Higher education throughout the world is confronting two phenomena, whether in market or central command economies. First, costs are rising, or should be rising, for three principal reasons. Wages and salaries generally rise in any enterprise, simply as a reflection of the economic growth of the country as a whole. Additionally, the costs of scientific equipment, periodicals, books, and other academic expenses rise over time, at least as fast as the average of all costs of all goods and services, and probably even faster, as such goods tend to increase in quality in addition to mirroring the price increases of the general economy. Finally, the costs of higher education rise as entire systems expand in order to accommodate new students and new programs. In general, throughout the world and in any economy, the per-student costs of higher education, and even more so the overall costs of higher education, are thus rising at rates in excess of average cost increases in these economies -- that is, in excess of the prevailing rates of inflation.

The second phenomenon is that resources from governmental sources--i.e., from broad-based taxes or the confiscatory effects of inflation stemming from the printing of money -- are becoming more scarce. Here too, one can observe three underlying causes. Many economies are currently in recession, including those in Europe and North America, and elsewhere in the world, with the economies of Russia and the other former Soviet Republics in a period of major, albeit we must assume temporary, downturn. Clearly, there is less revenue for the government, just as there is less real production and thus less real purchasing power for everything and everyone in the economy.

A second reason for constraint upon governmental revenue is the growing resistance in major western industrial powers to high taxes. Very simply, the citizens, who are also voters, want more for themselves and less to be taken in taxes or inflation for use as their elected representatives see fit.

Finally, public priorities are changing throughout the world. While there is no reason that higher education should necessarily, over time, lose in the competition for governmental resources, it would appear that expenditures for elementary and secondary education, economic infrastructure, health and welfare, and perhaps even for environ-mental restoration are emerging as higher priority objects for governmental spending in most countries.

In short, the current pattern throughout the world is for higher education costs to press upward faster than available governmental revenues. The solutions for Russia, at least in theory, are very simple. Again, they number three. First, the priority for higher education might be expressed more forcefully and successfully, and still more money wrested from the public purse. Because higher education is so important to the economic, political, and social future of Russia, it must be advocated forcefully. But this importance, self-evident to this audience, is no guarantee of the success of political advocacy. In fact, while the case for higher education must be proclaimed, it will probably be difficult in the near future, in Russia as in other countries, for higher education to elevate its place in the queue for public revenues significantly vis-a-vis the other priority claims on scarce public funds.

Second, the underlying cost of higher education may be cut. Universities and other institutions of higher education may become more productive. Basically, because higher education is a labor-intensive industry, this means fewer faculty and fewer staff. My own university, for example, has lost nearly 20 percent of the faculty and staff positions we had in the 1970s, and enterprises throughout the world, public and private, are becoming leaner and more cost-efficient.

In the Russian context, the imperative of cutting the number of faculty and staff in Russian universities is made more compelling by the extremely low wages and the great need for spending on equipment, libraries, and other non-personnel costs of operation. In short, even as costs may need to be cut, salaries must actually be increased, and operating expenses increased as well; the only possible cost-cutting in Russian higher education, therefore, appears to be through elimination of some faculty and staff -- a seemingly draconian measure in a society used to guaranteed employment, but arguably a necessary and even healthy measure in an economy where many enterprises, higher education among them, have become, by all international comparative measures, inefficient and overstaffed.

A third solution to the cost-revenue squeeze, of course, is to obtain revenue from sources other than the general public. Presently, Russia is acquiring revenue for its public sector in part through taxation, but also through the debasement of currency through inflationary printing of money. The alternative sources of revenue would be students, parents of students, or businesses and other agencies that employ the students and use the faculty and their research.

The solution to the cost-revenue squeeze in Russia will probably contain elements of all three: getting more money from government (including local or regional government), or at least bringing to an end the current devastating downsizing, cutting costs, and getting more non-governmental revenues. The dilemma in Russia, however, is vastly more urgent because of the collapse of the productive economy and the terrible erosion of the university budgets and of faculty and staff salaries. The imperatives of cost reduction and revenue enhancement, then, are particularly urgent.

What, now, does all of this have to do with Russia's transition to a market economy? The first answer, glib but also profound, is "nothing." That is, the transition to a market economy has, in itself, not been the direct cause of any of the current problems of Russian higher education, although it is clearly an indirect cause. More importantly, though, a market economy may contain some important suggestions for solution.

A transition to a market economy means principally two things. First, costs of goods and services begin to reflect the real value of the resources required for their production and the alternative uses to which these productive resources could be employed. If the costs of A and B are equal, it means that they are produced with essentially equivalent productive resources, and that, over time, we can produce either an A or a B, and the production of one is equivalent to foregoing the other.

The government can choose to subsidize the cost of a particular good, say, bread, and cause its price to the consumer to be lower than its real cost of production. But a market economy tends to make it clear that there is such a subsidy and that the bread is still costing the people, albeit partly through taxes (or the inflationary debasement of the currency).

To continue with the analogy of subsidized bread, the government can produce bread and sell it at a subsidized price, thus assuring that it will be inexpensive to the purchaser. However, it may still be costly to produce, probably even more costly than in the absence of a subsidy since there will be no incentive upon the producer to become more efficient. The bread may also be of low quality because the subsidy discourages other producers from competing on the basis of quality and thus eliminates the natural incentive for the state baker to enhance quality. Finally, the bread may be produced in insufficient quantity because, again, there is no incentive to produce to maximum demand; indeed, since there is a loss on each loaf, the incentive is for a persistent insufficient production of bread.

