Charity cases: Why UK universities are really going broke

Pundits from the political left and right increasingly agree that the UK’s funding model for universities is fundamentally broken. But their varying prescriptions for change usually overlook a key reason why the current financial crisis has arisen – the rarely mentioned legal reality that almost all universities are public benefit charities.

This is still a lively point of discussion on university boards where, between depressingly cyclical rounds of financial crisis and departmental redundancies, various parties argue whether universities are “businesses” and to what extent “business principles” should be applied to institutional decision-making. Such discussions polarise academics against administrators, senates against boards of governors and intellectuals against pragmatists. They pit well-meant commitments – to scientific enquiry over market forces, knowledge over profit, public benefit over business rationality – against the harsh realities of the annual budget sheet, in light of which such scholarly values often appear vague and sentimental.

These debates often assume there is only one available or even imaginable business model for universities: that of the for-profit retail, commercial or industrial company. Alternatives are seen as marginal variations of this supposedly “basic” model, supporting the argument that “the bottom line” should always be the primary concern and any financial problems derive from failures to attain specifically commercial efficiencies.

Yet most university staff will have the opposite signposted to them every working day: at the bottom of their emails, it states universities are not-for-profit, public benefit charities – in other words, educational organisations whose primary goal is creating and disseminating knowledge. Charitable status entitles universities to enormous tax exemptions, and the small print of their charters, degree-awarding powers and (typically) research funding insists on their public benefit role. Nonetheless, this is something that few higher education policy debates ever discuss. One can wade through the entirety of Stefan Collini’s 2012 book What Are Universities For? and even Paolo Rondo-Brovetto’s 2011 symposium collection The University as a Business, without once being informed that most universities are charities in law, substance and organisation.

Moreover, most university academics, administrators and governors are wholly unversed in the charitable business model. And this ignorance is the cause of many of the financial and value conflicts that presently bedevil universities.

So, why are universities charities, and what is the charitable business model?

Since the publication of The Wealth of Nations in 1776, liberal economists have misread Adam Smith’s declaration of the ineffectiveness of benevolent sentiment as a force in economic life as a straightforward criticism of charitable public works, in favour of self-interested commercial activity. However, Smith’s earlier Theory of Moral Sentiments made clear that it is precisely self-interest – when magnified by the imagination of possible futures – that motivates humankind’s great and necessary long-term transformations. Charitable institutions facilitate such transformations: they are distinct from purely commercial entities because they are generally focused not on a present market but on a desired and attainable future – a world as it should and could be but will not be unless they act.

So it is a mistake to think charities are based on economic idealism. Successful charities rely on a business model designed to help them thrive in far harsher circumstances than for-profit commerce could endure. The activities required to achieve their public benefit goals are generally not commercially viable, and cannot consistently be made to be so. Often, their goal is precisely to build viable markets where they do not presently exist.

There is nothing unusual about this. The fundamental prototype of charitable activity is the domestic economy of most families, in which adult carers perform secondary economic activities (in short, they go to work) to support the primary activities that sustain the household and their dependants. This is the only way this can work: it is impossible (and illegal) to ask a two-year-old child to get a job to pay their portion of the bills. In the narrow for-profit business sense, having children is a poor financial investment.

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Nevertheless, the vast majority of parents work every day precisely to achieve this end, and governments are content to generously support it, precisely because, like charities, their goals are to maintain the long-term viability of society as a whole and, indeed, the conditions that render for-profit business possible.

Indeed, the charitable business model is an almost complete inversion of the for-profit commercial model. For-profit businesses are based on the idea that one judges the need for an activity almost entirely on whether it will generate profit; it does not matter what it is as long as there is a market demand and profit can be accrued against costs. In the charitable business model, by contrast, certain activities (educating the public, fighting cancer or saving people from drowning) are deemed necessary or desirable to society as a whole regardless of their market value, and secondary economic activity is engaged in to support those activities.

