At the AFR higher education conference this week the demand driven system was criticised from the speaker’s platform and elsewhere.

Some Group of Eight universities are arguing for something they call ‘cap and trade’. The core idea is that, in exchange for accepting capped funding or student places, universities could trade in bachelor degree places and replace them with sub-bachelor or postgraduate places. Under the current system, sub-bachelor places are capped in public universities. Universities can enrol unlimited numbers of postgraduates on a full-fee basis, but in some courses they want to offer cheaper Commonwealth supported places, which are currently capped.

From the government’s perspective, cap and trade implemented across the entire system would give them more certainty about future higher education expenditure.

University of Melbourne VC Glyn Davis gave the argument a new feature at the AFR conference. He put as central to the demand driven system the goal of 40 per cent higher education attainment in the 25-34 age group. Noting that this had been achieved in some metropolitan areas, he suggested capping inner city universities while allowing outer metropolitan universities to continue growing.

The 40 per cent attainment goal was certainly part of the original Bradley report recommendations for the demand driven system and the subsequent government policy announcement. But how important is it to the overall logic of demand driven funding?

In my view the answer to that question is ‘not very important at all’. Indeed, I think targets are incongruous in demand driven systems. The right overall level of higher education participation, and the optimal distribution of students between institutions, disciplines and qualification levels is very hard to determine. Our judgments on this – at individual, institutional, workplace, regional and national levels – will continuously change as new information comes to hand. The strength of the demand driven system compared to more centrally controlled systems is that it can access and act on more of this information, and can do so promptly.

The 40 per cent attainment target itself shows that long-term planning is difficult. As I have noted before, when the Bradley report was being written in 2008 there was good evidence that across a range of fields the then capped system of student places was producing too few graduates. But by 2013 there was convincing evidence that we were producing graduates well in excess of labour market needs. Whether there are too many students is a more complex question – for that, we need to think about the realistic alternatives of university students. But the case for 40 per cent attainment is weaker now than it was a decade ago. It would not be sensible to try to push enrolments up just to meet the target. It would be better for enrolments to stabilise or decline (they have grown slowly since 2014).

A big problem with cap and trade is that compared to the status quo is would provide a minor improvement in flexibility at the qualification level (only sub-bachelor has a hard cap now) at significant loss of flexibility at the institutional and discipline level.

The demand driven system responds more effectively than the old capped system to student institution and discipline preferences. We can see in the chart below that modest overall growth in commencing domestic bachelor degree student numbers conceals significant increases and decreases at the institutional level. This is the system responding quickly to student preferences, rather than slowly adjusting to deals made years ago between government bureaucrats and university administrators based on information that is now out-of-date.

Under cap and trade, universities would still be able to adjust their internal distribution of places between disciplines, as they largely could under the pre-demand driven system. But their capacity and incentives to do so would be much weaker than now. To stay within their overall funded load, expanding student places in one discipline means reducing them in another. That’s always hard to do internally, especially when there is demand for all current courses on offer. The demand driven system minimises these trade-offs.

As there will never be a steady-state best-possible distribution of students between courses, or a stable optimal level of graduates in the population, we can never say that demand driven funding has achieved its objectives and move on to some other system. The strength of the demand driven system is its process for adapting and evolving.