In 1885, Leland Stanford Jr., railroad tycoon and California politician, was considering whether to create a new university. Stanford had given some thought to starting a technical school instead-he wanted his new institution to be avowedly practical-and, together with his wife, Jane, he sought advice from Harvard's president, Abbott Lawrence Lowell.
Not surprisingly, Lowell favored the university option. How large an endowment would be needed, Jane asked, to do the job right? Not less than $5 million, Lowell replied. There was a short silence, and then Leland spoke up. "Well, Jane," he said, "we could manage that, couldn't we?"
Stanford wasn't the only industrialist with such a dream. This was the Gilded Age, a time when the market ruled. By the turn of the century, John D. Rockefeller and his friends had chipped in with $10 million to start the University of Chicago, and Andrew Carnegie had launched Carnegie Technical Schools, renamed Carnegie Mellon University in 1967.
Fast forward to 2005 and imagine the following scenario. Bill Gates, Harvard's most famous dropout-and, with more than $40 billion, the richest man in the world-decides that, like Leland Stanford, he wants "to qualify students for personal success and direct usefulness in life."
Could Gates bring it off? Could Bill Gates University become the Stanford of the northwest? Conventional wisdom says no: Institutional newcomers do not have a chance in the rarified world of premiere American universities. Indeed, the only successful new schools in recent decades are the for-profit institutions like the University of Phoenix, and they aren't in the same league. But profound changes in how universities develop and maintain their reputations-the fact that, simply put, money talks so powerfully-prompt me to think that Gates would have a decent shot at cracking the inner circle.
History cautions against this argument. Since Leland Stanford's day, once a university has acquired its place in the pecking order it almost always has stayed there. Compare a hypothetical "Fortune 500" list of the top companies in 1900 with a similar ranking of universities from that year. While relatively few of these businesses still exist, the ranking of universities has changed remarkably little. In 1900, Harvard, Columbia, Yale, Cornell, Princeton, Johns Hopkins, Berkeley, Pennsylvania, Michigan-and the two newcomers, Chicago and Stanford-formed the Association of American Universities, the self-selected organization of top research universities.
A handful of schools like Clark University, a founding member of the AAU, have fallen from grace, and others have slipped a few notches. There have been some additions to the upper ranks, mainly science-driven schools like Caltech and MIT, and state universities in the midwest and west coast. But the stability is what's noteworthy. If you didn't know better, you would suspect it was a cartel.
How has this situation come to pass? An enormous investment would be needed to start a university with hopes of greatness. In 1885, $5 million-about $92 million in today's dollars-could buy Leland Stanford a first-class university. Not so these days. In 2002, forty-six institutions had endowments larger than $1 billion, and Harvard's endowment is approaching $20 billion.
Big science costs buckets of money. So does keeping up with the institutional Joneses-what economist Gordon Winston calls positional warfare-with Jacuzzis in the dorm rooms, rock-climbing walls in the gym, and sushi bars in the dining hall. Endowment is directly correlated with prestige, as Winston has shown: Top-ranked schools invariably subsidize their students more than those lower in the pecking order.
It is also true that higher education is a most peculiar market. The "sellers," the universities, seek out the most attractive "buyers"-that is, students and professors. Nabisco doesn't care much about who eats its cookies, but as Robert Frank notes, "the university's consumers are one of the most important inputs in its production process, and this is not the case for producers of typical private goods and services. [Elite institutions] need top students every bit as much as top students need them."
The chief draw for top students, a survey at elite institutions shows, is not the quality of education, something that's notoriously hard to decipher. Rather, it is prestige-more precisely, its place in the U.S. News & World Report rankings. Those rankings inform prospective undergraduates that others just like them will also be enrolling. That assures them of similarly motivated classmates, and increases the chances that they can make the kinds of connections that build careers. Even as college administrators complain about the formula that U.S. News uses, they are working assiduously to improve their position. This means, in essence, being a well-heeled institution with a highly selective group of students.
Among research universities, star professors figure especially heavily in the calculus of prestige. That's why schools seek to maintain their position by outbidding one another, offering the big academic names bigger salaries and lighter teaching loads, as well as top-flight colleagues with whom they can work, and good students who can make them look smarter.
