Q&A: Miguel Urquiola Discusses Market Dynamics of American Education System

Miguel Urquiola is a longtime professor at SIPA and, since July 2019, the chair of Columbia University’s Department of Economics. An expert on the economics of education, he focuses on understanding competition between schools and universities. Among other positions he served three years as SIPA’s vice dean.

In his new book, Markets, Minds and Money, Urquiola explores how the market dynamics of the American education system encourage brainpower and funding to combine in university settings. The result is a set of universities that attract noteworthy research talent and have an outsized impact on research output.

In a recent conversation with SIPA News, Urquiola discussed the triumph of markets in the research setting and other topics treated in the book.

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Why is economic theory a good lens to study education markets and university research? Does economic inquiry into how universities attract scholars and how they produce research yield new and relevant insights?

Economists believe that their analytical tools are useful in thinking about any market. To elaborate, there are markets, such as those for potatoes, steel, or cell phone services, that many inherently expect should be analyzed with economic tools. But traditionally people believed that the educational sector did not function as a mere market, and hence did not lend itself to economic analysis.

This has changed over the past decades. Now, economic inquiry into the educational sector is relevant and important, since the equivalence to other sectors is apparent: There are firms—universities and schools—selling services and goods, and there are consumers purchasing those services and goods.

Looking at education through an economic lens helps us to understand what is happening in this complex market. Applying economic logic to it can also help highlight how this market is distinct and interesting.

A salient observation economists have made is that when people buy education, they buy with an investment motivation. They mainly buy to prepare themselves for future markets, such as labor markets. What economics highlights is that when people have such a motivation, they begin to care about things like who else is buying from the same firm. For example, is the school they are considering very selective? Will it provide them with a good “brand” and with good networks? In the book I put such things under the heading of “sorting.” Sorting creates dynamics that make the educational market somewhat different and very interesting.

The book traces the journey of the American university system from a historic position at the bottom of the global pack to its current position of world leadership in research. You suggest that the United States’ free-market approach to education has helped its universities outpace their European counterparts. How does free-market orientation and self-rule manifest in the context of educational markets?

When I say the United States has a market system, I’m referring to aspects like free entry. In the U.S. it is easy to open a university; in most of Europe it is much harder. Self-rule means universities can govern themselves, and bear the risks and returns of the choices they make. These ingredients combine to create a marketplace in which “firms” compete—at times some enter and some exit. By contrast, in Europe since the Reformation states largely took over universities and limited their action.

This matters because in addition to providing teaching, universities provide sorting. Sorting means that schools deliver some type of homogeneity to their customers; they cater to certain types of students.

In the U.S., a market orientation and sorting combine to create mutually reinforcing tendencies that concentrate the most talented students and professors in certain schools, such as Harvard and Stanford. These schools’ graduates go on to succeed in the labor market, and later contribute financially to them, allowing them to keep investing into faculty and selectivity. The result is that a few dozen American schools are extremely wealthy and very well positioned to do cutting-edge research. Some of these also enjoyed an early-mover advantage in hiring good faculty and recruiting good students, and the natural tendency of educational markets is to reinforce those advantages. But what you end up with is a number of universities that lead the world in basic research.

Of course market operation is not a panacea, it creates both “winners” and “losers.” In the U.S., for example, there are thousands of colleges and universities that are less well provided for. But if you're willing to swallow that, you get a number of top schools that are extremely well resourced with minds and money, and therefore can produce research at a higher level than, say, German universities, which historically were better than those in the United States. Economics is about tradeoffs, and they certainly exist in this market.

Speaking of early movers, the book highlights Cornell and Johns Hopkins as two universities which, despite being later entrants in the market, have achieved a high level of distinction in teaching and research. What allowed these universities to stand out in this market?

