Home > education > The half-privatization of public higher education

The half-privatization of public higher education

from Robert Locke

Privatization is a big topic, but it is, since the enclosure moment in 18th century Britain, hardly a new one.  Usually people think of privatization since then in terms of how common ownership of physical capital, has been eliminated to the benefit of the rich investor.  Here the subject is approached from the viewpoint of human capital embodied in public education, especially higher education.

Economic theory has ignored and then de-emphasized this focus.  David Levi Faur explained in “Friedrich List and the political economy of the nation-state. (article in the Review of International Political Economy 4:1 Spring 1997: 154–178) that “in modern terminology we may say that Friedrich List emphasized the importance of human capital in economic development, which has been neglected in mainstream economic theory.”  Even when it was finally introduced into UK & US economics and their establishment followers,

“in the 1960s it received an individualistic interpretation that hardly did justice to the important role of the state and nationalist movements in building a mass system of education – not as a response to individuals, or to a market-driven demand for education, but as an elite effort to educate (and mobilize) the masses.”

Arno Mong Daastol in his dissertation echos this view (quote in a comment he made on the rwer blog to post on the Teaching of Economics, 21 May 2014):

“Starting in the 1960s, there has been extensive work done around the concept of ‘Human Capital’, following the pioneering works of Theodore Schultz (Cf. The Economic Value of Education, Schultz, 1963) and the Nobel Laureate Gary Becker (Cf. Human Capital … with Special Reference to Education, Becker, 1964). They both focused on education as an investment, as List did more than one century earlier.

These rather belated efforts to include immaterial- or non-manual work, have in economics increasingly resulted in growth models that have broaden the term ‘capital’ to include knowledge- and human capital. Nevertheless, as is common in economics, these growth models have only sluggishly found their way into standard textbooks, indicating their rather ad-hoc nature to the core of economic theory.

For instance, the standard textbook by Dornbusch and Fischer does not mention this at all in the 1978 edition, whereas Mankiw’s later edition from 2002, does mention human capital but briefly and superficially.

In more detail: C. E. Ferguson and J. P. Gould’s Microeconomic Theory from 1975 does not mention human capital at all (Cf. Ferguson and Gould, 1975). Hugh Gravelle and Ray Rees’s Microeconomics, from 1981 spend one page of over 600 pages, on the difference between human capital and physical capital. But they do not at all evaluate the importance of human capital or how to promote it (Cf. Gravelle and Rees, 1981). Macroeconomics, by Rudiger Dornbusch and Stanley Fisher in 1978, does not mention human capital at all (Cf. Dornbusch and Fisher, 1978). N. Gregory Mankiw’s textbook Microeconomics, discusses human capital on four pages, but solely from an individualistic angle and he focuses singularly on the effect on wages, not on the national effects. He spends just as much text on the role of education as a signal of achievement for the individual person, as he spends on the role of general education for society (Cf. Mankiw, 2006, p. 407). ”

(from ‘Friedrich List’s Heart, Wit and Will: Mental Capital as the Productive Force of Progress’)

As a consequence, today, it is possible, as David Levi Faur put it,

to identify two concepts of economic development, one that stresses material factors and another that emphasizes politics and human capital. These two concepts are embedded in the current popular notion of globalization. Globalization…implies that certain economic processes, often understood as unavoidable imperatives, carry human society towards economic and political reorganization on a global scale. This interpretation of globalization is materialistic – it neglects human capital and the role of government in economic development. It is a Smithian or a laissez-faire concept of globalization as it associates globalization with the economic processes of accumulation and the division of labour.  A second notion of globalization, Listian or that of economic nationalism, may also be introduced. This notion stresses that the forces of globalization are products of the augmentation of mental capital, a learning process which includes the creation of new forms of knowledge as well as the products of new forms of political organization. The nation-state in this interpretation has a crucial role in promoting, guiding and regulating the process of globalization. The nation-state is crucial to the process of globalization as it nurtures it, protects it and gives it meaning. (p. 160).”