While universities are a central public good for highly industrialised societies, education, particularly at its higher levels, is simply not a naturally marketable commodity. Students find many aspects of their studies time-consuming, tedious and difficult, especially those necessary to produce genuine employability and long-term benefit. Repetitious learning of technical skills, extensive reading, memorisation of complex detail, regular attendance and deadline management all provide little in the way of immediate excitement or payback for students, and the social and professional uplift that comes with degree-holding can take years to manifest.

As such, government and philanthropic support of various kinds has been provided in abundance to universities and students: degree-awarding powers, royal charters, tax exemptions, fee and maintenance grants, scholarships, interest-free loans and public and private endowments and donations. There is also social support from parents, politicians and employers for education even beyond the straightforward legal coercion for the under-16s. These enormously costly supports are the silent partners of the distinctly artificial idea of the “commercial student marketplace”.

Not all not-for-profit enterprises are commercially non-viable, of course. If one sold water in the desert in pursuance of a charitable goal to end thirst, one might indeed be able to make it financially viable. Universities, however, are not selling cool water in the desert: they are engaged in the subtle art of underwriting the knowledge economy. And knowledge (especially in its purely informational form) is typically not the sort of scarce commodity that derives commercial value. If I have a watch and I give it to you, you will have a watch and I won’t. However, if I tell you the time, we both end up knowing what time it is, making knowledge of the time what is known as a non-scarce commodity. Some academic offerings do prove marketable within the highly artificial higher education economy, but this is usually a temporary state of affairs, with profitability volatile and changeable across subjects. The business school may thrive this year, but English literature or engineering may quickly replace it as the new “big earner”.

These shifts depend on myriad conditions – international visa stipulations, economic conditions, technological changes, fashion and national secondary school curricula – over which universities have little control. Those unwise enough to cherry-pick a restricted set of “winning” degree programmes become bound to constant crystal ball-gazing, increasing their institution’s vulnerability to the possibility of collapse in the medium to long term.

This is why most universities opt for the cross-subsidising A-Z university model of subject disciplines, thus maintaining a modest financial buffer against the inevitability of market fluctuation and allowing for continuity and development of expertise and research. This is a sustainable business model, whereas the for-profit model generally is not: this is why my own institution, the University of Aberdeen, is 528 years old, while the life expectancy of the average Fortune 500 company stands at just short of 15 years.

And contrary to those that favour Schumpeterian creative destruction, this longevity matters. Undergraduates take three to four years to graduate, doctoral candidates up to 10 years, and research can take years to solve even the most specific problems. For reasons laid out more than a century ago by economist J. L. Hobson, growth is the primary mantra of the for-profit business model, but long-term stability is the essential condition of all centres of learning and knowledge.

In 1494, when Aberdeen was granted its papal bull, Bishop Elphinstone delayed founding the institution itself so that he could secure multiple further endowments to support it beyond the fees that the university levied: the takings of the nearby Snow Kirk church, the proceeds of St Germain’s Hospital outside Edinburgh, and extensive rent-generating land grants, among others. He understood that university education may be a public benefit, but is just not a natural commercial seller.

That remains true to this day. This is why universities and other successful charities enfold within their skirts many different kinds of secondary economic activity: shops, cafes, hotels, land rents, investment and savings options, philanthropic donations, fee structures, voluntary and paid labour – a wide cornucopia of activity, all serving the central charitable activity. Secondary income diversification of this kind is the most basic strategy of charity growth, combined with cross-subsidising from temporarily profitable secondary activities to temporarily non-profitable primary ones.

For instance, in 2022, the UK’s Royal National Lifeboat Institution (RNLI) generated a mere £4.4 million in charitable activities in 2022, against running costs of £188 million. But it had an income of £221 million in total, of which £140 million came from legacies and the rest in donations, trading and investment income. And this variety of economic styles is common to most charities. Universities, for example, are effectively communist when it comes to intellectual property; feudalist when it comes to land grants; rentier capitalist when it comes to halls of residence; and commercial capitalist when it comes to university shops and alumni merchandise.

