Center for Business & Public Policy
Collaborative blog exploring the relationship between market forces and public policy.

To briefly summarize this long post: the creation of knowledge through fundamental research is a public good.  Economic theory is clear that public goods will be under-provided without government funding.  And as government funding for higher education continues to shrink, it is increasingly the students and their families who are paying for the provision of a good that benefits everyone.  Is that really what we want? 

First, some background.  When economists speak of “public goods,” we have something specific in mind: goods that, once produced, are “non-rival” and “non-excludable.”  In plain English, “non-rival” simply means that one person’s consumption of the good does not diminish other people’s ability to use the good.  For example, the fact that I get to enjoy a fireworks show or the protection of a missile defense system does not prohibit my neighbor from also enjoying benefits from these goods.  This is in contrast to most usual consumption goods – for example, if eat a candy bar, it is impossible for someone else to then eat the same candy bar.  “Non-excludable” means, roughly, that once the good is made available, it is available to everyone.  A classic example of a public good is clean air in a city: my breathing the clean air does not prevent you from also enjoying it, and it is also difficult to exclude people from breathing the clean air when they are in the city.

A many-decades old and quite famous result in economic theory is that public goods are under-provided in a private market.  In essence, I might be able to contribute a little bit to the creation of clean air insofar as the net benefits to me of my efforts are positive.  But in making that calculation, I will fail to take into account the benefits on everyone else.  They will do the same.  So we will effectively end up with too little clean air.  It is a special case of market failure where – (tea partiers should cover your ears) – government intervention can actually do a better job of approximating the efficient market solution than free markets.     

Universities are in the business of creating several goods that are, at least partially, public goods.  The most obvious of these is the creation of knowledge.  Indeed, the mission statement here at the University of Illinois lists “creating knowledge” as one of the three central tenants for our existence.  In contrast to applied research – such as pharmaceutical company investing in R&D for a new drug – most of the knowledge created in our universities is “fundamental research” – sometimes called “basic research” (although basic is meant to mean fundamental, not easy!)  What distinguishes this type of research is that the ultimate goal is not a marketable product, but rather the advancement of knowledge itself.  While this knowledge often leads to tangible benefits that can be commercially viable down the line (e.g., two famous Illinois examples include the MRI and web-browser technology), much of the cutting edge research does not have commercial applications.  But it is extremely valuable nonetheless.    

A great competitive advantage of the U.S. over the past century has been its system of public and private research universities.  Indeed, this is one of the “secret sauces” that launched the United States into a world economic powerhouse over the past century.  Universities have been responsible for much of the technological and intellectual innovation that has shaped the world in which we live.  The fact that our standard-of-living is many times higher today than it was a century ago is due – in part – to our outstanding research universities.

Historically, much of this research has been supported by public dollars.  At public and private research institutions, much direct research funding has come from federal agencies such as the National Science Foundation, the National Institute of Health, as well as research funding from other cabinet agencies (e.g., Department of Energy, Department of Defense).  At public institutions, support has also traditionally come from state appropriations to support both the teaching and research missions of public universities.  For example, state funding has long been an important source of funds to pay faculty salaries, and it is those faculty who are, in turn, creating knowledge.

That model, however, is coming under increasing strain.  Thanks to enormous fiscal imbalances at the federal and state levels, many traditional sources of public support for higher education are declining.  Perhaps the most notable of these is the decline in state appropriations that support public research institutions.  Here at Illinois, our Chief Financial Officer, Walter Knorr, remarked in March that the,  “the state’s direct appropriation to the university is 26 percent below what it was 40 years ago, when adjusted for inflation.”

One of the leading experts on the economics of higher education, Ron Ehrenberg of Cornell University, has written extensively on changing nature of higher ed funding over the decades.  In a 2003 paper titled, “Who Bears the Growing Cost of Science at Universities,” he notes that ”while undergraduate students may benefit from being in close proximity to great researchers, they also bear part of the growing costs of research in the form of larger class sizes, fewer full-time professorial rank faculty members and higher tuition levels.”

 Since his paper was written, tuition rates have continued to climb, largely in an attempt to offset declining public sector support. In essence, students and their families are footing a larger share of the bill for the creation of knowledge. 

To be clear, I am not saying that students are getting a bad deal for their tuition dollars.  Indeed, every study of the returns to a college education reinforce that – at least on average – a college degree continues to be one of the best investments an individual can ever make.  This remains true even as tuition rates climb.  And it is also the case that students enrolled at research institutions benefit from interacting with faculty who excel at knowledge creation.  Clearly, students and their families agree that an Illinois degree is still a phenomenal investment, as indicated by the fact that applications to the University continue to jump, even in the face of tuition hikes.

Nonetheless, these are troubling trends.  If knowledge creation is central to our national well-being and economic growth, then we need to ensure it is supplied at the optimal level.  It should not be limited by the willingness and ability of students and their families to pay to for a university education.