The issue is mainline economics lack of appreciation of the privatization of community-created mental capital in the form of public higher education – which has been detrimental to the poorer members of the community through their loss of common rights, and advantageous to the richer member of the community who still continue to gain through their expropriation of the wealth brought to them in the form of the mental capital created through public expenditure

Government supported higher education in the US.

In 1975 state and local government expenditures on higher education amounted to 60.3% of all federal, state, and local government and personal expenditures on higher education in the United States.  This was their highest postwar share during a golden age of American higher education, which included the massive amounts spent on the GI bill that gave individual educational scholarships to millions of American ex-servicemen and women.  Although public education varied greatly from state to state, in the more progressive, like California, citizens attended a network of junior, two year colleges, four year state colleges, and state research universities with postgraduate education that provided them almost tuition free education.

Since it peaked in the late 1970, the 25-year (1987–2012) trend in states’ fiscal commitment to public higher education reveals the following:

State appropriations per full-time equivalent (FTE) student has declined 30 percent,

adjusted for inflation, from $8,497 to $5,906;

State fiscal support per $1,000 of personal income has plummeted 37 percent, from $9.32

to $5.89. If, in 2013, states had invested their personal income at the 1980 rate, states

would have appropriated $135 billion for higher education instead of the $72 billion they actually did

The cuts made by states in public higher education funding have in turn led to fast-rising tuition prices and deeper student debt burdens, making a college education less affordable. According to The College Board, the average published price of tuition and fees at public four-year colleges increased 50 percent between 2003–2004 and 2013–2014. During the same ten-year period, the lower, average net price of tuition and fees (factoring in all sources of grant aid) at public four-year colleges grew 62 percent.  Meanwhile, FTE student enrolment increased 62 percent between 1987 and 2012,underscoring the continued strong demand for affordable, accessible public colleges and universities.”

(A Proposed Federal Matching Program to Stop the Privatization of Public Higher Education
By Daniel J. Hurley, Thomas L. Harnisch and Barmak Nassirian.  Policy Matters
A Higher Education Policy Brief.January 2014)

To be able to finance their education, college students have gone deeper and deeper into debt.  David Ruccio notes in his 19 May 2014 blog: The Wall Street Journal reports that the Class of 2014 is the most indebted class ever. “The average Class of 2014 graduate with student-loan debt has to pay back some $33,000, according to an analysis of government data by Mark Kantrowitz, publisher at Edvisors, a group of web sites about planning and paying for college. Even after adjusting for inflation that’s nearly double the amount borrowers had to pay back 20 years ago.”

People call this event the privatization of Public Higher Education. Just as the landlord villagers saw the benefits they derived from exploiting the commons disappear with the enclosure movement, the lesser among us have seen the benefits enjoyed from publically financed higher education disappear with this privatization.

Among the benefactors, there have been the banks, who get income from student loans, and tax-payers who soon will not have to support public higher education anymore.

But the chief benefactors are those who continue to enjoy the fruits of government created mental capital, which is why this post is called a half-privatization.

In The Entrepreneurial Shift, (Cambridge University Press, 2004) Katja Schoene and I note (p. 25):

“Famous publically funded state-run research institutes exist in the United States.  But the US government allots most of its research budgets to laboratories in public and private universities and to private firms.  The government permits researchers on its projects, who work in these laboratories, to retain individual intellectual property rights to their discoveries and the law permits universities to grant licenses to commercial firms to exploit the discoveries that government-funded researchers make in university laboratories.  The university and the researchers share in the dividends garnered from this government-paid research.”

And so have defense contractors from the commercialization of government created knowledge.  H. Rheingold notes (1991) “If necessity is the mother of invention, it must be added that the Defense Department is the father of technology; from the Army’s first electronic digital computers in the 1940s to the Air Force research on head-mounted displays in the 1980s, the US military has always been the prime contractor for the most significant innovations in computer technology.”  Quoted in Robert R Locke, “American business school education and the revolution in interactive information technology,” in P. Jeffcutt, ed. (2004), The Foundations of Management Knowledge (London: Routledge, 66-82)

And so do the hedge funds and angel financial networks benefit from the mental capital transferred to them free of charge from projects paid for by the public purse.  How, with the effect of privatization on the lesser among us, could this half-privatization of public higher education do anything but increase inequality.

