(This essay was published in Hong Kong Economic Journal on 29 May 2019.)


The cold war profoundly changed American research universities, both in relation to their role in society and in terms of the scientific and scholarly disciplines practiced and taught within them. During the cold war, leading American universities moved from the periphery to the center of the nation’s political economy, funded by large government research grants that were motivated by the goal of winning the cold war against the Soviet Union.


Clark Kerr, who was chancellor in the 1950s and early 1960s of the University of California at Berkeley (founded as a state land-grant university in 1868), was the first university president to herald this shift publicly. He recognized the significance of the cold war to American universities. The advance of military technologies required the expertise of highly trained scientists and engineers.


By the early 1960s, the US federal government was spending approximately $10 billion annually on research and development, with the Defense Department and the Atomic Energy Commission contributing over one half of the total. Universities and university-affiliated centers received about one-tenth of these funds, more than half of which went to just six universities by the early 1960s — Harvard, MIT, Columbia, Chicago, U of California, and Cal Tech. These universities in turn depended on federal patronage for over 50 per cent of their operating budget.


But Kerr also saw the postwar university as the product of broader forces that were shifting the US from an industrial to a service society, from an economy in which labor and raw materials were the essential inputs to one in which expert knowledge was the key to economic growth and prosperity. High technology companies were clustering around the Berkeley and California campuses in the San Francisco Bay Area, around Harvard and MIT in Massachusetts, and around the campuses and research facilities in the Chicago area.


These cities of knowledge are evidence of the importance of the American research university in the post-World War II economy. This development set a new standard for what defines a great university. Attempts to replicate them in other parts of US and elsewhere in the world have seldom been successful, however.


Ascendance of America’s Research University


Not only did the university’s relationship to society change after World War II, the university underwent internal changes as well. Large laboratories staffed with myriad researchers having no teaching duties and working in groups with expensive, government-funded scientific equipment became common features of the leading research universities. The kinds of knowledge produced and taught also changed. Universities made room for new fields of study, such as nuclear engineering and Russian studies, which bore obvious relevance to US geopolitical concerns.


Professional advancement in the postwar university depended wholly on research and publication, which in turn depended on the development of federal support. Clark Kerr readily acknowledged that undergraduate teaching received short shrift as professors responded more to external demands than those of their own institutions and students.


If the university before World War II was a community of scholars and scientists, the postwar university was, as Kerr described it, a loose collection of academic entrepreneurs — scientists and scholars perpetually promoting themselves and their research to potential funding sources for support.


That the leading universities in the US changed in the ways that Kerr outlined has never been disputed. What has occasionally been a subject of debate, however, is whether these changes represented progress or degradation and decline. While Kerr regretted what was being lost — a sense of the university as a community and a devotion to undergraduate education — this regret was overwhelmed by his appreciation of what was being gained.


For him the university was no longer an ivory tower removed from, and at times suspicious of government and industry, but a flexible institution with multiple constituencies, in essence a “multiversity.”


The Question of Overheads Charge


Wartime collaboration between academic scientists and the military paved the way for the postwar relationship between American universities and the federal government based on the federal contract. This was an offer to subsidize the universities themselves through the payment of indirect costs — known as the overheads charge. This was levied on contracted research projects and provided the research university with a steady source of revenue.


The National Defense Research Council (NDRC), and later the Office of Scientific Research and Development (ORSD), adopted the practice of reimbursing overheads costs to the universities for administering research contracts at 50 per cent of the contracted sum. While investigations found such a reimbursement policy to be too generous and favorable to the contracting institutions, recommendations to itemize overhead costs, or to adopt a sliding scale with the lowest percentage set at 30% were rejected while retaining the fixed 50% basis is generally in favor.


In recent times the overheads charge has increased to nearly 60 per cent as administrative costs have increased in response to a heavier regulatory and compliance burden.


The private universities, who had seen their finances gravely ravaged during the Great Depression years, saw the overheads charge as an important source of stable revenue. Leading American universities, especially private ones, seized upon the favorable considerations of the federal contract and were especially keen to seek federal financial patronage.


