Philosophical &Theological Threads of Marx’s Theory

Source: To Overthrow the World; Sean McMeekin; 2024[1]

Purpose of Paper: Describe: the foundation of Marxism, Marx’s theory and Marxism’s impact on history.

Karl Marx claimed that history had been used to obscure men and women about their true condition in society. According to Marx history should establish the truth of this world no matter how dark it may be.

  • Marx also claimed that the task of philosophy was not to soothe, but to unmask human self-alienation. Later, Marx wrote that philosophers have made the mistake of only interpreting the meaning of the world rather than pushing to change the world.
  • Marx’s theory is based on the concept of the proletariat, which was first used in 1819 by Jean Charles Leonard de Sismondi. Sismondi saw the proletariat as the unemployed or poorly employed laborers living in misery, threatened by competition that drove wages down and threatened by machines that made their jobs obsolete. Proudhon also used the term in 1841 to describe the poor, as proletarians of the country, peasants or proletarians of the city, factory workers. For Sismondi and Proudhon, the proletarian could only gain social equality through political and intellectual emancipation.
  • Marx like Sismondi and Proudhon’s declared that the proletarian was a separate class. Since Marx believed that the proletariat did not recognize themselves as a separate class – proletarians, they needed Marxist philosophers to clearly identify the condition of the proletariat. According to Marx, the proletariat suffered because of their exploitation, and that their condition could only be changed through revolution.
  • Marx’s essay “Property and Communism” advocated the dictatorship of the proletariat as the Hegelian antithesis that would negate the property thesis that would then lead to a synthesis, a propertyless state without an overarching government. Marx claimed that communism solved the riddle of history and is therefore the solution (synthesis).
  • Marx in ‘The Poverty of Philosophy” concluded that only a violent revolution would lead to the dictatorship of the proletariat.
  • The Communist Manifesto laid out the earliest description of a communist system. Although Karl Marx and Frederick Engels are listed as joint authors, the’ Manifesto’ was mainly based on Marx’s concept of the communist revolution. The main theses of the ‘Manifesto’ are:
    • That industrialization and free trade alienated the relationship of man to man with self-interest and callous cash payment.
    • Abolition of property.
    • Heavy progressive or gradated income tax.
    • Abolition of all rights of inheritance.
    • Confiscation of all property.
    • Centralization of credit that is, financial institutions.
    • Centralization of the means of communication and transport.
    • Centralization of ownership, planning and management of all factories.
    • Universal work obligation and the establishment of industrial and agricultural armies.
    • Combination of agriculture with manufacturing industries to provide a more equitable distribution of work and pay.
    • Dispensing free education to the proletariat and the combination of education with industrial production.
    • Freedom under the capitalist conditions of production is a false reality
    • The bourgeois form of the family would vanish under the communist revolution.
    • Violence is a necessary element of the overthrow of the bourgeois/capitalist social/economic system.

