Learning From Socrates and Adam Smith on Financing Universities

In ancient Athens, students generally became educated by going to a learned man, paying him something, and in turn then received his wisdom in the form of lectures and dialogue. Suppose 10 students paid Socrates 10 drachmas each, or a total of 100 drachmas. Socrates' "salary" would then be equivalent to the amount of tuition payments made by students. The proportion of tuition payments going to pay the "professor" would be 100 percent.

Writing in 1776, Adam Smith lamented getting away from the financing scheme of the ancient Greeks, famously noting that the quality of teaching fell at Oxford when students stopped paying the professors directly and gave their tuition payments to the university. Before that happened, the Oxford dons would collect, say, 100 shillings in tuition revenue, and perhaps pay 15 or 20 shillings of that to the University for the use of space and minor other administrative services, so the percent of tuition fees going for faculty salaries would be high, perhaps 80 percent.

Using the new Delta Cost Project data compiled by Jane Wellman and associates (which essentially massages and makes more user friendly the data from the Integrated Post Secondary Education Data System—IPEDS—of the U.S. Department of Education), my Whiz Kid (student associate) Ryan Brady calculated the ratio of tuition payments to faculty salaries for 610 schools that will be included in the soon-to-be-released Forbes rankings of American colleges and universities.

While the percent of tuition revenues absorbed by salaries varies a good deal across schools, typically about half of those funds go for faculty salaries. The mean percentage for the 50 top schools in the forthcoming Forbes rankings is 52.2 percent; for the bottom 50 schools (those ranked 561 to 610), it is 48.7 percent. This proportion is almost certainly less than it was at Oxford before the reform ending direct payment of the faculty, not to mention what it was in the age of Socrates, Aristotle, and Plato. Moreover, a cursory examination of the data suggests that it is even less than it was in, say, 1990 in the U.S.

Moreover, the reported faculty-to-tuition ratio overstates the importance of faculty compensation in the modern university for two very large reasons. First, of course, a typical school earns a majority of its revenue from non-tuition sources. Even if one excludes federal research grants and payments for auxiliary enterprises (as the Delta Cost Project generally does), at most schools revenues from state and federal subsidies, endowment income, and gifts exceeds that received in tuition payments. The ratio of faculty salaries to total revenues (so defined) is closer to 25 percent.

Second, of course, tuition payments are made by students ostensibly for instruction by faculty members, broadly defined to include faculty advising and other forms of non-classroom assistance. Yet the evidence is overwhelming that faculty spend a lot of time doing other things, especially research. If one were to allocate faculty salaries for instruction to account for the non-instructional dimension of university service, faculty compensation for instructional services often is well under 20 percent of revenues raised by institutions, and almost never as much as 50 percent.

So what? The point being made here is that the ostensible principal raison d'etre of most universities—the education of our youth—is really a small part of university activities. Put differently, if the faculty salary for instruction to institutional revenue ratio were to rise to, say, 50 percent, by reducing the non-instructional dimension of university spending, the total cost of educating students would fall dramatically—to roughly the levels found in many other industrialized nations in the world. The cost inflation of higher education has little to do with the financing of learning, and a lot to do with the blob of assorted other activities schools take on, ranging from unsponsored research to the country club-like student services provided.

Any real reform of universities that contains costs must concentrate on this non-instructional component, although efficiencies are possible in the traditional learning areas as well. Is it wise for us to have faculty spending vast amount of times writing the 100th paper on some obscure topic for an equally obscure journal that hardly anyone reads? Should the consumption dimension of college—the recreational centers, the climbing walls, the indoor running tracks, the fancy student-union buildings, the luxury dorms—be divested or subject to the same tax laws that the rest of society faces? Is the huge run-up in administrative costs justifiable—do universities, for example, need Secretaries of State (or the academic equivalent of Vice President or Vice Provost for International Affairs, etc.)? In this age when we have an African-American president and recent Secretaries of State who were either black or female, do we really need an army of affirmative-action officers, multicultural specialists, etc.? Should universities be spending up to $20-million annually subsidizing the throwing of balls in contests in order to meet the entertainment needs of a bunch of mostly middle-aged men? I think not, and until higher education confronts these and other nasty questions, it faces further erosion in public support and sympathy.