right now).

And even though the quality of some Coursera courses is very high (though not all, as I hope to address in a future post), the rate of successful completion of these courses is abysmally low. Most of the people enrolled in Microeconomics Principles are not really “students” in any meaningful sense. They’re names on a list. Half of them have probably not even watched a single video lecture. (And have you noticed how there are fewer and fewer people participating in the forums each week?)

The completion rate for a recent bioelectricity course, offered by Duke University through Coursera, was 2.5%. To graduate from UIUC, a student must successfully complete dozens of courses, and yet the graduation rate is a lofty 82%. If Coursera were a university, its graduation rate would be less than 1%. And besides, most of its students already have university degrees. In a sense, many of the students who do well in Coursera are the ones who least need additional academic credentials. (I have a Ph.D. This course is great, and I’m learning a lot, but it’s mostly for fun.)

When considering a firm’s inputs, we should keep an eye on its outputs, too. Even with its massive costs, a traditional university breaks even, and its students come out way ahead: the monetary value of a good college degree is $200,000 to $300,000. That’s a lot of social surplus, and it doesn’t even factor in the non-monetary benefits of education. Coursera, by contrast, operates at low cost, but for now it also gives away its product for free, leaving it with a negative producer surplus. The consumer surplus of a MOOC is another matter. Tell me: are you getting what you’re paying for?