Karl Marx’s Theory Rests on These Historical Threads

    • Greek Philosophy used reason to make sense of the world:
  • Plato – in The Republic quoted Socrate’s proposition that “such words as ‘mine’ and ‘not mine’ and ‘someone else’s’ must lead to the dissolution of the social fabric. The best-governed city would be one in which the ‘sharing of pleasures and pains binds the city together’. A thoughtful ruler, or philosopher-king, should establish political equality among its citizens, who by sacrificing selfish interests would come to equate their own fortunes with those of the city in which they belong.
  • Aristophanes another Greek philosopher, proclaimed through a dramatic figure, Praxagora, that she would make land, money, and everything that is seen as private property, common to all.
    • Christian Theology
  • Christ’s Teachings – Jesus told his followers that it would be easier for a camel to pass through a needle that for a rich man to enter he kingdom of heaven. He advised one wealthy-petitioner, who asked what he must do to attain eternal life, “If you would be perfect, go and sell what you possess and give it to the poor.”
  • St. Martin of Tours, an early bishop of the new church, preached that a true Christian must act as “the helper of the lowliest, the protector of the weak, the shelter of the hopeless, and the savior of the rejected.”
  • Early Christianity introduced to the world the novel but counterintuitive idea that the weak, the poor, and the humble had as much human value as great statesmen, mighty warriors, and wealthy citizens. In the eyes of God all souls might be equal or at least judged by universal moral standards to which all were equally bound. Yet, Christianity even at its most radical stopped short of advocating outright equality of wealth as proposed by Socrates and Aristophanes.
    • Thomas More espoused in Utopia the vision of a society without money, laws, or lawyers, where economic activity is rationally planned by ‘magistrates’ who never engage the people in unnecessary labor. The chief end of a constitution is to regulate labor to serve the needs of the people and to allow all the people as much time as is necessary for the improvement of their minds so that they can contemplate the conditions that make their life happy.
    • John Calvin, a radical Protestant theologian, proposed the establishment of tight knit communities based on his theology of austere morality and the renunciation of materialism.
    • Jan Mathy was a leader of an Anabaptist Sect, predecessor of modern Amish or Mennonite sec that were strict Calvinists, who attacked Catholics and Lutherans for hoarding gold and other precious metals. Mathy led followers in looting Catholic monasteries, pressed for the abolition of money, and declared food stocks to be common property.
  • Enlightenment Philosophy used reason to advance the human condition through liberty, progress, and tolerance. One of the leading theorists of the era was Jean Jacques Rousseau.
    • Rousseau was a widely respected enlightenment philosopher who stipulated that social equality was only possible if humanity could avoid the corruption that were granted to wealthy citizens at the expense of others. He did not believe that reason and scientific ‘progress’ would improve lives. Rather, he believed that owning land corrupted society because it kept others from using it. According to Rousseau, the fruits of the earth belong to all and the earth to no one.
    • Rousseau’s essay, “The Social Contract”, stated that man is born free but chains himself by his personal needs. However, he did not believe that eliminating private property is necessary because a justly organized community will assure citizens of legitimate ownership. Nevertheless, Rousseau pointed out that an individual’s right to own property is subordinate to the community’s right to all property.
    • Rousseau concluded that whoever violates the general will (social contract) of the citizens to provide a justly organized society will be forced to obey by the entire community. Under this rule, the violator of the social contract must be ‘put to death” because the violator has lost the right to be a citizen and is now an enemy. However, if a citizen obeyed the ‘general will of the community’ the citizen could keep the right to private property.
  • French Revolutionary Philosophers who incited violence as inspire the establish of a new idealized state based on benefits as advocated by enlightened philosophers like Rousseau.
  • Maximilien Robespierre used Rousseau’s statement of the general will of the people to justify the guillotining of 25,000 enemies of the French communal state. His draconian rule became the precedent for apocalyptic revolutionary terror that has plagued and inspired western civilizations since the French Revolution.
  • Etienne-Gabriel Morrelly, Rousseau’s contemporary, believed that greed was the cause of man’s fall from grace. According to him, the desire to possess property is a universal plague of selfish interest that destroys social fabric. Thus, when property does not exist, none of its pernicious consequences will exist. In order to assure that society rid itself of greed, he proposed the following laws to align man with the intentions of nature.
      • Law #1: Nothing in society must belong to anyone, except for those goods used for immediate needs, such as for work or for personal needs like food.
      • Law #2: Every citizen must be sustained, maintained, and occupied at public expense.’
      • Law #3: All citizens must contribute to public services according to their strengths, talents, and age. This would later become the Marxian principle that from each according to his ability to each according to his needs.
      • Law #4: Foreign trade should be closely controlled to prevent accumulation of private wealth.
