Adam Smith on Public Policy: Teacher Compensation

Adam Smith experienced higher education as both a student and a teacher. He thought it was important that teachers be held monetarily accountable to students.

Paul Mueller

Paul D. Mueller is an assistant professor of economics at The King’s College. He completed his M. A. and Ph.D. at George Mason University. He also has a B. S. in economics and in political philosophy from Hillsdale College. He has published several articles in peer-​reviewed journals including the Adam Smith Review and the Review of Austrian Economics. He has also had pieces appear in USA Today, the New York Post, e21, and The Hill.

Although Adam Smith taught at Glasgow University for 12 years, he did not turn a blind eye to the failings of the universities. The biggest problem he saw in the prominent European universities of his day was not a lack of funding or a lack of access. It was the misaligned incentives of the professors. He speaks particularly harshly of the Oxford faculty he interacted with as a student. But the Scottish universities were mostly free of this problem, leading Smith to write to a friend that: “In the present state of the Scotch Universities, I do most sincerely look upon them as, in spite of their faults, without exception the best seminaries of learning that are to be found anywhere in Europe.”

Smith explains that the “degradation and contempt” with which many European universities are held “arises principally…from the large salaries which in some universities are given to professors, and which render them altogether independent of their diligence and success in their professions.” The misaligned incentives were the result of how professors were compensated, and therefore how they were held accountable. Historically, going all the way back to the Greeks and Romans, teachers made their living based upon the fees their students paid directly to them. There were no universities or degrees. Students sought teachers who could teach them something valuable and paid them to do so. These student fees were still an important source of funding for professors at Glasgow when Smith taught there. Henry Home relates a story of how Smith attempted to return his students’ fees when he chose to leave before the end of the academic year to tutor the Duke of Buccleuch. His students refused to accept their returned fees because he had already taught them so much. But Smith said:

‘You must not refuse me this satisfaction. Nay, by heavens, gentlemen, you shall not;’ and seizing by the coat the young man who stood next to him, he thrust the money into his pocket, and then pushed him from him. The rest saw it was in vain to contest the matter, and were obliged to let him take his own way.

Smith felt it was his fiduciary responsibility to return his students money for not delivering everything he promised to them. Contrast his commitment with that of faculty at other universities at the time:

The teacher, instead of explaining to his pupils himself, the science in which he proposes to instruct them, may read some book upon it; and if this book is written in a foreign and dead language, by interpreting it to them into their own; or, what would give him still less trouble, by making them interpret it to him….The slightest degree of knowledge and application will enable him to do this without exposing himself to contempt or derision, or saying any thing that is really foolish, absurd, or ridiculous. The discipline of the college, at the same time, may enable him to force all his pupils to the most regular attendance upon this sham-​lecture.

When universities pay professors directly, the professors are not accountable to their students, creating a principal-​agent problem. The arrangement severs the process of exchanging service for money:

The endowments of schools and college have necessarily diminished more or less the necessity of application in the teachers. Their subsistence, so far as it arises from their salaries, is evidently derived from a fund altogether independent of their success and reputation in their particular professions.

The principal-​agent problem of a professor’s being compensated by the university rather than by his students sets his interest “as directly in opposition to his duty as it is possible to set it. It is the interest of every man to live as much at his ease as he can.” People have a natural proclivity to take their ease and pursue their own interests. As a result, faculty will teach in a “careless and slovenly a manner.”

Even if a professor “is naturally active and a lover of labour, it is his interest to employ that activity in any way, from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none.” Without direct accountability to students, or close monitoring by administration, professors will generally teach in the way that is easiest for them. And even the energetic and industrious professors will devote most of their effort to projects that interest them rather than benefit the students. As a result, “In the university of Oxford, the greater part of the publick professors have, for these many years, given up altogether even the pretence of teaching.” Smith concluded: “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.”

Today, professors are paid by the institution, not by the direct fees of their students. Smith believed such a system reduced the motivation for good teaching. Despite many exceptions, on the whole Smith was right. At some research schools, the faculty have given up even the pretense of teaching and left their classes to their teaching assistants or graduate students. Tenure has moved higher education even further down the road of indulgence and neglect by the faculty. Many tenured research faculty would probably not be able to make a living from their student fees when they only teach two or three courses a year.

Smith thought that primary education created public benefits but should be funded primarily by student fees rather than government revenue. Imagine what he would think of the massive subsidies to the less essential higher education in universities and colleges today! Modern government funding contributes to the endowment and accountability problems Smith saw in universities. Making such institutions free for the student, as Hillary Clinton and Bernie Sanders have called for, would certainly have horrified Smith. It violates his principles of public finance—that those who benefit the most from government provision of some good should pay most of the expense for it through tolls or fees. Making college free to the student eliminates the last indirect connection between professors’ compensation and students’ payments. Is that going to improve poor teaching on college campuses? Smith probably wouldn’t think so.