The Economic Institutions of Higher Education (review)

In Economic Institutions of Higher Education, J. Patrick Raines and Charles G. Leathers survey the contributions of a number of key writers, from the eighteenth century onward, on the behaviors and operations of universities. Undoubtedly, this is an important area of inquiry for economists: higher education is now big business across the globe, and a historical analysis greatly helps in explaining how this growth has come to pass.

Raines and Leathers begin with a historical overview of universities (chap. 2), from the medieval colleges that trained students for religious orders, through the Enlightenment, to the behemoths that are modern universities. They then shift to analyses of writings on the functions and performance of universities by economists—Adam Smith (chap. 3), John Stuart Mill (chap. 4), and Thorstein Veblen (chaps. 5 and 6); other, more recent, contributions by David Reisman (chap. 7), Joseph Schumpeter, James Buchanan, and D. A. Garvin (chaps. 8 and 9) are also reviewed. The final chapter considers a future for entrepreneurial universities and academic capitalism.

The book covers a lot of ground, serving both as an investigation of the development of the university and an explication of the writings of selected economists as they relate to universities. Either task would merit a book in itself, so although Raines and Leathers do compare and distinguish the views of notable economists, they do not synthesize the development of thought on the economics of universities. To some extent, such synthesis is not possible: economic analysis of the modern university should be very different from that of the medieval colleges. Rightly, Raines and Leathers ground their investigations in a complex framework where competing interests of faculty, funders, students, and administrators play out. And as the chapter on Reisman's writings makes clear, each group may exert supremacy in different eras.

One common theme, however, does stand out in this book: universities appear as highly dysfunctional institutions. Smith's views on the low quality of teaching are well known, but Mill's criticisms of faculty indoctrination of students are equally pointed (both economists receive fair and full analyses in respective chapters). Plus, Veblen's polemic is full scale: both in what they did and how they did it, Veblen felt that American universities in the early 1900s were failing severely. The authors do a good job of cataloging each of these complaints, many of which remain pertinent today (e.g., the growing influence of business principles in higher education).

Unfortunately, such criticisms fail to address the distinctive nature of universities—their durability. Few institutions, organizations, companies, or countries have been in existence as long as the universities under scrutiny here. What is missing from the writings is how universities have managed to last so long and to prosper. Raines and Leathers devote some attention to the struggle for funding, and rightly focus on endowments in supporting such longevity: but much more credit might be given to Gordon Winston's (1999) explanation linking donations with peer hierarchies. Winston's model establishes not only how initial endowments self-perpetuate, but also how important these can be in nullifying competitive pressures in the higher education market.

Surprisingly, Raines and Leathers do not devote much attention to human capital, so compellingly propounded by Gary Becker (1993). The notion of education as a generator of human capital—clearly understood and beautifully articulated by Adam Smith—transforms how one views the economic role of the university. Conditional on the funding regime, students should enroll if there is an economic payoff (whether they deserve the payoff—a normative issue that Veblen addresses—becomes almost beside the point). Indeed, Smith's criticisms of universities do focus on the low quality of provision, but they are also coupled with a belief that the returns to education are not that high. This is surely a distinction between the classical and the postwar eras: since the work of Becker and Theodore Schultz, a vast literature has grown into a consensus that the returns to...