      • Morrelly also discouraged profit from the distribution of goods by decreeing that nothing can be sold or be exchanged between citizens. The exchange of goods would be regulated at the public storage facilities to prevent hoarding of goods by setting short, fixed terms for their use.
    • Francois-Noel Babeuf, a manager of feudal funds for leading members of the French aristocracy, became disillusioned the aristocracy/feudal system during the French Revolution. He rebelled against the inequality of the aristocrats and the church because they controlled the wealth of the state and impoverished the peasants. Babeuf in his Manifesto of the Equals opposed civic equality and demanded absolute equality in everything. He called for the French Republic to apply Robespierre’s reign of terror against the rich who were unwilling to renounce their wealth in favor of the indigent. He said that wealthy aristocrats were the true enemies of the people. Therefore, all property of the aristocracy should be confiscated and given to the poor. Like Morrelly, Babeuf would decree that provisions of all sorts shall be brought to the people in public places, where they would be distributed equally, which would underpin the Leninist-Stalinist rule that all members would perform all labor which would be collected into storehouses to be equitably distributed.
  • Utopians establish communities so that members can attain philosophic ideals to promote their betterment. Owen’s and Fourier both attempted to create utopian communities that embodied the ideals of the enlightenment.
    • Robert Owen, a mill owner in Scotland, bought land in Indiana for a planned agro-industrial community and named the endeavor New Harmony, ‘This community would unite all interests into one, and remove all causes for conflict between individuals and married couples. This community failed as people objected to the limitation on marriage and other restrictions of their freedom.
    • Charles Fourier, a wealthy French merchant, proposed restructuring industrial plants so that laborers would receive profit from the firm and would be able to change their work frequently to avoid monotony. His project failed when builder of his idealized agricultural farms wasted seeds needed for planting. He blamed its failure on souls corrupted by materialism.
  • Anarchism abolishes authority and replaces state-controlled government units with voluntary communities and mutual aid. Here are two leading anarchical philosophers who had a profound impact on revolutionary theory in the nineteenth century.
  • Pierre Proudhom Pierre Proudhon, one of the earliest proponents of anarchism was a contemporary of Karl Marx. Proudhon, as with Marx, declared that property is robbery, and the government uses violence and repression to enforce property rights. However, he deplored tyrannical violence and injustice to eradicate private wealth because it would produce stupid uniformity. He saw anarchy as the absence of a ruler or a sovereign that would lead to peaceful communities of voluntary self-governance. According to him, communism would promote forced social equality through oppression and slavery. The contradiction of Proudhon’s peaceable anarchic world is that anarchism could only take place after a violent spark was lit to galvanize the emergence of anarchic communities. There have been numerous instances where anarchists tried to light the spark with violence, for example: the Haymarket bombing in Chicago in 1886, the Wall Street Bombing in 1930, the assassinations of Empress Elizabeth of Austria in 1898, King Umberto of Italy in 1900, and President McKinley in 1901
    • Mikhail Bakunin, a Russian anarchist, as with Marx, declared that property is robbery, and that government has employed violence and repression to enforce property rights. However, Bakunin took a different tack than Marx by deploring tyrannical violence and injustice to eradicate private wealth because it would produce stupid uniformity. Bakunin like Proudhon, saw anarchy as the absence of a ruler or a sovereign that would lead to peaceful communities of voluntary self-governance. According to him, communism would promote forced social equality through oppression and slavery. Bakunin pointed out a great contradiction of Marxist theory; that is, if the proletariat is to be the ruling class and the other classes disappear, then who would they rule. Once the proletariat became the rulers, they will cease to be workers and begin to look on the workers’ world from the highest levels of the state. Most importantly they will no longer represent the people but will represent their self-interest to govern the people. Bakunin asserted that anyone who doubts this is unfamiliar with human nature. Furthermore, Bakunin saw the inherit arrogance of the Marxian model because the new rulers would be learned or scientific socialist-bureaucrats, and as a result these leaders of the proletariat would become independent of the proletariat. Thereby, the Marxian superclass of rulers would transform themselves into oppressive, offensive, and contemptuous rulers of the world. The dictatorship of the proletariat would become a self-serving governance mechanism that would run rough shod over society.
  • Dialectic Philosophy – Georg Wilhelm Hegel dialectical philosophy is the bedrock of Marxian theory that also exposes the internal contradictions of Marx’s application of the dialect philosophy.
  • Hegel believed that although the world was not a happy place, nevertheless, he believed that reason could be used to find an inner logic and harmony to promote societal change.
    • Hegel postulated that the world could be understood through a ‘dialectical process (dialogue) that would lead to a collision between opposing forces through a thesis (a proposition), an antithesis (a proposition in opposition to the thesis), and a synthesis (combines the truths of the thesis and antithesis). He believed that through the dialectic man would become self-aware and free. This dialectical cycle provided Marx with a logical basis for his theory.

