Comment on “Higher Education in the United States: Laissez-Faire, Differentiation, and Research”

I have served as dean of the Faculty of Arts and Sciences at Harvard and as dean of the Graduate School of Business at Stanford University. As a result of these 15 years of experience in academic administration, I learned quite a lot about the history of these institutions, their competitors, and their modes of operation and financing. Urquiola's (2023) account of the origins and current industry configuration of American higher education is precise and accurate. Since it has evolved to be a very complex system, this is no small achievement.

A distinctive, and I would say nearly unique, feature of the American higher education complex is the relatively large size of the private sector and the fact that it operates alongside and competes with a similarly large set of public sector institutions. In most countries, the public sector dominates, and even what is sometimes called the private sector has a much larger element of public sector funding.

As a result of this unusual configuration and the fact that (excluding federal research funding) public sector institutions are largely funded at the state level, it is a highly decentralized system. Urquiola correctly makes the point that this contributes to a high degree of product differentiation across the system and probably an unusual amount of experimentation. Perhaps this is in part what Urquiola means by laissez-faire in this context. It also leads to a relatively high variation in quality.

As Urquiola documents, US higher education in the early years consisted of small, mainly local, mainly religious in origin colleges with no ability or pretense to conduct research or advance scientific and technological frontiers. This changed dramatically at the end of the 19th century when a version of the German Research University model was imported and adapted to US conditions. Johns Hopkins is widely viewed as a key early adopter and leader, with others like Harvard following quickly.

Leadership played a key role within and across institutions. Significant expansion of federal government funding for research was, and continues to be, an important enabler. Urquiola suggests that an increasingly technologically sophisticated set of industrial sectors may have provided additional impetus, and that may be true, though it is hard to document. It is important in this context, to emphasize that government funding is critical. Even the institutions with the largest endowments could not come close to funding research at the levels and costs that characterize the present system.

The development of an American version of the research university began a process of differentiation in the entire sector. A few public institutions followed with support from their states, but not all. A group of colleges decided to remain 4-year colleges, to focus on education, not compete in the research sphere, and like the elite research university, restrict their size so they became increasingly selective over time, a process that continues to the present. This has turned out to be a highly successful segment, as Urquiola (2023) documents.

There followed many dimensions of differentiation that are covered well in the paper: public and private institutions outside the research and elite teaching colleges and universities: 2-year colleges, locally publicly funded community colleges, and more recently private or non-profit versions of the same, focused on professional and skills training.

Let me focus on selectivity for a moment, as it is often misunderstood. Why would not institutions move to try to satisfy the “excess demand.” There are several complimentary reasons (see Urquiola, 2023, Section 8). Learning from one's peers is one. A second is the signaling effect (a derivative of imperfect information in job markets) (Spence, 1974). Higher education certainly adds human capital to the students, to which there is a return in employment. But the signaling effect associated with degrees from highly selective institutions adds an additional return to the investment in education at that level. A third one, perhaps more important in professional schools, but still present at the undergraduate level, is the alumni network. It is an asset that creates valuable options in the future for those who are in it.

Selectivity and an actively supported alumni network are important parts of the financial model. An active alumni network is a key ingredient in fund-raising. Since elite institutions are expensive places to attend, that funding permits, among other things, a scholarship system that frees the admissions process to some extent from the constraint of “ability to pay,” which in turn expands the merit pool.

The development of the highly selective model led to an expansion of the target population. Early on, colleges served largely local markets. Now, the major research institutions, especially the private ones, serve a fully nationwide market with a significant additional component consisting of international students. That transition, to be able to recruit and evaluate on a national and international scale, required a major additional commitment of resources.

Selectivity is highest on the private sector side of the system. It is much more difficult to justify high degrees of selectivity when one is deploying public funds. And there are continuing contentious issues about the criteria to be used in selecting.

The federal research funding mechanisms are highly competitive, and generally, the screening is carried out by experts and is of high quality. This is not to say there are no biases in the direction of conventional wisdom or problems funding completely new lines of inquiry. But it is critical that the funding agencies do not directly fund universities. The funding goes to scientists who compete for funding. Provisions are made to help cover “overhead” costs that universities incur. In many countries, research funding goes to the institutions and then gets allocated to principal investigators, giving rise to additional layers in allocating resources and quality slippage.

The modern version of the US system has produced many internationally recognized research universities (public and private) and important research output along with highly trained scientific human capital. Whether it has served the broader population and the country well is more complex. It is on average, for the students and their families, an expensive system. And the real costs keep rising rapidly. Student debt, in excess of the value added in some segments, is also a persistent problem.

Urquiola (2023) is a valuable contribution, especially for readers whose experience is largely in state dominated systems (the normal case internationally). It very effectively captures the essential and somewhat unusual features of the US higher education sector.