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February 27, 2006

a market failure in higher ed (the Summers case)

In the highly competitive global market for college students and faculty, Harvard is the leader. A major consulting firm that was hired to advise Oxford (I think it was McKinsey & Co.) found that Oxford could potentially compete with any institution in the world except Harvard. In a business obsessed with rankings, Harvard sits on top, and everyone else emulates it.

President Larry Summers was popular with students (Harvard's "customers"), but unpopular with faculty (the employees). He was forced out by the Trustees, who have a fiduciary duty to protect the institution. Although we know that students never have much clout, it's a bit of a puzzle that the faculty should prevail in an organization that is so successful at attracting student-applicants.

Of course, it's possible that Summers was forced to resign because he was wrong on the merits, and the Trustees saw that. I suspect, however, that the issue was not his comments about women scientists or his confrontation with Cornel West (on which the Trustees might have thought he was wrong). The issue was a set of curricular and budgetary reforms that promised to enhance Harvard's actual education while eroding the power of tenured professors in the Arts and Sciences. On those matters, Summers was very likely correct.

I want to emphasize that I don't see students as customers. Nevertheless, an economic analysis is useful for revealing how institutions actually work (as opposed to how they should work). Here are two contrasting views of the economics of the situation:

1. Gary Becker, in the Becker-Posner blog:

The American college and university system is widely accepted as the strongest in the world. This is why American universities are filled with students from abroad, including those from rich nations with a long history of higher education, like Germany and France.

I conclude from this that the American university system must be doing many things right, at least relative to the other systems. And what is right about this system is rather obvious: several thousand public and private colleges and universities compete hard for faculty, students, and funds. That the American system of higher education is the most competitive anywhere is the crucial ingredient in its success. ...

Given the effectiveness of the American higher education system, its governance, including the role of faculty, is probably on the whole along the right lines.

Becker thinks that Harvard made a mistake by removing Summers and that its internal structure might be improved by strengthening the president; but the overall incentives are appropriate, and the best institutions will prevail.

2. John Tierney in the New York Times (Feb. 25):

In most industries, a company would cater to customers paying $41,000 per year, but Harvard has been able to take its undergraduates for granted. ... Harvard has long known that the best students will keep coming, not for its classes but simply for its reputation. Smart students want to go where other smart students go.

Suppose people picked hotels based on how intelligent they expected the other guests to be. Once a hotel got a reputation as a brain magnet, smart people would automatically go there, and hotel employees could afford to get complacent. ...

Senior professors can shunt off the more tedious jobs, like teaching freshmen or grading papers, to low-caste graduate students or visiting lecturers.

Tierney is pointing to a market failure. I think he's onto something. Each Harvard matriculant gets intellectual stimulation from smart peers, plus the reputational advantage of having attended the most competitive institution (regardless of the quality of the education offered there). Harvard is, as Tierney says, a "brain magnet."

In a sense, that's an arbitrary distinction; one year, the most successful high school students could all decide to apply to the University of Maryland, and they'd be fine if they all ended up here. But some signal must direct them to Harvard. The main signal is the reputation of the faculty. The senior professors don't have to teach; they just have to lend their names to the institution. In fact, they could probably resign and, for a time, Harvard would continue to sit on top of the rankings, simply because of its competitive applicant pool. However, Harvard must worry about the reputation of its faculty, because that is what creates the competition for students. Thus the faculty have a strategic position; thus they prevailed with the Trustees.

[PS: In passing, Becker makes a classic economist's observation: "What survives in a competitive environment is not perfect evidence, but it is much better evidence on what is effective than attempts to evaluate the internal structure of organizations. This is true whether the competition applies to steel, education, or even the market for ideas." That kind of reasoning leads people to try to increase competition in K-12 education--through vouchers--rather than analyze how schools themselves should function. Note, however, that someone must "evaluate the internal structure of institutions." Otherwise, there will be no rational plans for improvement. Competition changes incentives, for better or worse. It does not itself solve problems.]

Posted by peterlevine at February 27, 2006 07:50 AM

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