Universities' Nightmare Scenario

I ran across two articles yesterday, both at Real Clear Politics, that get the elite university problem either competely wrong, or they miss a whole lot. The first is at Semafor, Universities’ nightmare scenario: it’s not just federal funding cuts. Its premise:

The nightmare scenario for elite universities is here. The flood of White House actions aimed at private colleges can be hard to follow. But think of these universities as companies, and the math gets simpler — and the dangers become stark.

Top universities are financial titans, generating investment profits that mirror those of Wall Street firms.

. . . By revenue, UPenn is bigger than BNY Mellon; Columbia is as big as Coinbase. But these universities operate on profit margins thinner than those of a grocery store. In short, they make a lot of money but spend almost all of it.

This obscures a basic problem: for tax purposes, a university can't make a profit, strictly defined. It can collect revenues greater than its expenses, but those revenues must be reinvested in the university's primary activities, and they aren't taxed. For a profit-making company, the revenues greater than expenses are distributed to investors as income, and they are taxed. I'm scratching my head about why the writer just glosses over this distinction.

So the problem isn't that universities have a low profit margin. Universities aren't there to make a profit. So what are universities there for? Somerone might answer, to pursue truth, blah blah, and blah blah, thereby enlightening the world! Students! Research! Curing cancer! Actually, they're there for tax purposes. as I've outlined here, most recently on April 3 and April 5. Their endowments are creatures of the federal income tax, enacted via the 16th Amendment to the US Constitution, ratified in 1913. In those posts, I quoted extensively from Ferdinand Lundberg's The Rich and the Super-Rich:

Prior to 1913 at least, the problem of taxes could not have influenced Rockefeller in his philanthropies because business and wealth were subject then only to piddling local taxes. Nor can it be held that the creation of the Rockefeller Foundation was a direct reflex to the advent of federal taxes in 1913 because the Foundation had long been planned, at least since 1905. . . . However, even though the advent of federal taxes did not influence the idea of the Foundation, it was gradually noticed by others that there were distinct tax advantages in making philanthropic allocations. This fact is now part of standard tax doctrine, set down in many tax treatises. Gifts to philanthropic funds pay no taxes, the income on such funds pay no taxes, and there is no inheritance tax on such funds. Furthermore, stocks placed in such endowments carry corporate voting power--a nice point. It should be recalled here that it is power really, rather than money or property, that we are concerned with.

In other words, the robber barons of the Gilded Age, their heirs, and their successors had plenty of money to squander on mansions and estates, to the point that they could afford to donate blocks of their companies' stock to universities and other charitable endowments, especially after 1913. They didn't get those dividends, but they could do without that money. Nor did they need the capital gains when the stock was traded. On the other hand, as major donors to the universities, they or their agents sat on the boards of trustees and voted that stock, even though they didn't directly own it.

The article at the link says that Harvard gets 45% of its revenue from endowment dividends and tax-free donations. But this doesn't reflect the utility the endowment provides to its donors and their descendants in its proxy corporate control on their behalf. Universities like Harvard have always been plutocratic institutions, and they will continue to be so. Recall that although we don't know all the details of Jeffrey Epstein's financial chicanery, even though he had no four-year degree himself, he was able to hitchhike on the prestige of Harvard and MIT by representing himself as a major donor with powerful influence at both universities.

The second of the articles I found is at Real Clear Education: What Happened to Harvard? Like the first, this completely overlooks the real function of universities, especially after the introduction of the income tax. Its premise is simply bizarre:

When Lord Acton, the great nineteenth-century historian and champion of liberty, visited Harvard in 1853, he found that the college’s philosophy was common sense realism. Acton wrote that by “the third year, Reid becomes a textbook.” The Reid in question was Thomas Reid, author of An Inquiry into the Human Mind on the Principles of Common Sense (1764). The common sense realist philosophers—especially Reid, Adam Smith, and Francis Hutcheson—fundamentally shaped the thinking of America’s Founders and provided the foundation for teaching and learning in American colleges until Acton’s visit and beyond.