Marxism Flaws

  • That Marxian theory can deduce Hegelian logic of thesis-antithesis-synthesis in all individual and social behavior. The problem is that this deduction is in fact an untested assumption on their part.
  • That Marxism can control the self-interested behavior of citizens, when in fact the government scientific leaders cannot check their own self-interested behavior.
  • That a proletarian dictatorship will subsume their self-interested behavior like desiring better housing, good food, tailored clothing, elite education, while rejecting the opportunity to rid themselves of their enemies, real or imagined.
  • That the Marxist application of the Hegelian cyclic logic ends with the fading away of the proletariat dictatorship to be replaced with a type of anarchism in which no one governs. However, Lenin and Stalin did not accept this assumption because they believed that the dictatorship would continue ad infinitum.
  • That when the ruling class is replaced by the proletarian dictatorship it will improve the outcomes for the communist society. So far, where Marxian theory has been applied, it has failed miserably in improving the human condition. Unless the Marxist intent was to establish societies where the human condition is characterized by abject poverty, only then could a Marxist state be considered a great success.
  • That the proletarian dictatorship never disappeared as predicted by Marx, but became a permanent fixture of Marxist states as forecast by Bakunin. Furthermore, the caste of professional bureaucrats spent considerable time, effort, and resources protecting their perks while confiscating the wealth of their enemies.
  • That Marxism is an incredibly inefficient system to manage an economy is self-evident because it replaces market competition with national planners whose plans are governed by theory, self-interest of the leaders, and not market decisions of consumers and financiers. The internal contradictions of Marxian economies eventually rear their ugly head as they imposed impossible production goals on collective farm and industrial managers. The farm and industrial would lie about the actual amount of goods produce to protect their job, their perks, and their lives. These lies from the managers to the leaders led to false assumptions about the efficiency and effectiveness of the Marxian system, which in due time would crush the peasant and proletariat within a community of lies and universal poverty. In other words, deceit begat deceit which eventually led to the demise of the Sovie Communist State. There was an old saying by the proletariat under the Soviet State. You pretend to pay us and we pretend to work.

Marx the Bourgois Revolutionary!

  • While Marx wrote his revolutionary thesis, his father provided funds to maintain his son’s indulgent lifestyle. His father was not happy with Karl as a lay about revolutionary, who insulted the family.
  • Although Marx told a fellow philosopher that a ‘philosopher must be driven by a ruthless criticism of everything,’ he did not deny himself the fruits of his father’s labors. Marx was an early, but now familiar social type – a trust fund baby and revolutionary, who was not interested in a life of social consequence, but content to live off his parents as long as they allowed him the luxury of berating his father’s class.
  • Marx most radical papers came after he married his childhood sweetheart, who had a nice sized inheritance. In addition, Marx had a dream job that required little work except to write opinion pieces berating the bourgeoisie. Soon after the marriage, he and his wife move to London where they lived the life of an upper crust bourgeois- renting a splendid residence staffed by liveried servants. Marx met Engels in Belgium. Engles had a reliable source of income from his father who was an owner of a textile mill
  • While Marx was with Engels in Belgium, Marx took became a working revolutionary by promoting class consciousness to factory laborers. He discovered to his chagrin that they wanted better wages not revolution. Marx saw laborers as narrow-minded and unsophisticated about their exploitation by factory owners. Marx drew the conclusion that a revolutionary cadre would need to raise the consciousness of the proletariat as a class. After the proletariat learned that they were exploited, they rebel against the owner and the communist utopia would come into being.
  • Marx admitted that though not being a proletarian, he and other communists had the great advantage of clearly understanding the need for a proletarian mass movement. Therefore, only Marxists could teach the theory of Communism, which may be simply stated as the Abolition of Private Property.

The Marxist Revolution in Russian

Unfortunately for Marxist theorists the revolution took place in a peasant country and not a country, as expected by Marx, in which the bourgeois oppressed the proletariat workers. Marx thought that the communist revolution would take place in heavily industrialized Germany. However, that did not take place until Germany was conquered after World War II. What follows is a brief discussion of how despotic leaders pressed the communist revolution on Russia and then outside of Russia after the second world war.