This distinction between loss-making charitable activities and supporting commercial activities is important when it comes to charitable trustees’ legal responsibilities. In the face of changing economic conditions, such as a mass shift to online purchasing, the RNLI could reasonably dispense with its shops and collection tins without compromising its charitable and public benefit role. However, if its trustees decided instead to stop saving people from drowning or teaching them how to swim because this didn’t make enough money, it would no longer be a charity.

As for universities, their primary, not-for-profit educational considerations are embodied in the proceedings of their academic board or senate, where value is understood in terms of educational and research excellence, academic standards, ethics and discipline. By comparison, the secondary supportive activities, more concerned with financial propriety and sustainability, are the bailiwick of the board of governors or university court.

Nonetheless, these subsidiary activities – many of them commercial – benefit greatly from their association and alignment with the primary charitable goal. Indeed, when skilfully handled, such secondary activities can help achieve the charitable goal in a larger, societal sense. It is not for nothing that the RNLI shopping catalogue sells teddy bears in lifejackets and journals with maritime knots on the cover. These are aides-memoires and identity-builders, projecting a cultural hinterland of values around the charitable goal, building loyalty and encouraging philanthropy.

In the same way, there are huge social, political and financial forces that universities can and must capture if they are to successfully fulfil their public benefit obligations: forces of goodwill, financial support, vocation and aspiration. These cannot be mobilised simply by likes on a TikTok video: they require the concrete interactions of purchase, fee, rent, commodity, gift and donation as vehicles, precisely because these interactions manifest concrete commitment to the central charitable goal. Successful charities thus embody an interdependent ecology of economic activities.

However, in many UK universities today, this ecology has been replaced by a narrow commercial dependence on their central activities of teaching and research – which, even on a good day, rarely cover more than 85 per cent of their costs. As a consequence, they have found themselves vulnerable to the winds of change that have swept through the UK, blowing no one any good.

In many respects, this creeping malaise emerges from the declining place of charitable institutions within the broader political landscape. This is very much a late-20th-century phenomenon, resulting from the Cold War’s pitting of private commercial capitalism against state funded and controlled communism, a duopoly that squeezed the hybrid charitable business model out of the public imagination. In the UK, decisive state interventions following the Robbins report of 1963 increased the number of universities and provided massive state funding through student maintenance grants. The result was a deep institutional dependence on state funding throughout the 1960s and 1970s, a period regarded by many academics as the halcyon days of university life. But this was dramatically reversed under Margaret Thatcher’s reforms of 1981 and the strangely self-inflicted Jarratt report of 1985, which eventually led to the withdrawal of maintenance grants and reintroducing tuition fees in a “student as consumer” model.

The effects of these various about-turns have been signal. Setting aside the confusions between law, rhetoric and academic process implied by the idea of the student customer, universities found themselves in an ever-tightening financial noose. During the Robbins era, many older universities jettisoned longstanding endowments and commercial infrastructure to deal with temporary cash-flow issues, while allowing their existing secondary economic activities to wither. Newer institutions never had those resources in the first place. Consequently, income became tied to an increasingly commercialised framework for universities’ primary charitable activities: teaching and research.

More important than all of this, however, is a cultural shift that treats the dual charitable economies of universities as though they were single commercial ones. Put bluntly, many university administrations find it difficult to imagine how you would treat teaching and research in a way substantially different from a shopping mall, focused only on the present market. Consequently, the future-focused and intentional nature of universities – the precise grounds on which they receive substantial government and philanthropic support – has been progressively lost.

To reverse this trend will require enormous imagination, creativity and hard work by university administrations. Most of all, however, it will require a belief in the central charitable goal itself.

Martin Mills is a senior lecturer in anthropology at the University of Aberdeen, where he has recently retired as staff governor and trustee.