But influential figures like Ralph Waldo Emerson (Harvard 1821), Nathaniel Hawthorne (Bowdoin 1825), Henry David Thoreau (Harvard 1837), and Henry Ward Beecher (Amherst 1834), were hardly common-sense realists. Emerson

led the Transcendentalist movement of the mid-19th century. He was seen as a champion of individualism and critical thinking. . . Friedrich Nietzsche thought he was "the most gifted of the Americans," and Walt Whitman called Emerson his "master".

Hawthorne's

fiction works are considered part of the Romantic movement and, more specifically, dark romanticism. His themes often center on the inherent evil and sin of humanity, and his works often have moral messages and deep psychological complexity.

Thoreau

anticipated the methods and findings of ecology and environmental history, two sources of modern-day environmentalism.

. . . Thoreau is sometimes referred to retrospectively as an anarchist, but may perhaps be more properly regarded as a proto-anarchist.

Beecher

supported social reform causes such as women's suffrage and temperance. He also championed Charles Darwin's theory of evolution, stating that it was not incompatible with Christian beliefs. He was widely rumored to be an adulterer, and in 1872 the Woodhull & Claflin's Weekly published a story about his affair with Elizabeth Richards Tilton, the wife of his friend and former co-worker Theodore Tilton. In 1874, Tilton filed charges for "criminal conversation" against Beecher. The subsequent trial resulted in a hung jury and was one of the most widely reported trials of the century.

Frankly, it sounds like Harvard and other institutions of higher learning before Lord Acton's visit were producing graduates not all that much different from the graduates of Harvard and other such institutions we have now. Beyond that, we should keep firmly in mind that even more influential figures from the same period like Abraham Lincoln and Mark Twain had limited formal education and didn't attend university at all. (Mark Twain made fun of the English visitors like Lord Acton or Mrs Trollope who purported to write with insight about their visits to the US.)

I think it's important to recognize that US colleges and universities in the 18th and 19th centuries were finishing schools for the upper classes, and most of the students were no more interested in what was in the formal curriculum than they are now. Emerson, Thoreau, and Beecher in particular seem to have taken away from their college years beliefs that were comfortable and convenient, not much common sense involved, no differrent from the students we see today.

UPDATE: On further reflection, the American Founders were on the whole Freemasons, freethinkers, or deists, influenced more by European radicals than Scottish common sense realism. George Washington did not attend university; neither did Benjamin Franklin. Thomas Jefferson attended the College of William & Mary, not Harvard, where he was influenced by Locke, Francis Bacon, and Isaac Newton of the previous century, none Scots. More important, Smith's The Wealth of Nations (1776) was published well past the time the US Founders had formed their ideas, as indeed was Reid's 1764 Inquiry.

On one hand, the writer at Real Clear Education seems to be looking back at an idealized Harvard that never existed, and in fact, he doesn't seem to be terribly familiar with the intellectual products of that university during the period he most admires. On the other hand, what we're also seeing is a mark-to-market on the value of a four-year degree overall.

Ferdinand Lundberg saw an inflection point in the position of Harvard and other universities as financial institutions in the enactment of the federal income tax. What intrigues me is that students of the selective admissions system at elite schools like Alan Dershowitz and Jerome Karabel also trace its development to the same period, about 1913. This comes roughly a generation after the late 19th century wave of Jewish immigration to the US, when the children of this wave began to apply for admission to these schools.

This suggests to me that the elite universities made adjustments, all highly favorable to the plutocracy they served, about a century ago in response to the rise of progressive policies, but their essential content and outlook didn't change. Contra the one writer at the last link, I don't think they ever purposely taught anything like common-sense realism, any more than they do now. But any rise of common-sense realism in current political discourse is now a major threat to their existence.