In transition economies, governments have sold
off universities to raise money and reduce the public footprint―notably in
Kazakhstan, the largest of the post-Soviet economies in Central Asia. In that country,
the educational share of government spending has usually been lower than the
world average since 2004, according to World Bank data. In general, poor
countries may emphasize education more, relative to other products of the
government, than rich countries do. Education’s share of government spending is
larger in highly-indebted poor countries than in the world on average, which in
turn has a larger share than do high-income countries. These trends raise the possibility that
governments view education as a tool of limited value in developing the
economy. Advocates of privatization may believe
that especially in higher-income countries, turning over colleges to the market
will enhance efficiency.
In reality, privatizing universities may be lucrative in the short
run but costly in the long. This post explores why selling colleges to the
private sector might stunt economic growth.
The paper will look at a case study of this argument―how the United
States government in the last half of the 19th century stimulated
growth that continues today by publicly financing universities.
A morsel of theory
Advocates of privatization argue that the market can run
universities better than the government can. In reality, colleges are more complex
than privatizers concede.
To see why, consider two services that a university provides:
Practical education, in such fields as accounting and marketing, which enables the
graduate to earn more money. This is a
private service that earns a rate of return on the labor market, since it
enables the graduate to earn more. An
owner of the university can claim part of this return for herself, so she has
reason to increase the net value of practical education. The market may be able
to provide practical education efficiently, in the sense that it produces all units
of such education that has value net of costs.
Research and social
education. By
“social,” I mean that a university prepares the graduate to be a better citizen
through courses in such areas as political science, history, and the liberal
arts. An owner of a university who maximizes net revenue may not provide these
classes because they do not increase the graduate’s wages and thus the owner’s
own rate of return. Similarly, basic research has social value but does not
directly create profits. Breakthroughs in the theory of molecular biology may
not command a price on the medical market, although they may lead to treatments
of cancer someday.
In general, research and social education create “public goods.” The
layman defines a public good as anything produced by the government; but in the
view of economists, pure public goods are products with two characteristics
that prevent markets from furnishing as much of them as we would like:
Nonexcludability. By definition, no one can be physically constrained from consuming
public goods, whether or not she pays for them. Because nonbuyers cannot be
prevented from enjoying public goods, no market producer will provide enough of
them, since she cannot charge all beneficiaries a price. For example, no one
can be prevented from breathing, so everyone will benefit from clean air
whether she pays for it or not. Therefore she won’t pay―and so no profit
maximizer will volunteer to purge the air of particulates.
Another example: In colleges, training in political science creates
better citizens who help others by making more informed choices at the polls.
Because the college cannot collect payments from all citizens who benefit from
informed voting, it may not offer enough education and research in the field if
it is trying to maximize net revenues.
Nonrivalry. One person’s consumption of
a public good will not reduce the amount available to someone else. If Smith studies Jones’s history of the English
language, Smith will not diminish the degree to which someone else can
understand that history by studying the book. In contrast, an apple is
rivalrous: If I consume it, you can’t.
A nonrivalrous good is not scarce, so it cannot earn a price based
on scarcity. The market won’t supply it,
because a producer cannot profit from a zero price.
In short, if a profit maximizer buys a university, he may produce little
of such services as basic research and social education, because he cannot
profit directly from them. Ironically,
eliminating these services will diminish a university’s reputation and thus
reduce the market rate of return to its practical education. In principle, a
profit maximizer may furnish research to maintain the university’s reputation
and thus its high rate of return; but such a producer must be unusually
far-sighted.
Education also suffers from a more mundane constraint in markets: The
impossibility of collateral, as Friedman pointed out. If Smith wants a loan for purchasing a home,
he can put up the house itself as collateral.
But he cannot do this if he wants a loan for education, since providing
human capital as collateral amounts to slavery.
For that reason, poor households cannot get many educational loans
without guarantees from third-party financiers such as the government.
