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Subversive Lessons from China

The last book by economist Ronald Coase offers provocative ideas for higher education, and not the ones you would expect.

By Jane S. Shaw

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October 08, 2013

Shortly before he died this year at the age of 102, Ronald Coase and a colleague, Ning Wang, published a book about capitalism in China. There may be lessons in it for higher education in both the United States and China.

First, a word about Ronald Coase. He is a laconic economist, having won a Nobel Prize primarily for just two articles, written twenty-three years apart. Those two articles transformed economists’ understanding of why firms exist and how property rights underlie the workings of an economy. He didn’t waste time with small matters.

This book on China isn’t a small matter, either. How China Became Capitalist concludes that China is, indeed, a capitalist country (not a “state capitalist” or “socialist market” country). More important, he and Wang argue that the Chinese economic miracle did not come about through the action of the state. In part, it came about through inaction. (For more detaiI, see my review at the Freeman.)

After Mao Zedong died in 1976, with the country still in chaos from the Cultural Revolution, some very basic, broad-based reforms were made, even before Deng Xiaoping came into power. For example, enterprises (virtually all state-owned) were allowed to pay workers differentially (although workers’ mobility from one enterprise to another was restricted). Trade in basic commodities was restored (although most prices were still set centrally). 

When Deng took over, he recognized that the state-owned enterprises, the major source of goods and services, were abysmally unproductive. He poured resources (economic and intellectual) into changing the incentives of the enterprises.

But the greater autonomy given to state-owned enterprises didn’t have much effect and ultimately most of those enterprises were privatized or just closed.

As you’ve guessed by now, other sectors—farming families and village factories—were the ones that broke loose and fueled the engine of growth for the next thirty years. Thanks to the modest but general reforms, they grew in the face of the national government’s outright hostility—and in the case of private farming, even prohibition. In 1987, Deng expressed genuine surprise at how productive private farms had become.

Now, what is the implication for higher education? We all know that reform is needed. Students are graduating without the intellectual foundation for jobs that require a college degree—if they graduate at all. Astute analysts recommend big changes like revamping accreditation, modifying federal grant and loan policies, and pressuring universities to focus on learning outcomes.

The Pope Center endorses many, if not all, of those reforms.

It’s possible, however, as the China experience suggests, that government-oriented reform efforts, especially on a national scale, will not go very far. It may take too much political maneuvering, too much political capital, too much time to force universities to measure student learning or to increase graduation rates (while retaining academic rigor).

The Chinese lesson is that reforms that open up competition may be better than incentive-focused efforts. In China, say Coase and Wang, reform meant that state-owned enterprises became more autonomous and were allowed to keep profits, but they still did not face market competition for resources. In fact, under reform, heads of enterprises could negotiate with central planners about how much they would have to produce, how much credit they would get, etc. Coase and Wang write:

It was equivalent to a firm being allowed to set its own prices for inputs and choose its rate of taxation. As the firm was able to negotiate the rules of the game, there was little pressure to improve its internal strength.

If that sounds a little like a description of state universities in the United States today, that is not accidental.

But the lavish support given to state-owned enterprises in China had an unusual benefit. It distracted the politicians from the real change going on under their noses—the local initiatives of villages and families.

And such change—decentralized and private—may be going on in U.S. higher education.

I have in mind a potpourri of activities, both small and large, current and future. These may include greater use of the American Council of Education course-approval system (thus moving toward unbundling of education), expansion of early college, innovations by small schools that depend on enrollment, new business education-qua-apprenticeships (for example, the Minerva Project), online universities such as Western Governors University and UniversityNow, etc.

Ironic though it may seem, if the government, the universities, and even reformers concentrate on “big” and “important” problems, they may inadvertently allow alternatives to today’s education to emerge outside their focus of attention.

Let me return to China. The authors of How China Became Capitalist devote several pages to China’s higher education system, saying explicitly that China’s reforms have not been extended to universities.

“The fatal organizational flaw of Chinese universities is their lack of autonomy,” they write. “The majority of Chinese universities remain primarily funded by the state and under the strict control of the Ministry of Education.” This level of authority is comparable to the government control over state-owned enterprises before reform began.

One government policy is to increase the number of college graduates and, indeed, the government has done that. Coase and Wang say that in 1995 about 5 percent of 18-to-22-year olds were able to go to college; by 2007, the figure was 23 percent. But the results have not been happy.

Newspaper articles in publications such as the New York Times show that college graduates in China are desperate for jobs that fit their credentials—in other words, the number of college graduates is out of line with the demands of their economy (that may be true in the United States, too).

Equally important, the Chinese are disturbed by the “Qian puzzle.” Qian Xuesen, a prominent scientist who died in 2009, is known for asking, “Why have Chinese universities not produced a single world-class original thinker or innovative scientist since 1949?” (The People’s Republic of China was founded in 1949.)

Coase and Wang have an answer: China does not have a marketplace for ideas. With its education system under government control and political influence, its incentives are to satisfy the wishes of bureaucrats, not explore and share ideas, the fundamenta of education.

For example, in the late 1990s the government introduced a new compensation system for faculty. Beyond a basic salary, faculty are compensated  on the basis of the number of their publications. This has led to an enormous output of journal articles—at the price, the authors contend, of destroying creativity. (This emphasis on publications, of course, has a counterpart in the United States.) 

In conclusion, the Chinese experience, both its fast-growing economy and its shallow intellectual productivity, offers a lot for us to think about. Broad rules that favor competition and remove protections, rather than a focus on specific reform policies, might give higher education a greater chance to flourish in both countries.

 


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