  • Vladmir Lenin
  • Vladimir Lenin was the primary protagonists who pressed forward with the Russian Revolution in 1917 and imposed draconian measures against what he saw as counter-revolutionaries. His vehicle for the revolution was the Bolshevik party.
  • During the Russian Revolution and the civil war that followed from 1917-20, a famine spread throughout the country because of droughts, the loss of agricultural workers due to WW I and resistance to the communist revolution. During the famine, the Bolsheviks (communist party-political leaders) led by Lenin introduced compulsory labor for peasants and confiscated their harvests to feed the main cadre of party supporters in Moscow and Leningrad. The Communist leadership deemed that they had to feed their comrades in those cities first because they might rebel without food. The resulting famine in the agricultural districts of the Soviet Union resulted in the deaths of 2.5% of the population. Famine would become the main tool in subjugating recalcitrant citizens in Russian and other communist countries in Asia.
  • Besides the suppression of counter-revolutionaries, the party leadership enacted laws to confiscate: industry, small business, news media, and Russian Orthodox church. At the same time, the Bolsheviks enacted laws that allowed divorce when one party to the marriage simply said that the marriage was over that upset centuries of traditional religious beliefs. In addition, the Bolsheviks turned class privileges on its head by giving priority in work, housing, education, and food to the proletarians, while former members of the bourgeois and aristocrats were assigned to menial work and were denied entrance into colleges and technical academies.
  • The Bolshevik brought the state into line by renaming Russia as the Union of Soviet Socialist Republics (USSR).
  • Joseph Stalin
  • During Lenin’s life-ending illnesses, Joseph Stalin, a revolutionary brigand from Georgia, insinuated himself between Lenin’s household and the party leadership. Immediately, upon Lenin’s death, Stalin took control of the party leadership. It was from his perch as Communist Party Leadership that he took control of the party apparatus and the governance of the state and provinces. Stalin spent the rest of career and life eliminating perceived threats from fellow comrades and from all sectors of the country. His paranoia about those both near and far led to a series of purges and trials that cowed the population while eliminating millions of citizens of the USSR.
  • The list of purges under Stalin were long and never ending. They first started with the removal and execution of former comrades and leaders of the central party committees like Grigory Zinoviev and Lev Kamenev. Unfortunately, for Kamenev, he made the mistake of suggesting to Zinoviev and others that they should replace Stalin because of his incompetence. As a result, they were labeled as ‘leftist threats’ and quickly dispatched. The execution of these two former friends, comrades, and leaders of the party were soon joined by untold thousands who were imprisoned or quickly dispatched by the Soviet secret police.
  • By 1931-32, Stalin moved from eliminating individuals to nearly eradicating citizens of the Ukraine because they resisted Stalin’s decree to force the peasants off their small agricultural holdings into collective farms. This political action led to the famine called the Holodomor, in which the Soviet census suggests that 3.9 million Ukrainians starved to death. Their emaciated bodies could be seen on roads, in front of houses, in the fields, and on the streets of cities adjacent to the Ukraine.
  • Show Trials of the Late 1930s followed the assassination of Sergei Kirov, the communist party head of Leningrad. The assassin appeared to have a personal vendetta against Kirov, but the assassination provided Stalin with the excuse to purge more of those whom he believed were his enemies. During this purge, Stalin executed the director of the KGB, Genrikh Yagoda, and military leaders claiming they were part of a vast right-wing conspiracy. Lastly, Leon Trotsky, Stalin’s nemesis from the days of the revolution was murdered in Mexico. The result of the purges was that most of the old Bolsheviks were killed, and the ranks of military officers were gutted. Nearly l million died during trials and 2 million were left starving in Soviet prison camps (Gulags). By the start of the invasion of Russian by Hitler in 1941, the Red Army was still trying to fill all its empty officer billet with qualified officers. The loss of military officers had a disastrous effect during the first year of the invasion where millions were captured and/or died.
  • As Stalin took control of the foreign policy of the Soviet Union, he attempted carry forward Marx’s proposition that the countries of Western Europe were ripe for communist revolution. He established the Comintern to foster international revolution. While there were a few cases of communist revolutionary activity in Hungary and Germany, they soon failed. As a result, the drive to Overthrow the World was postponed until after WW II.
  • World War II was both a tragedy and triumph for Stalin’s version communist leadership. Although Stalin conquered Nazi Germany and took possession of a ring of formerly independent countries on the edge of the Soviet Union, the victory cost the lives of 27 million soldiers and citizens. After the war, the Soviet Union struggled to survive because of the loss of so many laborers and managers.
  • There is credible evidence that after excluding the massive number of deaths during the second world war, that Stalin’s was responsible for the death of another 14 million people. These figures do not begin to cover the loss of freedom to millions of Soviet citizens confined to the notorious gulags as slave laborers.
  • Stalin’s actions coupled with the general inefficiency of a communist regime permanently weakened the country’s ability to reach a state of economic stability.
  • Sad Note of Naivete for Emigrants to Communist Russia

Many American trade union members sought to escape the Depression in the United States during 1930s by emigrating to the socialist paradise. They sincerely believed Soviet propaganda that communism had solved the problem of poverty. Sadly, they soon discovered that the place was not a worker’s paradise. Instead, it combined hard work with long shifts, low wages, rationed food, no travel, and few days off with the constant fear of being sent to the Gulags. Many of these emigrants died either in the gulags or during the war.

