Higher Education Needs Some Creative Destruction

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 miscalculate—those who fail to adequately meet the needs of their customers or utilize new, cost-saving technology—lose 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 nation’s 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.

[Related: “Gee Whiz! WVU Confronts the Real World”]

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 education—how 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 education—their 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 today’s woke ideological fixations.

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  • Richard Vedder

    Richard Vedder is Distinguished Professor of Economics Emeritus at Ohio University, a Senior Fellow at the Independent Institute, and a board member of the National Association of Scholars.

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7 thoughts on “Higher Education Needs Some Creative Destruction

  1. I agree with the concept of “creative destruction” put forth by Joseph Schumpeter in his book Capitalism, Socialism and Democracy. It highlights how businesses in a competitive market are continuously created and destroyed, enabling more efficient firms to meet consumer needs and utilize resources effectively.

  2. The concept of “creative destruction” discussed by Joseph Schumpeter highlights the dynamic nature of the private market economy, where businesses constantly emerge and decline based on their ability to meet customer needs and adapt to new technology. This process of creative destruction fosters economic growth by reallocating resources to more efficient and responsive firms. In contrast, the stability of universities is notable, as top institutions tend to maintain their positions over time with little movement. While private businesses have real-time indicators such as stock market valuations and sales to measure their performance, universities lack a widely accepted bottom line, making it challenging to reward or hold individuals accountable for their contributions. Recognizing the distinct characteristics of the private sector and academia, it becomes evident that the dynamism and constant adaptation observed in businesses differ from the relative stability seen in universities.

    1. I agree that the concept of “creative destruction” highlights the dynamic nature of the private market economy. Businesses are constantly emerging and declining based on their ability to meet customer needs and adapt to new technology. This process of creative destruction fosters economic growth by reallocating resources to more efficient and responsive firms.

      In contrast, the stability of universities is notable. Top institutions tend to maintain their positions over time with little movement. This is due in part to the fact that universities have a long-term focus on education and research. They are not as driven by short-term profits as businesses are. Additionally, universities lack a widely accepted bottom line, making it challenging to reward or hold individuals accountable for their contributions.

      Despite these differences, I believe that universities can still benefit from the principles of creative destruction. For example, universities can be more open to new ideas and approaches. They can also be more willing to experiment and take risks. This will help them to remain relevant and competitive in the face of changing market conditions.

      Here are some specific ways that universities can embrace creative destruction:

      Promote innovation: Universities can create an environment that is conducive to innovation. This includes providing resources for research and development, as well as encouraging collaboration between faculty, students, and industry partners.
      Embrace change: Universities need to be willing to change and adapt to new technologies and market conditions. This means being open to new ideas and approaches and being willing to experiment.
      Reward risk-taking: Universities need to reward risk-taking and innovation. This means providing incentives for faculty and students to take risks and celebrating successes.
      By embracing creative destruction, universities can ensure that they remain relevant and competitive in the years to come.

  3. The problem is accreditation, which is the prerequisite to receive student financial aid monies, which all but 2 colleges (Hillsdale & Grove City) do.

    This is why there have really been no new colleges founded since the early 1970s, the University of Austin being a notable exception and I’d like to know how they are financing it because the initial expenses of a start-up college would be largely financed by the tuition dollars of their initial students, which you can’t get now because they can’t get financial aid to attend a college that isn’t yet accredited.

    Because of this accreditation mandate, when higher education expanded in the late 1990s, it was branch campi of existing colleges and not new ones (as it had been in the 1960s) because the branch campus could use the accreditation of the existing college to enable its students to receive financial aid.

    There *was* “creative destruction” in the past as small colleges would be founded and others would fold — all through the 19th Century and up to about 1970, there were lots of little colleges started, not all would make it but those which did subsequently expanded to the colleges that exist today. And that’s not happening anymore because of the opportunity cost created by the accreditation mandate.

  4. One of the best things we could do is change the criteria for hiring faculty. Stop all affirmative action hires. Stop using social credit scoring (e.g., required fealty statments to DEI) to eliminate applicants.

    Other improvements would be to eliminate departments created out of whole cloth (e.g., womens studies and ethnic studies) that cannot and will not provide any value to society. Drop education departments. Make departments disclose job prospects and publish typical salaries (beginning career and 20 years later) for graduates with degrees from their departments.

    Eliminate tenure. If not, then make every faculty member submit post-tenure review packets every 3 years. Those who don’t perform—regardless of rank or years at the institution—are terminated. Not suspended or put into remedial programs, but terminated.

    Still more improvements would be to cut administrative staff by 50% (minimum). Every school at my university has an associate dean for inclusion—despite having a university DEI department heading by an individual at the vice-president level. Why does the school of engineering at my university have 14 people working in the dean’s office but less than 100 faculty? Incidently, that does not include students working in the dean’s office.

    The one point of disagreement I do have with Professor Vedder is the notion of funding students with scholarship vouchers. We have far, far too many people in college because they got out of high school and couldn’t think of anything else to do. I’d guess at least 40% of college students have no idea of why they are in college. Providing students with vouchers will just exacerbate the problem. I believe the reason why so many young people are in college is because the federal government really pushed the student loan program so everyone can go to college—whether academically qualified or not.

    1. No! Don’t eliminate education departments because then K-12 will become an even bigger mess than it already is because there always will be K-12 teachers and they are going to come from *somewhere*….

      It would be like if engineering departments beloved in metaphysics and alchemy — there still will be bridges built, by engineers that some from *somewhere* so the solution would not be to abolish schools of engineering!

      No, the solution is to clean up the schools of education, and for the rest of the faculty to take schools of education seriously and to demand they be worth being taken seriously.

      1. The late William F. Buckley commented that “I would rather be governed by the first 1,000 people listed in the phone book than by the faculty members from an Ivy League University.” I would rather K-12 teachers were selected in a similar manner than to have them show up with an education degree.

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