Myth busting: the laissez-faire origins of American higher education.

• Author: Bennett, Daniel L.
• Position: Essay

Harvard University is named after its first private benefactor, John Harvard, a statue of whom remains a landmark on its campus as a legacy of his generosity that helped finance the nation's first college in its infancy. Although Harvard's gift played an important role in the school's early development, the institution's history was powerfully shaped by a significant amount of state intervention that sheltered it from competition and kept its doors open with a steady stream of subsidies and protections during its formative years.

Similar stories of state intervention contributing to the development of colleges can be found for most of America's colonial institutions, but many scholars nevertheless conclude that American higher education had become a laissez-faire market in the decades before the Civil War. This view has been shaped largely by knowledge of the rapid expansion in the number and diversity of colleges following America's independence, which resulted in the establishment of as many as eight hundred colleges by 1861 (Westmeyer 1997). For example, John Brubacher and Willis Rudy suggest that the sector's growth was "fostered by the conditions characteristic of the laissez-faire, individualistic society of the time" (1997, 59).

The 1819 Supreme Court ruling in Trustees of Dartmouth Coll. v. Woodward (17 U.S. 518) is widely viewed as contributing to the rapid growth of private institutions during the period, with many education scholars depicting the decision as unleashing capitalism on higher education. Jurgen Herbst, for instance, suggests that the decision "ensured that higher education ... would draw on the strengths and suffer the liabilities of laissez faire capitalism" (1982, 147). Arthur Cohen and Carrie Kisker add that with this decision the "federal government enhanced the free and open market" in higher education (2010, 65).

The sector's growth during the period has also been attributed to a liberal regulatory environment. Referring to the diversity of colleges that emerged during the period, Martin Trow suggests that the lack of regulation constituted a "kind of license for unrestrained individual and group initiative in the creation of colleges of all sizes, shapes, and creeds" (1989, 12). Cohen and Kisker comment that "[i]n the absence of regulations ... [a]ny group could solicit hinds ... obtain a business license ... and open for instruction" (2010, 64).

Although aspects of the antebellum higher-education market were undoubtedly characteristic of free-market capitalism, this essay serves as a critical challenge to the hypothesis of the laissez-faire origins of American higher education. An examination of the political economy of the period against a true free market for higher education shows clearly that the state was more involved in shaping the sector than has generally been recognized. The laissez-faire origins hypothesis is largely a myth that has been propagated by a misunderstanding of the enduring effects of state intervention in altering the market process.

Framework for Analysis

What would a truly free market for higher education look like? A free-market economy is devoid of distortionary government interventions such as regulatory requirements and government subsidies, which often add unnecessary costs, constrain competition, redirect market allocations, or impede economic agents' decision-making ability. When the market process is unhindered by state intervention, a great deal of experimentation is undertaken as entrepreneurs and nonprofit organizations try out different ideas to determine what the market wall sustain. Consumers vote with their wallets for the products and services that they most highly value. Products with a high demand remain in production and generally attract additional investment. Products and services with weak demand are rooted out by market forces. As such, free markets are characterized by experimentation that involves both success and failure as the market process leads to innovation and the production of highly valued products and services (Kirzner 1973, 1985; Bennett, Lucchesi, and Vedder 2010).

As a benchmark, a free market for higher education would consist of three features: property rights, privatization, and competition. Recognizing the potential collective-action problem of higher education that may arise if students do not accrue the full benefits of higher education and thus may be unwilling to bear its full costs, this framework is general enough to apply to a diverse set of institution types with heterogeneous objectives such as profit, reputation, and revenue maximization. This allows for colleges to offer a product that can be construed as an investment, consumption, club good, or some combination of the three.

Property rights would be clearly defined, and colleges would be free to manage their institutions and resources without governmental interference in a free market for higher education. This feature has several implications. First, colleges would be autonomous entities that make decisions and enter contracts that are independent of political influence. Second, their property would be protected from arbitrary extraction from government or other aggressors. Last, regulations that arbitrarily alter the value of an institution's property or increase its costs of doing business would be avoided, particularly if they are discriminatorily imposed such that they benefit some colleges at the expense of others. The latter two points ensure that the full costs of investment are foreseeable and that the full benefits are realizable, enhancing the efficiency of the market and reducing the risk of malinvestment (Kirzner 1985).

Privatization encompasses several underlying factors. First, colleges should be established by groups of private individuals who finance the institutions with capital and revenues contributed voluntarily. This system necessitates the exclusion of government subsidies as a source of capital or direct revenue because such subsidies are generated through the involuntary taxation of other individuals' economic activities. (1) The operating costs of colleges would be met with revenues generated from tuition-paying students, philanthropic gifts, or other voluntary means of generating revenue. Colleges should be operated as private rather than government enterprises, but this does not necessitate that all institutions be organized as profit-seeking entities. Private nonprofit institutions are permissible so long as their revenues are raised through voluntary channels. (2) Indeed, many of the institutions established during the period under examination were affiliated with religious denominations for the purpose of instilling a certain set of values in young men and the community such that the nonprofit organizational structure was appropriate (McAnear 1955; Manne 1973).

Laissez-faire higher education would also be characterized by competitiveness. It would be free of legal or political barriers to entry or exit. The only obstacle to entering the sector would be access to the private capital necessary to finance the startup costs of a college. Exit from the sector would always be an option when desired and mandatory upon failure. Politically sanctioned monopolies or other restrictions on the number of colleges would not exist in a free market, and taxpayer-financed bailouts or government as lender of last resort policies would not be an option for financially defunct colleges. Colleges that met the market's

demands by attracting tuition-paying students and voluntary donors would survive and grow, whereas colleges that failed to do so would falter. Higher education would thus be characterized by both entry and exit, each dictated by market forces rather than by political decisions.

The State and Colonial Higher Education

Frank Blackmar describes eight ways the state aids higher education and suggests that "nearly all of these methods originated among the colonies and were adopted by the states" (1890, 24). As such, an understanding of state intervention in higher education during the colonial era will provide perspective on the development of the industry after the nation's founding. Nine colleges were established during the colonial era. The colonial colleges were founded primarily as religious institutions, with most receiving substantial economic assistance from government. The sector was unambiguously uncharacteristic of a free market as the colonial colleges received monopoly protection and a variety of subsidies. Politically erected barriers to entry and competition as well as rent seeking existed in American higher education from its inception, stifling the market process. These arrangements altered the path of the sector and the economy, putting it on a different trajectory than it otherwise would have taken in the absence of state intervention (Kirzner 1973, 1985).

Regional Monopolization

Colonial colleges required a charter from either the Crown or the colonial government to begin legally operating. This requirement granted government officials the power to control the number of college charters issued and thus the capacity to erect a political barrier to entry for potential entrants. Trow describes the charters as "a monopoly grant to an institution of the power to grant degrees in a specific colony" (2003, 10). Herbst indicates that the colonial colleges "enjoyed the official sanction, if not always the financial support, of the colonial legislatures, and from them derived [their] claim to a monopoly on higher education" (1982, 128).

Both the colleges and the government had incentives to preserve a monopoly on higher education in the colony. From the colleges' perspective, new entrants would undoubtedly compete for private donations, tuition-paying students, and government subsidies. It has been suggested that the colonial colleges held a monopoly over the training of colonial leaders and that the...