The U.S. is known for having both exceptional private business enterprises. It is the prime mover in creating the most powerful and bountiful economy in history and also for having great colleges and universities. Its schools dominate world college rankings and draw students from throughout the world.
Yet American universities are facing a dramatic decline in public support.
This is manifested in lower enrollments today than a dozen years ago and widespread threats to their funding, as both the Trump administration (via threats to revoke tax exemptions, reduced research support, etc.) and Congress pose what some college leaders deem existential threats to their very existence. Additionally, some state governments are beginning to sharply increase their intervention into the affairs of public universities that have historically exercised a great deal of independence.
A major reason corporations are faring far better than universities in today’s public policy milieu can be explained by one word: ownership. Everyone knows who owns and controls the operations of American companies, but who “owns” or controls our universities?
We all know that Elon Musk makes the key decisions at SpaceX and Tesla, but who does so at elite universities like Harvard or Stanford, or even at distinctly less selective and prestigious schools, such as Ball State University in Indiana or the University of District Columbia?
Who owns or “runs” Harvard? Is its president, Alan Garber, truly the “CEO?” Is the controlling authority the governing board — or in Harvard’s case, one of the two governing boards? Is it the faculty, whose presence is absolutely essential to carrying out the dominantly important institutional functions of discovering and disseminating knowledge?
Is it a vast and ever-growing bureaucracy that constitutes the administrative bloat raising university costs and diluting the emphasis on the primary academic functions? Is it the students whose presence, like the faculty, is the whole point of higher learning? Is it rich alumni, like Johns Hopkins’ Michael Bloomberg or the University of Oregon’s Phil Knight, whose multi-billion dollar contributions are critically important to the future of those institutions?
Are any of these the “owners” in any sense? Or, are universities often better viewed as confederations of various largely autonomous fiefdoms that pay allegiance and some funds to a central administration, very much like feudal lords in the Middle Ages nominally recognized a distant king to whom they paid some feudal dues?
Using Harvard as an example, does the Harvard Business School pay a tax out of its tuition and endowment revenues to President Garber across the Charles River, mainly so that it can continue to use the prestigious name “Harvard?” And what of others using the Harvard moniker — Harvard Law School, Harvard College (undergraduate school), the Kennedy School of Government, etc.?
This brings us to another term explaining the difference between the relative efficiency of colleges and American business: incentives. In American business, major errors in decision-making can literally be either a death sentence or being put on life support, but success provides owners and CEOs with vast wealth.
In contrast, a successful college president might get a bonus of $100,000, although his or her head football coach, effectively running a business in a highly competitive market environment, might get a salary vastly dwarfing that of his nominal university president boss.
The great Austrian-American economist Joseph Schumpeter said that capitalism thrives on “creative destruction,” whereby failing company resources are ultimately absorbed by newer successful enterprises better serving changing consumer tastes or more adroitly responding to new technology. In higher education, if you make a big mistake, you might not get an annual raise; in business, a big mistake very likely will cost you your job.
In my new book, I argue that the dulling of incentives and ambiguity of ownership have contributed to the recent decline in support for our universities. Fortunately, the incentive system of markets, while heavily diluted by governmental and philanthropic subsidies, are still somewhat present in higher education, and the threat of severe retrenchment or even closure hopefully will lead to needed reforms as more colleges realize their very existence is imperiled.
Richard Vedder is the author of “Let Colleges Fail: The Power of Creative Destruction in Higher Education.” He is also a distinguished professor emeritus in economics at Ohio University and a senior fellow at the Independent Institute.