These barricades to education may thwart economic growth, since the
amount of education acquired accounts for a fifth of the differences in labor
productivity across countries, as estimated by Hall and Jones. One might think
that the gain in productivity will fully show up in wages and thus induce the
potential worker to pay high tuition while in college. But even productivity
increases that are not due to public goods may not be completely reflected in
wages. In a competitive labor market, wages will not fully capture the average
amount produced by a worker, because they are determined by the least valuable
worker hired. Consider a bicycle shop with two mechanics: One repairs five
bikes a day; the other, three bikes. Customers pay $50 per repair. The value of
the first mechanic is $250 per day; of the second, $150. If the shop pays the
same wage to both mechanics, its wage will not exceed $150, since otherwise it
will lose money on the second mechanic. But a $150 wage understates the value
of the first mechanic.
To illustrate the economic value of a college education, consider a
case study of the United States.
Log-cabin
colleges
American universities
supply public goods partly because voters think that the schools should advance
social welfare―an attitude that strengthened over the century following the
American Revolution. Land subsidies to
American education date back to the early American republic. The states created
public universities after the Revolutionary War ended in 1783; schools that had
received land from government included several that are still successes, such
as Harvard, William and Mary, Yale, Michigan and Dartmouth, noted Tolar.
As proposed by
Thomas Jefferson, the Northwest Ordinances of 1785 and 1787 set aside a section
in each township to support public education. “Religion, morality, and
knowledge,” said the 1787 ordinance, “being necessary to good government and
the happiness of mankind, schools and the means of education shall forever be
encouraged.” Congress also encouraged new states to provide public
education. “On the value of diffusing
knowledge through public schools there was substantial agreement,” wrote the
historians Tyack, James and Benavot, according to Kaestle. By the 1860s, free education was as mandatory
in the Old Northwest as it had long been in New England. However, before 1862,
most Americans had thought education “the responsibility of parents, churches,
and local town meetings,” wrote Kaestle.
This view would have circumscribed the public goods produced by universities,
particularly because only the rich could afford college since students had to
pay for their own lodgings, noted Cook and Ehrlich.
Northwest leaders
embraced the new philosophy. “An early attention to the instruction of youth is
of the greatest importance to a new settlement,” said Manhasset Cutler, who
founded a major player in the Northwest, the Ohio Company. “It will lay the
foundation for a well-regulated society. It is the only way to make subjects
conform to its laws and regulation from principles of reason and custom rather
than the fear of punishment.” (The quote is from Kaestle.)
Growing pains
Though
well-intentioned, the Northwest Ordinances did less to advance education than
did a later law. Perhaps the Ordinances were hampered by the primitive
conditions of the frontier. In contrast,
in its own words, the Morrill Act of 1862 sought “to promote the liberal and
practical education of the industrial classes in the several pursuits and
professions in life.”
This motivation
was decades old. “The agricultural origins of the Morrill Act go back as far as
the American Revolution,” wrote Duemer. The
Act’s contribution was to create colleges through a national system. It led to land-grant universities in each
state to teach agriculture, engineering, and the arts of war. Before the Act,
colleges had taught only a limited menu of fields. In 1819, the surveyor general of New York, Simeon
DeWitt, said colleges prepared students for "only three professions, law,
physics, and divinity, the only professions recognized as ‘learned.’" (The
quote is from Peterson). This was in the
European tradition.
Public acceptance
of public universities varied from region to region. Abraham Lincoln signed the Morrill Act in
1862, during the Civil War, when Southern congressmen weren’t around to object
that the Constitution didn’t say that the national government could provide
education. After losing the Civil War, Southerners changed their minds, and the
1890 Morrill Act set up agricultural colleges in their region.
In
any region, governmental wealth stimulated the creation of public universities.
In the 19th century, the Louisiana Purchase and smaller acquisitions
left the federal government richer in land than in funds. So Congress often
pursued economic development through land grants. The 1862 Morrill Act granted 30,000 acres to
the state for each of its Congressmen. Thus a state with two senators and three
representatives received 150,000 acres from the federal government. Roughly
speaking, the Act channeled more funds to more populous states.
The first Morrill
Act created 57 land-grant universities, mainly in rural areas to serve farming,
Liu noted. The pace of creating schools
picked up after 1887, when the Hatch Act threw more federal money at them. The
second Morrill Act added 18 land-grant universities in the South, many of them
devoted to African-American students because of segregation.
The land-grant
colleges still account for most departments of agricultural education in the
United States. The success of the
colleges “has shown the value of federal leadership and the advantage of bulletins
on nature study, school gardening, and having uniform laws and finances
creating an entire higher education system,” wrote historians Herren and
Hillison. The land-grant schools also grew over time and took on more
disciplines.