In contrast, the production of bread in a market economy, with a market price equal to its cost of production, suggests that the price may be higher, but that:

• this price will still reflect the lowest possible real cost, because there is an incentive for efficiency, as lower production costs mean more profits and more sales;

• there will probably be an abundant supply because more production means more profit to the supplier;

• there will probably be more quality because, again, more quality means more sales and thus more profits; and

• the price will probably not be higher than cost plus the absolutely necessary profit to the producer, or else competitors will enter and seize a portion of the market by lowering the price, a measure to which the original producer will have to respond with equal or even lower prices -- thus assuring, with ease of entry, a price to the consumer that matches the most efficient cost of production.

A market economy also makes it clear that all money spent by the government was first taken, directly or indirectly, from those who produce. It may be taken directly by taxation. It may be taken indirectly by the printing of money and the resulting inflation and debasement of the purchasing power of money held by the general public. In either case, purchasing power flows from the hands of the general citizen into the hands of governmental agencies. Modern industrial democracies, of course, require substantial public sectors. It is necessary, though, that both government and citizens be aware that money spent by the government came originally from the people, and the government must be accountable for giving maximum value for the dollars it has so taxed or otherwise taken.

A transition to market economy does not by itself cause higher prices and inflation. The higher prices of inflation come because the government is still spending large amounts of money without an efficient tax system to remove money from the hands of the people, so it turns to the old easy way of printing money and debasing the value of the currency left in the hands of the people. With a good tax system, a market economy does not have to mean excessive inflation.

A transition to a market economy also does not by itself cause high costs of higher education. Such underlying costs have always been high in Russia because of very high ratios of faculty to students, very extensive provision of higher education to begin with, and large numbers of very small and relatively inefficient institutions of research and instruction.

The transition to a market economy also does not mean that higher education cannot be principally, or even entirely, governmental. Most universities in the west, in fact, are public, although universities can also be privately owned and run and perhaps funded, partly or entirely, by government -- as in the Netherlands, Canada, some of the universities in the United States, Japan, and India.

Finally, a transition to a market economy does not mean that higher education cannot continue to be given free, or at least at a low price, to students. Most public universities of the West provide higher education either free or at low tuition fees. How-ever, a market economy will make it clear what these subsidies cost, and what the alternatives or tradeoffs might be.

A market economy also suggests some solutions to the financial dilemmas and current inefficiencies of Russian higher education. For example, if Russia were to decide to make its student dormitories and restaurants pay for themselves--i.e., to withdraw the subsidy and make the price cover the cost--several things would follow. First, there would be great pressure upon the university to keep the cost as affordable as possible to the student and thus to be as efficient as possible. There would probably be pressure to improve quality and service, also in order to keep the business, to justify the price, and to keep the students from going across the street to a free market provider. Finally, there would be government funds released from the subsidy of the canteens and residence halls that could be shifted into instruction and faculty salaries.

So what, in the long run, will the transition to a market economy do for higher education in Russia? I suggest four benefits:

First, in the long run, the Russian economy will be more productive, and that will mean more resources and revenues for everything, including government generally and including higher education. Regardless of the size of the public sector and the range of services and enterprises that Russia chooses to keep within its state, or public, sector, an underlying market economy ultimately will enhance incentives and direct productive resources toward the goals and services of greatest value.

Second, a market economy will clarify alternatives and real costs in higher education and direct the available resources into the uses of highest priority. For example, the continuation of an inefficient laboratory in one field means the inability to devote those same resources to the expansion of a brand new laboratory. That is, the cost of not closing down the inefficient lab is the inability to have the new and more needed one. The cost of a new professor in, say, linguistics is not having the same resources available for a new professor in, say, political science. The cost of a new computer may be seen as foregoing the purchase of books, periodicals, and faculty travel. And so forth. In short, a market economy clarifies tradeoffs and provides incentives for maximizing the benefits of available resources.

Third, a market economy may suggest certain expenditures now undertaken by Russian universities--such as the provision of residence halls and restaurants -- that can be done more efficiently either like a real business, with prices set high enough to cover all costs, or possibly even by contracting to a private company. In either case, governmental resources that are now being devoted to the subsidy of such activities could be channeled instead into high priority instruction and research.

Fourth, the great benefit to students from the opportunity to attend a university, particularly given the likelihood that many students will come from more privileged and affluent families anyway, might suggest some equity in requiring those parents and students to bear at least some of the costs of higher education -- as opposed to having all costs borne by all citizens, many of whom, and especially the less fortunate of whom, are not likely to benefit directly from higher education.

The forces of the market, in short, clarify alternatives, provide incentives, and suggest certain directions that the faculty and administration of universities might take to maximize the benefits from the available resources. It is my hope, and I suspect the hope of others who have learned both the difficulties and advantages of having to make such hard decisions, that the transition to a market economy in Russia can, ultimately, bring the benefits of greater wealth, greater freedom, and more rational use of resources to Russian universities as well as to the rest of the Russian economy.