Picking up on the ideas of Karl Marx and German historian-economist Werner Sombart, Joseph Schumpeter, in his 1942 classic Capitalism, Socialism and Democracy, suggested that in a vibrant, private, competitive market economy, firms are constantly being created and destroyed. Businesses who miscalculatethose who fail to adequately meet the needs of their customers or utilize new, cost-saving technologylose sales and profits. They may even go bankrupt. This creative destruction frees up resources to be utilized by firms who are better responding to consumer needs and expanding.
The destruction of businesses is part of the process of economic growth. In 2000, Enron, Sears, and Eastman Kodak were important, even iconic, American businesses, and now they are either gone or, in the case of Kodak, shadows of their former selves. Meanwhile, companies like Apple, Alphabet (Google), and Tesla have grown dramatically, and their owners have been richly rewarded. Creative destruction and expansion were occurring simultaneously, and the output and consumption of goods and services grew as well.
Contrast this to universities. My student assistant Nicholas Jadwisienczak examined the nations top companies in 2000 and 2022 and compared them with the leading universities in both years. He used the Fortune 500 list to find the largest corporations (by sales), and the U.S. News & World Report rankings to find the best national universities for both years. For the private corporations, only six (24%) of the top 25 in 2000 existed in the same form in 2022. Some companies merged with others, or divided themselves into multiple firms, or simply died. There was a lot of creative destruction. What about universities? Of the top 25 in 2000, 24 were still in the top 25 in 2022. The University of Virginia barely moved off the list, while New York University joined it. Most schools showed little movement. For example, Harvard went from #2 to #3. Harvard was in the top three in 2022, but it would have been so if we had U.S. News rankings in 1922, or for that matter 1822 or 1722.
With private businesses, we can track real-time changes in valuations by following the stock market, and quarterly assessments of progress by looking at changing sales. But how do we measure how Harvard is doing? Universities have no widely accepted bottom line. Consequently, it is hard to either accurately reward or penalize individuals for exemplary or poor performance.
The founder of modern economics, Adam Smith, was aware of this problem, and he pointed to a possible solution in The Wealth of Nations. Smith noted that professors at the University of Oxford had given up altogether even the pretence of teaching after Oxford decided to pay faculty a salary from its endowment income rather than have the professors charge students directly (keeping most of the proceeds). When professorial income depended on obtaining tuition money directly from students, faculty applied themselves, carefully preparing for class, helping students outside the classroom, etc. Today, some professors are relatively indifferent toward their students because their financial rewards come primarily from publishing articles in the Journal of Last Resort that few read and almost no one cites.
So, with some nudging from participants at a recent, marvelous Independent Institute conference in California, I have decided to write a book on creative destruction in higher educationhow we need more of it, penalizing those who do not perform the central mission well and rewarding those who do. Maybe we should again have professorial pay depend at least partly on student fees. Maybe schools should have skin in the game (financial stake) when students do not repay their loans. Indeed, maybe borrowing for college should be reformed, with students selling equity (like common stock) in themselves instead of just borrowing (income share agreements). Maybe research funders should take costs more seriously, giving some grants to the lowest bidder (maybe the one getting the least overhead compensation for doing grant work) for topics suggested by the grantor, not the grantee.
Maybe we could better assess teaching performance if we had a standardized national exit examination. Indeed, why not let students take courses at a multitude of colleges and, if they pass a rigorous national exam, why not give them a college equivalence diploma (similar to the GED given to those who seek high-school-level diploma credentials)? Why should a single college have a monopoly on providing students educational services?
Additionally, maybe governments should get out of the business of directly funding higher educationtheir claim that colleges are a valuable public good seems increasingly dubious. At a minimum, states should permit, maybe even nudge, schools to engage in some creative destruction, killing mediocre colleges with high costs and/or poor student outcomes. That is starting to happen already, but with reduced governmental subsidization it would increase. As an intermediate step, maybe states should fund students (with scholarship vouchers) and not schools, introducing more competition in higher education financing. Schools would then be more dependent on students for dollars, which would probably lead to a significant downturn in spending for todays woke ideological fixations.