Historically, the U.S. system was weak at research compared to its European counterparts. And I suggest in the book that, ironically, the market was the source of that weakness—again, the market is not a panacea. Specifically, for a long time consumers’ affinity for denominational [religious] sorting stunted universities’ development. Until well into the 1800s American schools offered only narrow, rigid curriculums and did not hire specialized professors who could provide advanced instruction.

To be able to compete at research with European universities, reform was critically important. Cornell and Johns Hopkins proved very important in establishing this reform as they showed more conservative schools like Harvard and Columbia that one could provide instruction of a different type—namely, they focused on specialized training and on graduate training.

Being new entrants and fortified with large private donations and in some cases public support, these universities were able to attempt new instructional methods and had a huge impact on the U.S. market. Older schools like Harvard, Princeton, and Yale were able to successfully respond and adapt to this innovation, in part aided by their first-mover advantages. But Cornell and Hopkins remain in an excellent position, having sparked educational instruction that appealed to a much wider audience.

The book alludes to the inequality stemming from the sorting dynamics which concentrated minds and money in a few institutions. How does this inequality manifest and what are its implications for university outcomes, both research and teaching?

The U.S. is “great” at generating inequality, and this is true in the educational sector as well, particularly as it relates to research performance. What you have in the U.S. is a small number of highly prestigious schools like Stanford or MIT, that account for a small share of enrollments but enjoy an enormous amount of wealth and talented students and professors. All in all, there are about one hundred “elite” research universities in the U.S., the so-called “Research 1” public and private schools. At the same time, you have thousands of much less well resourced schools, from many state universities to community colleges

While this state of affairs might have developed organically, it is sustained in part by federal research funding. Government research expenditures, a major source of resources since World War II, are distributed competitively, which advantages the same small pool of universities. In other words, the federal government allocates more money to the universities that bring the best projects, and those tend to be the ones that are richer because they've concentrated the minds and the money to start with. So this reinforces the kind of dynamic that can make the system perform well at research. Again, this inequality helps produce good research, it allocates resources in a manner that enhances research productivity.

I should emphasize that this allocates money well if what one wants from the system is research. “Research 1” universities are the best at research, but they are not necessarily better at everything. For example, they may not be better in terms of teaching or pedagogical practices. In the book I discuss that elite universities can get away with sometimes providing substandard teaching because the inertia is so strong that they will continue to attract both strong students and funding. So I think that the free market is a good way to produce research but it might not be good way to produce everything in education.

This also applies to K-12 education, where the task is obviously not research but good pedagogical practices. To me it is not obvious the market is great way to produce these. For example, market “solutions” like vouchers have not turned out to be the educational silver bullets many economists expected.

There's an interesting statistic in the book about American universities having produced more Nobel winners than the next 29 countries combined. While impressive, the Nobel Prize has been mired in controversy and criticism in certain matters, including being out of step with modern research methods. Why did you chose this as a new measure of research performance?

Like any measure, the Nobel is imperfect. First, it doesn’t cover every field. In addition, many academics prefer to use publications as a measure of research performance, in part because it has become much easier to count and assess publications with computerized bibliographic databases.

The problem with these databases is that they exhaustively cover publications for only the past few decades. And given that in the book I wanted to talk about the period in which American universities were weak, which is into the late 1800s, I wanted data that ensured greater chronological coverage. The Nobel permits that.

Students are starting to prefer European universities again, at least at the graduate level, because among other things they are more affordable. Are European universities expected to make a big comeback and disrupt the education market? What factors are likely to call American research leadership into question in the coming decades?

Consistent with what you say, European universities have been improving and European states have been trying to both emulate and compete with the U.S. in research and funding. However, I do not think this poses any significant threats to the U.S. university system since the U.S. is still able to attract many of the best academics. Nevertheless, the book highlights threats to American research performance. These include limits on the immigration of talented scholars and technological changes like massive online courses. The fact that a sector has worked well for a number of decades does not mean it will work well forever.

—Shalini Seetharam MPA ’20

This interview has been condensed and edited for clarity.