  • Overthrowing the World Resurfaces after WW II
  • Mao Zedong won the Chinese civil war in 1948 after the United States withheld military support for Chiang-Kai-Shek undermining his miliary position relative to Mao.
      • Mao added a twist to Leninist-Stalinist revolutionary action – the public confession. These confessional meetings held in towns and villages throughout China forced the middle class to confess to their bourgeois sins and to give up their property. These confessionals typically led to either a re-education camps or a public execution.
      • When the Chinese Communist took over the government, they drove out all foreign business owners and confiscated their properties. Mao, in most other aspects of his takeover of the government, followed the Stalinist line of confiscating property, forcing property owners into poverty, naming untrained people to run the government, and in cases of peasant recalcitrance – starvation.
      • Mao was fond of creating chaos throughout his reign, for example, he began his regime with the Hundred Flowers Campaign, the Great Leap Forward, and the Cultural Revolution. The first event spread communism throughout China, the Great Leap Forward was intended to quickly industrialize the nation, and the Cultural Revolution destroyed most of the traditional culture of the country. These campaigns sowed chaos in the villages and the cities; as a result, these campaigns were utter failures.
      • Mao may have been the Communists champion killer because he is credited with killing 45 million of his citizens through famine, punishment camps and executions.
      • After Mao’s death, his chief deputy, Chou En Lai, introduced a capitalist economy but kept the party in control of the government. The results have been mixed. The government has used a historic tactic to suppress counter-revolution by claiming an outside country, in this case the United States is an existential threat to the Chinese state.
    • Kim Il- Sung’s family in North Korea, and Pol Pot in Cambodia followed the communist platform but introduced quirky local variations, such as family worship in the case of the Kim’s and Pol Pot’s attempt to eliminate everyone who was not a true believer by killing them. Even though the death records of North Korea are not accessible, analysts have estimated that the Kim family have killed between 700,000 to 3.5 million people. Pol Pot’s regime was more ambitious in ridding itself of citizens perceived as threats to Pol Pot communist regime by killing 1.5 to 2 million Cambodians or about 25% of the population of Cambodia.

In summary, Marx’s theory has proven to be an utter failure with its main result being the murder of 54 million in Russia, China, North Korea, and Cambodia.

Rebirth of Marxism, despite the historic evidence of the failures and accompanying murderous policies, the young seem to be enamored by the fairy tale of all being equal and the ending of private property. Of course, they are foolish enough to ignore that they as members of the bourgeois are the very people that they intend to eliminate.

  1. This paper liberally paraphrases statements from To Overthrow the World. Since this is an informal paper, I have not cited the references to the paraphrases. However, it is fair to assume that nearly every major point and bullet point can be tied back to the Overthrow the World book.

The Simple Budget Model That Confounds Fiscal Strategy for Private Colleges and Universities

This simple budget equation captures the major factors that drive the on-going financial condition at most private colleges and universities. The conundrum for the president, chief financial officers, and other chief administrators is the degree to which they do or do not have control of the budget variables.

Budget Model

The budget model is a straightforward linear equation with easily recognizable variables that drive the outcome net income. However, the values that feed the variables make the model idiosyncratic for each institution. In the past, the model was a finely tuned instrument intended to set tuition that students can afford, fund its operations, and maintain its solvency. Owing to the large number of closed or merged colleges and cancelled academic programs, the budget that is based on the current structure, policies, and academic programs is having greater difficulty finding: a tuition price that works for the student and college, funding its operations, and maintaining solvency.

Budget Model Balancing Mechanism: Revenue, Expenses, and Net Income

The budget model depicts the balance as changes take place among– revenue, expenses, and net income. The following table lays out typical changes in revenue expenses, and net income.

Revenue

Expense Decisions

Net Income

If revenue increases

Expenses could increase

Net could decrease, remain stable, or go down.

If revenue decreases

Expenses could increase

Net would go down

If revenue remains the same

Expenses could remain the same

Net could remain the same

If revenue remains the same

Expenses could increase

Net would go down

Because private colleges are dealing with significant threats to their cash reserves, the budget model variables and values should be construed to estimate the impact of the budget on cash reserves. Therefore, depreciation would not be included in the model because depreciation is a non-cash transaction. As a result, net Income should be equivalent to positive or negative changes to cash reserves. Obviously, this caveat does not account for non-cash variables or values such as, depreciation. While the primary goal of the budget model is to estimate the cash effect of budget decisions, it would be prudent for the college to test the budget impact on the audit version of net income by including depreciation.

Richard Cyert and the Budget Model

Before the discussion on the budget equation begins in earnest, let us consider what Richard Cyert, a leading organizational theorist, and the late president of Carnegie-Mellon University, developed the concept of Economic Equilibrium,[1] which is a state of long-term financial sustainability that rests on the following principles[2].

  • There is sufficient quality and quantity of resources to fulfill the mission of an institution, and
  • The organization maintains:
    • The purchasing power of its financial assets.
    • Its facilities in satisfactory condition.

