Universities and incentives

On this day, in 1740, Adam Smith—who would later become the pioneering economist who authored An Inquiry Into The Nature And Causes Of The Wealth Of Nations, set off for Bailliol College Oxford. This young man from the rural port of Kirkcaldy on Scotland’s east coast had already distinguished himself as a student at the University of Glasgow and now, aged just 17, had won a scholarship, the Snell Exhibition, to attend one of the most distinguished centres of learning in the world. Or so it seemed.

It took the young Smith a month on horseback to get to Oxford from his home in Kirkcaldy. That in itself was something of a revelation to the budding economist. He had already noted how much grander and livelier was Glasgow, compared to his childhood home. Kirkcaldy’s export trade in coal and other goods was fading; the larger and safer harbours of Dundee to the north and Edinburgh to the south were better placed. And Glasgow, being the recently-unified Great Britain’s closest great port to the Americas, was developing a thriving trans-Atlantic trade in tobacco, cotton and other new goods. All the more so because of regulations that forced the colonies to trade only with Great Britain, and not its enemies and competitors in the Netherlands, France and Spain. But now, as he rode the 400 miles through the Borders and down through England, he was struck by the steadily increasing prosperity. The cattle were better fed, the living more opulent, than anywhere in his native Scotland. 

Perhaps these experiences stimulated his interest in economics, though he had come to Bailliol to study the classics. Bailliol College, indeed, had what was reckoned to be perhaps the finest library in terms of classical authors, and Smith—an avid reader even as a schoolboy, and in later life a man of whom it was said he could never resist buying a book—would be in his element.

Up to a point. What Smith actually found at Bailliol was that few if any of the teachers had any interest in helping him further his education. “In the University of Oxford.” he would write much later, “the greater part of the public professors have, these many years, given up altogether even the pretence of teaching.”

Why? Well, it was Adam Smith’s first lesson in incentives. Oxford professors were paid whether they taught students or not. So why bother?

It was very different from Smith’s own experience, two decades later, when he himself taught at his other alma mater, the University of Glasgow. There, the teachers were actually paid by the students. So when Smith—by then a sort of intellectual rock-star thanks to the success of his book The Theory Of Moral Sentiments—was induced away from teaching his course, with the offer of a fabulous lifetime salary, to tutor the 12-year-old Duke of Buccleuch, he worked out how much he owed each of his students for the lectures he would miss, and prepared little pouches of money for each of them. But the students refused to take the refund, and mischievously put them back into his pockets. They thought they had already had great value, even with the course incomplete.

The difference in the two systems, and the incentive effects on the teachers, was not lost on Smith, and became a major theme in The Wealth Of Nations. “Public services are never better performed,” he wrote, “than when their reward comes in consequence of their being performed, and is proportioned to the diligence employed in performing them.”

Having exhausted everything the great Bailliol library had to offer, Smith returned home to Scotland a year earlier than planned. He had educated himself. Remembering the experience, he wrote: “The discipline of colleges and universities is in general contrived, not for the benefit of the students, but for the interest, or more properly speaking, for the ease of the masters.”

In the UK today there is a debate on whether universities should return to being free to students. In other words, teachers would get paid, by the state, just for being there. And the students, with no financial leverage over them, would have little way of punishing bad teaching. If we could ask Adam Smith, he would no doubt have much to say on that subject.