What potentially gives Bill Gates-or Warren Buffet or the Walton (Wal-Mart) family-an opening is the fact that, during the past quarter of a century, American higher education has been transformed by the power as well as the ethic of the marketplace. Entrepreneurial ambition, once regarded in academe as a necessary evil, has become a virtue. In Britain, where in the "Brideshead Revisited" world privilege counted for everything, the great modern success story has been the resolutely democratic Open University. That school opened in 1970 and, as its name suggests, it is open to all comers.
Now Open University enrolls 180,000 undergraduates in Britain alone, many more in Europe and Asia. The government's Quality Assurance Agency ranks it among the top thirty British universities in research, and among the top ten in teaching; in engineering instruction it outperforms Oxford and Cambridge. By contrast, in America the great success story of modern times is New York University, whose achievements reveal the profound potential impact of money on institutional reputation.
In 1975, NYU was literally teetering on the edge of bankruptcy. Then it recruited John Brademas, a longtime congressman and able fundraiser, as its president, and its situation started to improve. Millions of dollars were lavished on superstars, many of whom were given their own research centers. The arrival of each new faculty recruit created what economists call a signaling effect, letting more timid souls know that it was safe to jump from Chicago or Princeton to Washington Square.
In determining its priorities, NYU opted not to break the bank with investments in Big Science, focusing instead on some of the professional schools and liberal arts departments. The most dramatic transformation came in philosophy. Philosophers are relatively cheap; all they need, the old joke goes, is a ream of paper, lots of sharpened pencils, and a wastepaper basket for their false starts. NYU was able to recruit established professors from schools like MIT and Oxford, bringing together people who welcomed the chance to work together. In 1995, the university lacked an accredited Ph.D. program in philosophy; five years later, it was ranked number one.
Traditionally NYU was a commuters' school, but millions of dollars were spent to create a vibrant campus. As word of these developments spread, students from across the country with stronger academic records started showing up, and that change registered on the U.S. News rankings. The school was also able to exploit its connections to attract heads of state, including Bill Clinton, Tony Blair and Jacques Chirac, to a widely publicized conference at NYU's overseas center in Florence; that coup gave credibility to the university's boast that it was a leading player in higher education across the globe.
Could Bill Gates duplicate NYU's feat? Gates starts out with the great advantage of instant and generally positive name recognition. (Whether students a century ago were eager to enroll in "Robber Baron U" is unknown.) He does not have New York City going for him, as NYU does, but NYU made its first move before the "I Love New York" days, when the city was not such a draw. Besides, Bill Gates' home town of Seattle is far more appealing than New Haven, home to the nation's second most prestigious school.
Doubtlessly, Gates would emphasize science, and that costs a lot of money. Yet at least in high tech he has an enormous leg up, and his university would give new meaning to industry-university collaboration. Gates U could also buy talented students with generous scholarships based not on the traditional criterion of need, but rather on merit; that's what schools such as Washington University are increasingly doing.
If Gates were to convert half of his fortune into an endowment for this new institution, he would instantly match Harvard's resources, but there is no need for such a dramatic gesture. Endowments at top-flight schools such as Brown, Vanderbilt and Johns Hopkins are less than a tenth as big as Harvard's. About such a sum, Bill Gates could say to his wife, Melinda, just what Leland Stanford said to Jane: "We could manage that." Moreover, with Gates as the lead donor, others would contribute, for there are always dormitories, libraries and professors' chairs to be named.
The NYU story contains another lesson: Raising endowment may not be crucial to institutional success, at least in the short term. Why should a school spend just five percent of the money that it raises-the typical payout from endowment-when it can spend it as fast as it takes it in? NYU, impatient for status, opted for this "spend it now" approach. NYU's endowment barely topped $1 billion in 2002. That is just a quarter the size of Emory University's endowment and smaller than Williams College's.
Even if Bill Gates U or something like it eventually opens, the longstanding dominance of a school like Harvard or Yale would not be threatened. In many ways, including the ineffable cachet, they have too much going for them. But a place like NYU-or even Chicago or Stanford, where similar ventures began in an earlier Gilded Age-would be closely monitoring these developments.
The fact a new university could join the ranks of the elite in the course of a single generation is another example of how, for good as well as bad, the market has come to dominate higher education.
David L. Kirp, professor at the Goldman School of Public Policy at the University of California, Berkeley, is the author of "Shakespeare, Einstein, and the Bottom Line: The Marketing of Higher Education" (Harvard University Press, 2003).