Cyert’s theory posits that equilibrium depends on continuously increasing cash flows from operations to maintain the purchasing power of its operating financial assets and sufficient capital gifts to keep its facilities in satisfactory condition. Colleges need a dynamic state of economic equilibrium in which financial resources grow to avoid a state of disequilibrium; i.e. budgetary outcomes that puts a private college a risk of slipping into insolvency. An institution can no longer assume that positive but small changes in net income and financial assets are sufficient to stave off disequilibrium.

When an institution’s financial condition has eroded to the point where its cash and financial reserves have been seriously depleted, developing a strategic plan to achieve a dynamic state of equilibrium is difficult. Easy decisions, such as raising tuition or simply cutting expenses across the board, can be counterproductive if it pushes the college outside its competitive boundaries[3]. As Richard Cyert noted, “the trick of managing the contracting organization is to break the vicious circle which tends to lead to disintegration of the organization. Management must develop counter forces which will allow the organization to maintain viability.”[4]

Cyert’s proposition about economic equilibrium implies that it is imperative for colleges to retune their budget model to maintain or regain equilibrium. Keep these comments in mind, as the revenue, expense, and net income factors that make-up the model are examined.

To reiterate, the purpose of this paper is to gain a better about the budget equation and the factors that drive the equation.

Revenue Factors

Revenue provides the funds to support operational costs to carry out the mission of the college. The revenue factors discussed below include: enrollment, tuition and fees, tuition discount, and non-tuition revenue

Enrollment (E)

Enrollment, as anyone who works in budget planning well knows, is not a simple sum of all the students in the college. The nuances are myriad. Here are several aspects of enrollment that need to be considered.

  • Recalling that this is a budget exercise, enrollment is subdivided based on the price charged for a particular segment of enrollment. For example:
    • Undergraduate students typically are charged a different tuition than graduate students,
    • Part-time students are either charged at a fixed rate depending on how part-time status is defined; or on sliding rate depending on the credits taken;
    • On-site classes may have a different rate than on-line classes;
    • The price-enrollment categories are endless. Obviously, any degree of complexity in the price-enrollment requires precision in accounting for the different enrollments so that enrollment and accounting records can be reconciled.
  • Besides the price-enrollment dynamic, enrollment is subject to student demand for the college, graduate outcomes, its programs, reputation, location, and schedules. Student preferences have changed dramatically since the COVID pandemic and changes by employers in the type of skills that they seek from college graduates. Now, a growing proportion of prospective and enrolled students want a degree that directly related to their probability of finding employment that provides both a loveable wage and cover the costs of living and debt service for their education.
  • Moreover, prospective students seek more information from social media about colleges and their outcomes. As a result, the old enrollment strategy of traveling to high schools to find students is now a minor tactic compared to current dynamic and sophisticated student marketing campaigns.
  • The Enrollment Cliff has wrecked the old new student strategy of needing just a few more to make budget and sustain financial operations. Because of the Cliff private colleges now live in a state of anxiety because they cannot find students to match current enrollment let alone keep pace with costs by enrolling additional students to

Tuition and Fee Charges (T)

  • Economics of tuition and fee charges – they are the price that mediates student market demand and the supply of colleges programs. Because of the demographic cliff combined with too many colleges offering similar programs, colleges have lost their capacity to control tuition and fees. Under these conditions, price – tuition and fees – should fall. Since most of the discussion about tuition is about the posted price, real price declines have been missed. For years, analysts have pointed out that tuition discounts reduce the posted price and over the past several years, real tuition has been falling dramatically as tuition discounts increase. (see the later discussion on tuition discounts to understand the impact of rising discounts on a college’s financial stability).
  • Howard Bowen.[5] in the 1980s expressed skepticism about the apparent business principle in which expenses drove tuition and fees. The implication of their skepticism is that at some point private colleges and universities would lose that luxury in which tuition and fees could be pressed forward without any consequences. It is now evident given the tight constraints that college face when adjusting tuition charges that their incredulity was justified.
  • Colleges have been able to game tuition constraints by increasing fee rate and by adding new fees. This game will not work well during a time of pinched student financial resources.
  • Colleges no longer face an ignorant student market with few choices, parents and students have become savvy price negotiators, which has transferred pricing power from the institution to the student.