  1. paul davidson
    May 28, 2014 at 2:58 pm

    I was the beneficiary of public higher education. I went to Brooklyn College (starting in 1946)where the total cost was $5.00 per semester plus the cost of buying textbooks. I was the first person in my family to attend college . my parents could not afford to send me to a private college although my high school had identified me as positive college material.

    without this public higher education I would have had to stop my education with a high school diploma. There are a number of famous people who went to one or the other of the “free” City Colleges of New York — including I believe Kenneth Arrow.

    Part of the reason public financed higher education has declined has to do with the economic arguments spread by Milton Friedman. Milton lived in Perth Amboy New Jersey and his father was a worker in the garment industry and apparently too poor to send Milton to a private university such as Princeton.

    Friedman has boasted in print that he went to Rutgers University in New Brunswick, New Jersey — the State University -and his higher education was paid for by the taxpayers of New Jersey. Milton was originally a math major but he looked for a “gut” course and people told him to take economics which he did. His professor of economics was Arthur F. Burns who convinced Friedman to make economics his profession.

    Friedman boasted that the New Jersey taxpayers were fools to finance his education — since from the day of his graduation from Rutgers he left New Jersey and never to return — and so did not pay any taxes to New Jersey (to reimburse the State for his education) out of the lush income he earned in his later years .

    Milton often offered this story to explain why college education was an investment in personal human capital and therefore should be financed like all investments by borrowing from banks and financial markets. So was born the idea of student loans rather than public financing of higher education.

    I once asked Milton why not extend this idea down of private finance for investment in education to student loans to finance education starting in kindergarden through high school? I never got a good answer.

  2. May 29, 2014 at 1:15 am

    Human capital is clearly important for economic production, but it is not physical, in the sense of machinery. Hence “physical capital” is not a good descriptor for capital used for economic production, to distinguish it from “financial capital”, which is financial claims not directly related to economic production. Monetary stimulus increases financial capital but not necessarily productive capital which is the driver of economic growth. Economists, including Keynes and Piketty, don’t seem to understand the difference (or assume the two types of capital are perfectly correlated).

  3. May 31, 2014 at 11:01 am

    Dear Robert,

    Friedrich List’s focus on human capital (in a wide sense) may seems like a rare flower in the history of economic thought, but it was not unique where he came from.
    List e.g. claims that educators, artists, physicians, judges, and administrators “are productive in a much higher degree” indirectly than those who are producing directly (List, 1841).
    His angle was so generally accepted by his contemporaries that most comments to his works were related to List’s practical objects: Unification of Germany through customs union and infrastructure (rail and telegraph – and thus prepare for industrialisation). There was no reason to make a big deal out of education in this ‘land of professors’, but List did point to the necessity of establishing more practical education: (emulating French) polytechnic schools.
    One immediate and obvious forerunner regarding human capital was the German-born Adam Müller, whom List met in Vienna in 1820. But more importantly, living in Germany, List (1789-1846) lived in ‘those times’ that saw human capital as the natural starting point for political action: Germany was ‘saturated’ by the views of ‘the German Renaissance’: German Idealism. In List’s early life, e.g. the politically engaged philosopher Fichte was still active (with his emphasis on education, a state policy for science, and the ‘primacy of practical reason’) and List even collaborated with Hegel. These were men with also very practical opinions on German society. Whereas e.g. England and her philosophers/scientists largely embraced a Materialistic interpretation of the Enlightenment, Germans chose to stick with the Idealism of the Italian Renaissance. As historians of philosophy and science have pointed out (e.g. Windelband, Burtt), English economists and their theories were shaped by their philosophical culture. The main reason for List’s better vision of human capital was that he had the luck to be born into a more advanced culture, intellectually speaking.

