Belanger compares the profitable and non‐​profitable sectors of the economy.

We cannot trace the distinction between nonmarket organizations (such as nonprofit universities) and commercial, profit making enterprises to the different traits of individuals within each organization. Rather, the differing constraints or “rules of the game” motivate the individuals involved in distinct ways. Between market and nonmarket institutions, significantly different systems of sanctions and rewards operate. A priori, we can predict that different results will flow from such different frameworks.

“L’Université, organisme à but non lucratif” (“The University as a Nonprofit Organization”). Revue d’économie politique (France), 87 (1977): 574–590.

Those universities where nobody has an explicit right to the school’s budget surplus, are nonprofit organizations. When, moreover, a nonprofit agency like a governmental university wields a certain measure of monopoly power, a surplus arises that can either dissipate in inefficiencies or show up in nonmonetary compensations. Many consequences follow from the curtailed competition in higher education. In general, Adam Smith’s words still deliver a contemporary ring. They describe the decline in educational standards when teachers lack exposure to the discipline of consumer demand and market signals.

In some universities the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set directly in opposition to his duty as it is possible to set it.… It is the interest of every man to live as much at his ease as he can; and if his emoluments are to be precisely the same, whether he does, or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly manner as that authority will permit. If he is naturally active and a lover of labour, it is his interest to employ that activity in any way, from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none.

If the authority to which he is subject resides in the body corporate, the college, or university, of which he himself is a member, and in which the greater part of the other members are, like himself persons who either are, or ought to be, teachers; they are likely to make a common cause, to be all very indulgent to one another, and every man to consent that his neighbor may neglect his duty provided he himself is allowed to neglect his own.

(The Wealth of Nations, Book V, part 3, article 2.)

More particularly, lack of competition in higher education arises when: (1) government restricts entry in the “industry”; (2) the consumer ignores the quality of educational services; and (3) the central planner has no way to evaluate the output and efficiency. of the education “producers” (i.e., the university teachers).

In nonmarket politicized schools, a “discretionary budget” exists, and the thorny question is to determine who appropriates it. Government bureaucrats succeed in appropriating a sizeable chunk. They transform this financial leverage into more power for themselves. In effect, they directly control and allocate resources among the different programs of a university, a task they have assumed more regularly during the past 15 years.

To the extent that government contents itself with indirect control of university performance, members of the university community take a larger share of the discretionary surplus. Since they exert little effective control over the “production” or teaching function, university administrators must share much of their discretionary budget with the relatively autonomous faculty. The right of academic freedom allows university teachers to organize the production of education around their own interests; they thereby appropriate in nonmonetary compensation a large part of the university’s discretionary budget.

Professors not only dominate the university, they also dominate their “clients,” the students, as “consumers.” Students, who often do not pay directly for their education, exert little consumer power over decisions. In fact, education seems a unique economic sector where the consumer has to satisfy minimum requirements in order to continue buying. In this nonmarket situation, students have little consumer sovereignty and have little means to gain real power.

In short, the nonmarket aspect of most universities allows the teaching faculty to appropriate a large share of the discretionary budget and thereby advance its own self‐​interest. Like doctors in a nonprofit hospital, professors have no interest in making the institution efficient, that is, to minimize costs or adapt their services to the consumers’ needs. The distinct system of nonmarket sanctions and rewards does not encourage agents in the more efficient ways of market forces such as consumer demand.