To the land-grant
colleges, the Hatch Act added agricultural experiment stations. The stations
supported such tasks as renewing soil, picking crops to grow, and canning. “For example,” wrote Tolar, “a small farmer
in eastern Oregon may contact the local experiment station and ask for advice
on anything from which type of seed is best for the soil on his farm to advice
on how to rid his barn of mice. His wife may ask for directions on how to
preserve certain vegetables or what to feed chickens.”
Other variants on
the Morrill Acts included the Smith-Lever Act of 1914, which expanded education
of farmers and homemakers, according to Whalen and Tolar. And the 1944 GI Bill
subsidized higher education for 8 million military veterans, noted Cook and Ehrlich.
Land-grant
colleges were so successful that Congress extended the concept to marine
research (1966), urban research (1985), space research (1988), and research
into sustainable energy (2003―the “sun grant” colleges).
Apples and curve correction
The
Morrill Acts seemed designed to provide public goods. The state could build the colleges on the
land―or sell the land to fund the colleges. But it could not spend the money on
buildings. This is consistent with the interpretation that the Morrill Acts
intended to finance public goods that―unlike buildings―would not be supplied by
markets.
The laws also
banned the state from using the land grants to pay for managing the investments.
The state would have to shoulder that cost, wrote Whalen. This too jibes with
the idea that the Morrill Acts were meant primarily to furnish nonmarket goods.
Finally, the Morrill
Act “also specified that the state had to invest the trust so as to yield at
least 5 percent annually, make that income available for the purposes of the
grant, and make up any deficiency,” noted Whalen. Thus the law did not regard
the trust as a money-making proposition. Perhaps one of its purposes was to
provide education and research that markets wouldn’t produce. “Land-grant institutions were asked to deploy
a liberal and liberating education for a broad swath of society, an education
that had practical value.”
To say that the
education was practical is not to say that the market would necessarily produce
it. For example, the Morrill Acts expanded the supply of engineers in the US. Although
the practical worth of engineering may seem obvious today, before the Morrill
Acts most engineers were products of West Point, and they numbered only 300 in
1866. By 1911, under the Morrill Acts, 3,000 engineers were graduating each
year in the US.
The public
services produced by a university can strengthen markets. For example, a land-grant school, Washington
State University, discovered that the Japanese were not buying American apples
because these were oblong rather than round.
So it developed perfectly round apples, said Tolar. Yes, we can view such activities as private goods
that the market can support: The export of round apples yields profits. But the underlying knowledge of such
innovations may be a public good if its dissemination cannot be contained; and giving
such practical education to poor farmers makes more equal the distribution of
income.
A final example of public goods that a university can bestow upon
us: Basic research for defense services.
We have already seen that the market will not produce enough of such a
public good. And yet its value is evident.
In the United States, “the successful research underpinning the
production of the atomic bomb convinced the public that fundamental research
was worthwhile, even though its application might not be immediately apparent,”
said Peterson. So perhaps the government should create it by financing research
universities.
Disembodied know-how
All told, the
number of universities per capita in the United States grew rapidly after
passage of the first Morrill Act, igniting economic growth, noted Cook and
Ehrlich. In their econometrics, they
devised a quasi-experiment in which the Morrill Act was a treatment of the
United States, with the United Kingdom (and sometimes other Western countries) as
the control group. They find that after the
Act passed, 78 more universities per 100,000 residents were created in the US
than in the UK. They controlled for factors
that might also have affected the creation of universities, notably real GDP
per capita.
Cook and Enrlich
conclude that the Act “launched the public higher education movement in the US…[which]
spearheaded a higher long-term rate of growth in per capita income in the US
relative to the UK and other major European countries.” For much of the 19th
century, the US had been “relatively poor” (p. 1). But it established a lead in educational
attainment over Europe in the 20th century, largely due to the growth
of high schools from 1915 to 1940. This
triggered economic growth: “Higher educational attainment was perhaps a major,
if not the major, instrument through which the US overtook Europe as the
economic superpower in the 20th century.”
In 1998, of those aged 25-64, a larger share had gone to four-year
colleges in the US (27%) than in any of the five largest economies of Europe.
