Day 2: The History of Higher Education in the US
A series on my new class: The Economics of Higher Education
Why does the market for higher ed look the way it does? When did this structure come to be? What economic forces pressured the market for higher ed into its current form? And how might economic forces today change the landscape of higher ed tomorrow?
Today’s readings
Goldin, C., & Katz, L. F. (1999). The shaping of higher education: The formative years in the United States, 1890 to 1940. Journal of Economic Perspectives, 13(1), 37-62.
Hoxby, C. M. (1997). How the changing market structure of US higher education explains college tuition. (No. w6323). National Bureau of Economic Research Working Paper.
(Optional) The "Dear Harvard" Letter and Institutional Autonomy
(Optional) How Universities Became So Dependent on the Federal Government
Goldin, C., & Katz, L. F. (1999). The shaping of higher education: The formative years in the United States, 1890 to 1940. Journal of Economic Perspectives, 13(1), 37-62.
These authors think that the structure of modern US higher education was set in motion in the late 1800s and early 1900s. By modern structure they mean:
most institutions are large with lots of educational offerings
universities are places of both teaching and research, and they include both academic and professional training
more students go to public institutions than private
some states invest more in higher education than others
Why did these patterns develop, and why at that time in US history?
From the perspective of a liberal arts college professor, I’m most interested in why most higher education institutes are large and include both teaching and research, academic and professional training, so I’ll focus on that. Check out their article if you’re interested in the balance between public and private institutions, and why Western states invest more in public education than Eastern ones.
In the later half of the 19th century, the Second Industrial Revolution was underway. Because science was now more useful to industry, the value of workers educated about science increased. This increased the demand for higher education generally. As industries became more advanced and specialized, the market demanded more specifically trained workers (e.g. an oil firm didn’t just want a guy who knew something about chemistry and digging for things, they wanted specifically a petrochemical engineer). This increased the number of different kinds of training that were valued by the market, which led to a splintering of academic disciplines. This splintering meant that universities couldn’t get by with a few generally expert science professors who taught a bit of everything, they needed many more specific experts.
The advance of science and technology also inspired some human centered scholars to “tech up” and apply mathematics and statistics to their interests. (As an aside not included in their article: Economics became a mathematical discipline in the late 19th century, splitting away from the more broad and general field of Political Economy. William Stanley Jevons wrote his book A General Mathematical Theory of Political Economy in 1862, Léon Walras did his work on General Equilibrium Theory from 1874-1877, and Irving Fisher’s dissertation on the mathematics of utility functions and their maximization was published in 1892.) Social scholars became more specialized also, both toward and away from math and the scientific method, and thus the social science disciplines splintered also, just as the physical sciences did. This required universities to support a larger number of different departments in the social sciences too.
All of this meant that in the mid 19th century universities could thrive as relatively small organizations employing relatively few, jack-of-all-trades professors. By 1924, universities were large and employed many, highly specialized professors.
In addition to changes in size, universities also experienced a change in scope. Goldin and Katz say that “for most of the 19th century, American institutions of higher education were centers of learning, not research.” They say that while in European universities the functions of teaching and research remained separate through the 20th century, and professional schools (for medicine, law, etc.) were separate still, universities in the US became a new kind of institute of higher education that combined academic teaching, scientific research, and professional training. US universities found that there were complementarities between research and teaching. Advances in knowledge due to research could be quickly passed into teaching and therefore imbued into workers. Teaching responsibilities could also be spread among a larger number of professors who also did research, which drove costs down. Goldin and Katz don’t say so, but I suspect that there were also probably financial returns to the patents generated by faculty research and owned by the university. The new American model of a modern research university thrived. Goldin and Katz credit the integration of research, academic teaching, and professional schooling as one of the reasons why many major universities stepped back from “the classical curriculum of liberal arts colleges and gave way to a more modern one.”
My questions:
If scale and variety of offerings was and is so important to the survival of modern universities, how and why do liberal arts colleges survive and thrive?
In the late 19th and early 20th centuries, it sounds like many or even most major scientific and technological advancements came out of research universities, which is a main reason why resources (public, private, and human) were attracted to universities. Is the same true now? Are most scientific and technological advances coming out of universities? AI is coming almost entirely out of private industry (I think). Could a shift in the way technology is advancing be partly responsible for the waning support of universities?
Hoxby, C. M. (1997). How the changing market structure of US higher education explains college tuition. (No. w6323). National Bureau of Economic Research Working Paper.