Tuition Discount (td)

  • A tuition discount is an unfunded institutional scholarship that reduces the price of tuition. Because the scholarship is unfunded, the college does not receive offsetting cash from endowed funds as it would with a funded scholarship or a government grant. This means that as unfunded tuition discounts increase, cash decreases and the capacity of the college to cover its existing cost structure is diminished, which increases its risk of failure.
  • The financial crunch, in which colleges try to maintain economic equilibrium during a period of severe decline in student markets, change in student preferences away from existing majors, and, as will be noted below, decisive cuts in federal funds is putting greater pressure on colleges to increase tuition discounts. The problem is, as indicated above, that every uptick in tuition discounts cuts into the cash needed to support operations and throws colleges into economic disequilibrium.

Non-Tuition and Fee Revenue (NT)

  • The sources of Non-Tuition and Fee cover grants, gifts, endowment draws, auxiliary revenue, and any other revenue not related to tuition. Just a note on endowment draws, since median draws is about 5% of the endowment, a $1 draw $20 of endowment. This relationship requires a large endowment to have any real impact on the budget. Because most private colleges do not have large enough endowments or the prospects of substantially increasing their endowments, this source of revenue remains a minor player during a time of financial crisis.

Further Notes on Revenue in the Budget Model

  • For the average private college, enrollment driven revenue is the primary source of funds that drive the outcomes of the budget model.
  • For most new and continuing students, the price of enrollment is made palatable by federal aid, funded institutional scholarships, and unfunded scholarships. Any significant negative changes in federal and funded scholarships can adversely affect a student’s decision to enroll. In addition, when colleges try to minimize the effect of shrinking federal aid or strong price competition by increasing tuition discounts, too often the financial viability of the college is threatened.

Expenses Factors

Expense factors delineate the way in the categories in which funds are allocated to carry out the mission of the college. The expense factors discussed below are: direct costs, general administrative costs, depreciation, and capital expenses.

Direct Costs (DC)

Direct costs include: instruction; student services, academic support, and other costs associated with delivering educational services to students. NB. This discussion does not include research because private colleges with large research budgets usually have a different budget dynamic.

General Administrative Costs (GAC)

General administrative costs encompass: institutional administration (president’s office, insurance, utilities, and like costs that relate to all segments of the college), building and grounds, and other general administrative costs that are included in the audit under institutional expenses.

Auxiliary Costs (AUX)

Auxiliary costs cover the cost of running: residence halls, food stores, book stores, and any other peripheral operation that is deemed by the college as auxiliary to the main purpose of the college and generates auxiliary income.

Depreciation (DEP)

Depreciation is the annual accounting charge against net physical assets, such as, buildings, grounds, and equipment. Depreciation should not be included when estimating cash generated from net income.

Capital Expenses (CE)

Capital expenses usually involve interest payments on debt.

Notes on Expenses

Multiple conditions usually constrain the flexibility of budget planners in what they can easily cut during a financial crisis: tenure, employment contracts with long-term commitments, debt, location of classrooms, utilities, contracts with third parties, zoning restrictions on the use of property, and restrictions on the use of endowment funds, engineering limits on buildings. Each college often has unique conditions which limit a college’s flexibility during a financial crisis.

Net Income (NI)

Net income is simply what remains after expenses are deducted from revenue. If the goal of the college is to reach Cyert’s Economic Equilibrium, then the college must focus on the Net Income in terms of the cash that it produces.

The Balancing Act

  • Typically, when a college intends to resolve financial stress by using the Cyert Criteria of Economic Equilibrium, it must continuously Net Income shows positive cash flow. Then, the rebuild cash reserves and any loans from the endowment within two to three years? If the budget model falls short in resolving financial distress, then the college must work harder to reduce costs, find new sources of income, and convert assets to cash.
  • Debt covenants, such as, the requirement not to produce a string of deficits, can force a college to make large expense cuts that would dimmish the college’s capacity to serve its mission.
  • Debt collateralization occurs when a college grants rights to property to a debt holder to secure a loan. During a financial crisis, collateralized property may not be sold without the debtholders’ permission. Moreover, even if they can sell the property, the debtholder could tell the college that the proceeds from the sale go toward reduction of debt principal.

  1. Cyert, R. (July, August 1978); The Management of Universities of Constant or Decreasing Size; Public Administration Review; p. 345.

  2. Competitive bounds refer to a matrix with price and quality as axes of the matrix. A specific market is depicted as a smaller square within the matrix which includes potential students who prefer to enroll at a specific college with a particular level of price and quality.

  3. Bowen, Howard C. (1981) The Costs of Higher Education; Jossey-Bass; San Francisco; pp.18-20.