Grasping Reality on TypePad, by Brad DeLong

Greg Mankiw's Blog: Time for Harvard to Move?: The Wall Street Journal reports one of the most pernicious ideas I have heard of late: 'Massachusetts legislators, demonstrating a growing resentment against the wealth of elite universities in tight economic times, are studying a plan to levy a 2.5% annual tax on the portion of college endowments that exceed $1 billion. The effort takes aim at one of the primary economic engines of the state, which is home to nine universities with endowments that surpass the $1 billion level, led by Harvard University's $35 billion cache, the nation's largest.... Supporters said the proposal would raise $1.4 billion a year. Based on the most recent size of Harvard's endowment, the university would have to shell out more than $840 million annually...'

There is an important underlying issue here with respect to America's private universities...

Let me put it this way: in 1960, the University of California--then overwhelmingly UCB and UCSF and UCLA--was about four times the size of Harvard, 5000 vs. 1200 undergraduates a year, with graduate students and faculty roughly in proportion. Clark Kerr, as president of the University of California in the 1960s, took a look at space constraints in Berkeley and Westwood, took a look at the rising population of California, took a look at increasing wealth, took a look at increasing educational attainment, took a look at the increasing attractiveness of American universities to people abroad, and conclude that the number of undergraduate students who could and would want to take full advantage of a UC education was going to grow eightfold over the next fifty years. So he decided to go all-out to clone UCB and UCLA.

And he did it.

Today we have UC Davis, UC Merced, UC Santa Barbara, UC Santa Cruz, UC Sunnydale, UC Irvine, UC Riverside, UC San Diego which together with UCB and UCLA graduate 40,000 undergraduates a year. Quality of education at UCB and UCLA has suffered a little bit as this cloning process has diverted resources away from us--but only by a very little bit. And the other UCs are damned good--with Davis and UCSD now being, I think, equal to the flagship campuses (although we don't admit it in bureaucratic system wars). And the Cal States do an impressive job as well. And the community colleges provide remarkable educational value for the money. The high administrators of the University of California starting with Clark Kerr have an extraordinary, remarkable accomplishment to look back upon. And they should be very proud--especially as they have accomplished it in the face of declining relative levels of support from the state legislature in Sacramento.

Harvard, over the same fifty-year time span...

Harvard has gone from 1200 undergraduates a year to 1600, and has done so in spite of starting with a substantial endowment and receiving $15B of private charitable gifts. Harvard does a great many things well--and I am impressed by the fact that Larry Summers's presidency seems to have had the effect of creating a large brand-new science building on every block. But it is hard to think that the production function from resources to outcomes is an efficient one or something to be particularly proud of: I think presidents Pusey, Bok, Rudenstine, Summers, and Bok again (and Faust) were beaten by the system. At meetings of high academic administrators Berkeley Chancellor Robert Birgeneau and his ilk can hold their heads up high as proud successors to a highly capable group of administrators who made a lot of lemonade out of the lemons that they were handed, but I don't think Harvard president Faust can do the same.

Somebody last week—was it Jan de Vries? John Ellwood? Somebody else? I forget who, but it is not original to me—said that the right model for Harvard over the past century is Yugoslavia. Remember the story of the Yugoslavian socialist worker-managed firm? If you add another worker to the firm, that worker gets a pro-rata share of the firm's value added. The firm's value added has a component attributable to the firm's capital stock, a component attributable to the ideas embedded in the firm, a component attributable to the firm's market position, and a component attributable to the workers. Hire another worker, and only the last of these goes up: the first three do not, and so average compensation falls.

This means that a worker-managed firm is likely to shrink whenever it gets good news that makes it more productive--the larger is the value added due to ideas, capital, or market position, the more expensive does it become for the existing workers to replace workers who leave, let alone hire enough workers to expand. While a competitive market capitalist firm responds to good news about its productivity and value to society by increasing employment, a Yugoslavian-model market socialist firm responds to good news about its productivity and value to society by shrinking. On this analysis, the very success of Harvard over the past two generations together with its degree of worker management has created enormous internal pressures not to expand, the better to share out the surplus among the existing stakeholders.

If this story of Harvard-over-the-past-two-generations-as-the-socialist-Yugoslavia is correct, then a bunch of hard questions are raised about:

• The judgment of those who have tried to satisfy their charitable impulses by giving $15B to my alma mater over the past two generations.
• The proper incentives that the government should try to present to the institution--and to those who might try to satisfy their charitable impulses in the future by adding to its endowment.
• The responsibility of alumni like myself to try to influence the future governance of the institution: corporation members like Bob Reischauer know what is going on at least as well as I do, but seem to have been unable to move the institution.
• The question of how Harvard should expand if indeed it should expand: it doesn't seem to be nearly as good as the small liberal arts colleges or even its rivals Yale and Princeton at undergraduate education (I did very well, but only because I quickly found two places--Social Studies in Hilles basement, and the graduate economics program--where Harvard was, effectively, a small college); the medical school and the biomedical complex that surrounds it appears to do very well indeed as research institutions; the public policy school seems to have been an experiment worth trying that did not fulfill Derek Bok's hopes, but that I cannot fully evaluate; few of the many people I know who went to the law school say many good words about it; et cetera...