Hoxby says there were four previous theories offered for why tuition rose so much between 1940 and 1990:
Baumol cost disease (non-traded services get more expensive when they can’t increase productivity as the traded sectors do)
“List” prices may increase, but price net of financial aid is not increasing that much (Ehrenberg-Murphy)
The demand for college graduates has increased while supply is inelastic, which drives up wages and therefore the willingness-to-pay for college (Clotfelter)
The government is a third-party payer for higher education, which drives up prices just as it does in health care (Bennet Hypothesis)
The theory Hoxby offers in this article is complementary. Her argument:
Since 1940, geographic mobility increased generally and for education specifically, so colleges now compete nationally.
Colleges therefore lost market power, in both buying inputs (professors and students) and selling outputs (enrollment to students).
More competition for inputs (professors and students) increased factor prices for those inputs (salaries to professors and subsidies/tuition discounts/merit aid to students).
More competition to attract buyers for outputs (enrolling students) pushed up the average quality of outputs (the college experience).
Increased competition increased the returns to investment for colleges (for both infrastructure and human resources), which also pushed up the average quality of outputs.
Because average quality increased, the average price charged for college increased too.
These effects are compounded because when high ability students enroll at a college, more high ability students want to go there, leading to an upward spiral of demand. This leads schools to compete on quality, not price.
“A college that makes investment in quality that contributes to its fixed costs will get expanded returns - the direct improvement in service quality and the indirect in quality through improved peers.”
All of these factors increase homogeneity within and heterogeneity across institutions (as students sort across schools), both with respect to student quality (as measured by SAT scores) and prices (measured by tuition) (and presumably faculty and amenities quality too).
The differentiation in quality and price between schools is much stronger for private institutions than for public. There are more private institutions that cater to high quality students and charge high prices, while there are also private institutions that cater to middle ability students and charge middling prices. Public institutions are more similar to each other, serving students of lower ability (but similar ability across public universities) and charging lower prices (but similar across institutions).
This geographic mobility helps to explain why states invest less in higher education now than they used to: high ability students are more likely to go out of state and to private institutions, so their middle and high income parents are less interested in supporting their state public university system.
My thoughts:
Are students with good high school grades and test scores still concentrated within the 10-20 most elite colleges now, as was true between 1980 and 1990? I would guess not as much, because colleges nowadays are additionally competing on quality through amenities, not only academic quality. I suspect that students today are more concentrated by economic bracket.
This work assumes that the subsidies paid to students increase with student academic quality. i.e. she assumes only merit-based financial aid. But most financial aid today is based on financial need. How would Hoxby’s analysis change if we took this descriptive fact into account?
(Optional) The "Dear Harvard" Letter and Institutional Autonomy
This post comes from my Substack friends Jay Akridge and David Hummels over at their Substack Finding Equilibrium. I’ve found many of their posts enlightening and I was very interested to see this one last week.
Their post last week is essentially asking “when and how did the US federal government get involved in the financing, curricular, and admissions decisions of colleges and universities? Is this recent push by the Trump Administration brand new, or are there historical precedents and analogs?”
I highly recommend you read the whole thing, and subscribe to their Substack for future posts.
(Optional) How Universities Became So Dependent on the Federal Government
This recent New York Times article is focused on the more recent relationship between large research universities and the federal government. They pick up in the post World War 2 era and continue to the present day. Much of this I’d read elsewhere, but I did learn something new:
In 1980, Congress changed the law to transfer patent rights for federally funded research to the universities from the federal government. The idea was to apply conservative free-market principles to the academic research sector, allowing universities to profit from licensing the innovations created in their labs.
Huh. That’s interesting. I wonder how much money that brings in for universities. I wonder if it is more or less than the proposed increases to endowment taxes. And I wonder if Congress might view research universities more favorably if they returned the profits from Congress’s investments to the US Treasury, as the Fed does. Perhaps the negotiators for R1s with endowments could suggest that trade. Us SLACs with endowments but no patents would really appreciate it.
That’s where we’re at on Day 2! And I already know that I cannot possibly keep up with posting every day alongside actually running class and attending to my research and service. Instead, I’ll spread these posts out a few times a week. But don’t you worry. The Block Plan waits for no one, and the students and I will push on.
Next up: Why does college cost so much? In class we’ll be discussing Chapters 2, 4, and 5, and maybe even updating the figures with more recent data. Stay tuned!
Jessica! You are providing positive spillovers😀 I am reading with great interest given the churn occurring all over higher ed and especially in our backyard.