    Arno

  4. davetaylor1
    May 31, 2014 at 1:31 pm

    Since it seems no-one is going to do anything about the fault in the system which blanks out half the first comments, may I suggest the first person replying to a blog sends the message “Intentionally blank” before sending his views as a second comment.

    Here Paul Davidson’s comment is signficant. One can view it by copying it all and pasting it into a word document.

    • robert r locke
      May 31, 2014 at 3:36 pm

      Dave, I am repeating Paul Davidson’s first comment here. Does that deal with your complaint?

      I was the beneficiary of public higher education. I went to Brooklyn College (starting in 1946)where the total cost was $5.00 per semester plus the cost of buying textbooks. I was the first person in my family to attend college . my parents could not afford to send me to a private college although my high school had identified me as positive college material.

      without this public higher education I would have had to stop my education with a high school diploma. There are a number of famous people who went to one or the other of the “free” City Colleges of New York — including I believe Kenneth Arrow.

      Part of the reason public financed higher education has declined has to do with the economic arguments spread by Milton Friedman. Milton lived in Perth Amboy New Jersey and his father was a worker in the garment industry and apparently too poor to send Milton to a private university such as Princeton.

      Friedman has boasted in print that he went to Rutgers University in New Brunswick, New Jersey — the State University -and his higher education was paid for by the taxpayers of New Jersey. Milton was originally a math major but he looked for a “gut” course and people told him to take economics which he did. His professor of economics was Arthur F. Burns who convinced Friedman to make economics his profession.

      Friedman boasted that the New Jersey taxpayers were fools to finance his education — since from the day of his graduation from Rutgers he left New Jersey and never to return — and so did not pay any taxes to New Jersey (to reimburse the State for his education) out of the lush income he earned in his later years .

      Milton often offered this story to explain why college education was an investment in personal human capital and therefore should be financed like all investments by borrowing from banks and financial markets. So was born the idea of student loans rather than public financing of higher education.

      I once asked Milton why not extend this idea down of private finance for investment in education to student loans to finance education starting in kindergarden through high school? I never got a good answer.

      Lyonwiss

      May

  5. davetaylor1
    May 31, 2014 at 3:33 pm

    Robert, I know you are an American, a land where history apparently began yesterday, but in Britain the history of enclosures goes back to prehistory (to drystone walling, as much to clear debris from rocky fields as to retain and domesticate animals). Enclosures of feudal estates for more lucrative sheep farming, displacing feudal manpower and the strips of allotment which serfs cultivated for their own needs, was already going on by the 1400’s, and can be seen resented in Book 1 of More’s ‘Utopia’ (1525), castigating a supposedly Christian England as a land where “sheep ate men”. Privatisation of the enclosures began c.1540 with Henry VIII privatising the church and selling off the monastic estates, which had previously provided public services including research and development, education, health care and other public services. Three hundred years on, urbanisation and pressure from Christian revivalists and the likes of Marx led to Government beginning to see the need to provide public services, starting with the Royal Mail in 1840. By 1950 public services were beginning to become reasonable, but by 1980 it was all happening again under Mrs Thatcher.

    It seems to me the 18th century enclosures, financed by Bank of England (1694) IOU’s, were different in that there were then virtually no public services to privatise. They were privatising the livelihoods of the public – tenanted farms and associated cottage industries – by forcing people off the land and into wholesale manufacturing. More like the disgusting situation now, with the unrestrained takeover of sound businesses (like Cadbury’s and Manchester United here) by people with free access to borrowed money – which not they but employees and customers are obliged to repay.

    • robert r locke
      June 1, 2014 at 9:29 pm

      Thanks for the clarifications. I got involved in looking at the enclosure movement when investigating the 18th century agricultural revolution. So, like most people who do not know much about the world that preceded their existence, I, an historian who concentrated on the modern period in European history (1750-) in my studies, do not know much about what came before, except the high-middle ages, 1050-1350, which was one of the fields for my PhD. But I looked mostly at the continent. Professor Lynn White, Jr. the historian of Medieval technology, was on my PhD committee.

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