Higher
education produces technological advances through “creative knowledge, which
flows from the minds of scholars, scientists, inventors, and entrepreneurs and
increases their capacity to accumulate new knowledge.” Such disembodied
knowledge may have increased the growth rate of per capita income in the
US. Over the period 1871–2012, the per-capita
annual real GDP growth rate in the US versus the UK was 1.8% versus 1.4%. “Our basic thesis,” wrote Cook and Ehrlich, “is
that the differences in the long-term per-capita income growth stem primarily
not from differences in physical stocks, including land or other natural resources,
but from differences in the rates of growth of human capital.” This resulted partly
from the institutional carrots in the US for accumulating knowledge, such as
high rates of return to schooling.
In
general, Cook and Ehrlich thought their evidence “remarkably consistent with
the view that human capital formation—especially
through the channel of public higher education—was the ‘secret weapon’
through which the US was able to achieve its robust long-term rate of
persistent, self-sustaining growth in productivity and per capita income”
(emphasis in the original passage).
Some
macroeconomists dispute that going to school for more years will spur economic
growth more rapidly than other causes can. One view, analyzed by Spence, is
that people may attend prestigious colleges not to learn but to signal a
prospective employer that they deserve a high wage. In another view, developed
by Hausmann and others, growth is more likely to arise from the increasing
complexity of the economy, since this combines old and new knowledge in
innovative ways.
Admittedly,
“systematic econometric studies have yet to verify the hypothesis that
investment in schooling serves as an engine of long-term growth,” wrote Cook
and Ehrlich. Nevertheless, Liu gives supporting
evidence. Liu studied whether land-grant universities created in the 1860s generated
spillovers for the local economy. Like
Cook and Ehrlich, he took an experimental approach. Presence of a Morrill land-grant university
was the treatment for a county; control counties had no such university. The control
counties were synthetic: Liu constructed them as weighted averages of potential
control counties, choosing the weights so that each synthetic county resembled
a treated county in traits that preceded the land-grant university. This eliminated
differences between treated and control counties that might have influenced the
results systematically. By comparing the performance of the matched counties,
one can observe the impact of the university as time passes. For example, in Knox County, Tennessee,
population density over time was much like that of the synthetic control until
the late 1860s, when East Tennessee College came into being (the University of
Tennessee today). Population density then grew more rapidly in Knox than in the
control.
Do
land-grant schools generate spillovers? Liu’s answer: Yes, eventually. On average, population density around the
colleges that had been built through the 1862 Act, rose by 6% over 10 years and
45% over 80 years. This created scale economies, cutting production costs. Also, proximity to the colleges boosted
productivity in manufacturing by more than half in the long run (80 years)
though not in the short. These results are
consistent with the view, common among regional economists, that the success of
the two most famous high-tech clusters in the US, Silicon Valley and Route 128,
owes much to their nearness to Stanford University and the Massachusetts
Institute of Technology. “Investment in
higher education increases population density and enhances local productivity,”
wrote Liu. “This partially justifies the continuous subsidy to post-secondary
education.”
But
though the Morrill schools targeted the practical arts, their impact on the
share of manufacturing labor in the population was statistically insignificant.
“This yields potential implications for policy makers who seek to develop an
industrial city by investing in higher education.”
Public funding of
universities can grow the economy over the long run if it emphasizes products
that markets would under-provide, such as social education, basic research, and
little-known but promising industries. Alternatively, one might ensure such
efficiency for a privatized university by turning over its shares to a nonprofit entity. --Leon Taylor tayloralmaty@gmail.com
References
Cook, A., &
Ehrlich, I. 2018. Was higher education a
major channel through which the US became an economic superpower in the 20th
century? (Asian Development Bank
Institute Working Paper No. 820). Retrieved
from the Asian Development Bank website: https://www.adb.org
Duemer, L. S.
2007. The agricultural education origins
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135-146
Friedman, M. 1962.
Capitalism and freedom. Chicago:
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Hausmann, R.,
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Hillison, J. 1996. Agricultural education and the 1862
land-grant institutions: the rest of the story.
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Peterson, J. B. 1977. Origins
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2002. A land-grant university. Retrieved from https://dpb.cornell.edu (Republished from the Cornell University 2001-02 financial plan, pp. 1-13, Ithaca, New
York: Cornell University)
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