Higher education has seen better days. The recent high-profile case of plagiarism and dishonesty by former Cambridge professor Jason Arday has become a flashpoint in a broader debate over whether universities still maintain the academic excellence they claim to value. Many on the political right argue that the left-wing ideology that elevated Arday is eroding traditional standards. Liberal critics tell a different story, blaming corporatization and a consumer model that treats students as customers. The rise of adjunct instruction and decline of tenure-track positions, they argue, have further eroded expectations and professionalism. Both sides nevertheless converge on a diagnosis: rampant grade inflation and declining academic rigor are chipping away at public trust in what a college degree actually signals.

What is often missing from this debate is the question of incentives. Charlie Munger, the longtime vice chairman of Berkshire Hathaway, was famous for insisting on their decisive power. “Show me the incentive,” he liked to say, “and I’ll show you the outcome.”

One of his favorite examples involved FedEx. Its overnight system depended on workers unloading, sorting, and reloading packages at a central hub with almost no margin for delay. Yet planes kept leaving late. Managers’ efforts to encourage teamwork barely moved productivity. The fix was simple: Pay workers by the shift rather than by the hour. Once the planes were loaded, they could go home. The delays vanished. Paying by the hour had been a perverse incentive—workers had nothing to gain from moving faster.

Higher Ed’s Perverse Incentives Have No Quick Fix

Higher education is more complicated. Universities are not merely delivering a product; they are expected to cultivate citizens capable of participating in democratic life and contributing to the economy. That requires rigorous standards that equip graduates to navigate serious challenges, from AI disruption to unsustainable debt and ecological uncertainties.

Regrettably, the most powerful incentives facing higher education work against those standards.

Consider enrollment pressures. Although elite institutions and flagship state universities remain comparatively insulated, the pressure to attract and retain students is intensifying across the sector. The impending enrollment cliff creates a direct incentive for tuition-dependent universities to lower admissions standards simply to fill seats. State reimbursement formulas tied to graduation numbers compound the problem, pushing institutions toward looser degree requirements or grade inflation to boost completion rates.

It is unsurprising, then, that roughly 90 percent of U.S. universities are now test-optional or test-free. Raising the admissions bar threatens enrollment and fiscal health. Equally unsurprising is the growth in student-support infrastructure—advising, counseling, tutoring, and mental-health services. The more underprepared students an institution admits, the greater the pressure to help them persist to graduation.

And underprepared they are. Recent NAEP data show a troubling deterioration in academic achievement, particularly in reading, with 12th-grade scores falling to their lowest level in decades. Recent ACT data tell a similar story: average scores have declined substantially since the mid-1990s. Yet high school grades continue to rise.

The result is a troubling disconnect: Students’ measured competencies appear to be declining while their grades signal the opposite. The same pattern is evident in higher education. A’s and B’s now constitute the overwhelming majority of grades at many colleges, while D’s and F’s have become vanishingly rare. There are even calls to abolish grades altogether. Western Oregon University recently eliminated D− and F grades for undergraduates, while the University of Michigan will replace first-semester letter grades with “Pass” or “No Credit” beginning in 2027.

Less About Villains, More About Incentives

It is easy to malign such decisions as short-sighted or corrupt. Conservative critics often treat changing grading policies and “administrative bloat” as bad choices driven by overemphasis on equity and mental health at the expense of competence and grit. Yet as students arrive less prepared, an administrator’s primary responsibility is protecting the institution’s fiscal health. Debates over higher education too often ignore the constraints shaping stakeholders’ behavior.

Faculty are no exception. It is easy to criticize them for abandoning rigorous instruction. Yet given the incentives they face, their decisions to inflate grades and reduce coursework are predictable.

Student teaching evaluations are central to the story. Course ease has been shown to be a leading predictor of high student evaluations. Probationary faculty seeking tenure—and adjuncts hoping to keep their contracts—have compelling reasons not to antagonize students who influence their career prospects. Add a traditional reward system that prioritizes research productivity, and the question is clear: Why would professors risk student and administrative pushback by insisting on high standards?

Education Essential Reads

The result is a system in which nearly every actor—administrators, admissions officers, and faculty—faces incentives that pull against rigor. Munger never suggested FedEx simply needed better employees. He understood that people respond to the incentives in front of them. Until those incentives are redesigned, no amount of ideological critique, from the right or the left, will restore the rigor of the college degree.

A Much-Needed Conversation About Incentives

I cannot pretend to have a magic-bullet solution to this structural problem. My colleagues and I argue that a renewed national commitment to both public financing of higher education and high academic standards is overdue. At present, we have the opposite: a student-debt-financed system encouraging ever-greater enrollment while weakening the signals that tell us what students can actually do. We are producing more graduates with high grades but, too often, insufficient marketable skills while student debt approaches $2 trillion.

From a post-tribal perspective, liberals have to take seriously the conservative argument that not everyone is suited for a four-year college degree. Conservatives, in turn, have to acknowledge that access to higher education should not depend on family wealth. Greater public financing, combined with meaningful admissions and learning standards, may offer a better path forward.

The alternative is to keep passing underprepared students from high school and through college with massive debt and unverified skills. It’s easier in the short term to kick the can. But what happens when the diploma no longer signals competence?

Bad incentives can explain how we got here. They can’t excuse where we go next.