The aggressive pursuit of research contracts by Harvard was one of two key reasons why it succeeded in pulling ahead of Columbia, which had arguably been the leading university at the end of World War II. The other reason was its use of merit scholarships to attract the best undergraduate students.


It is interesting to note how the overheads charge on research contracts is set in Hong Kong. Universities funded by the University Grants Committee are only allowed to set an overhead charge of 15% if the funding comes from government. If the funding comes from private sources, then the permitted charge is set at 30%.


At such low levels the incoming revenue from contract research is barely attractive to local universities.


Government contracts are the more important source of contract research in Hong Kong, but bidding for these is often a losing financial proposition for the universities and is pursued more for recognition and as public service rather than a source of revenue.


In the US, on the other hand, Stanford and Chicago universities together were able to shape the twentieth century political economy of the US and enable it to finally defeat the Soviet Union. This is their story.


Stanford and the New Technology Industries


Stanford, founded in 1885 by railway baron Leland Stanford in Palo Alto, California, was not quite a leading research university at the end of World
War II. Its fortune changed dramatically under the leadership of Frederick Terman, who became dean of the School of Engineering in 1945 and Provost from 1955 to 1965.


Terman encouraged his students to form their own companies and personally invested in many of them. His students at Stanford included Oswald Garrison Villard, Jr., Russell and Sigurd Varian, William Hewlett, and David Packard. In 1951 he spearheaded the creation of Stanford Industrial Park (now Stanford Research Park), where the University leased portions of its land to high-tech firms.


Companies such as Varian Associates, Hewlett-Packard, Eastman Kodak, General Electric, and Lockheed Corporation moved into Stanford Industrial Park and made the mid-Peninsula area a hotbed of innovation, which eventually became known as Silicon Valley.


As Provost, Terman greatly expanded the science, statistics and engineering departments in order to win more research grants from the Department of Defense. These grants generated funds for patented research, catapulted Stanford into the ranks of the world’s first-class research universities, and spurred the growth of Silicon Valley.


Terman’s efforts to create a mutual relationship between Stanford and the tech companies in the surrounding area also greatly contributed to Stanford’s growth, because Silicon Valley became the most dynamic engine of US economic growth in the age of information and communications technology.


Terman was invited to duplicate his success in many different locations but was only successful in one other place. In 1966, he played a central role in helping the Park Chung-hee administration establish the Korea Advanced Institute of Science, which later became Korea Advanced Institute of Science and Technology (KAIST). Many of South Korea’s leading technology companies can trace their origins to KAIST.


Terman and Stanford laid the early foundations for the rise of Silicon Valley by successfully developing a tripartite partnership of federal grants, academic knowledge powerhouse, and vibrant private enterprise.


The Chicago School


The University of Chicago was founded in 1890 by oil baron David Rockefeller. One of its most pivotal leaders wasRobert Maynard Hutchins, who was president (1929-1945) and chancellor (1945-1951) of the University of Chicago. Hutchins was very disturbed by the government’s influence on the University’s scientific-research funding after World War II. He wanted specifically anti-statist thinkers and hired, among others, Aaron Director to the Law School, Allen Wallis to the Business School, Friedrich von Hayek to the Committee on Social Thought, and economist Milton Friedman.


Hutchins had opposed the war, but after the attack on Pearl Harbor he offered the government the resources of the university. Millions of dollars in government contracts poured in. The Manhattan Project, which developed the atomic bomb, was only one of many projects operating on the university campus during the war years. But by 1944, Hutchins again began preaching for peace, and the atomic bomb made his message all the more urgent.


Hutchins was a strong advocate of academic freedom and always refused to compromise his principles. For example, in 1935 when drugstore magnate Charles Walgreen asserted that his niece had been indoctrinated with communist ideas at the University, Hutchins stood behind his faculty and their right to teach and believe as they wished, insisting that communism could not withstand the scrutiny of public analysis and debate.


When the University faced charges of aiding and abetting communism again in 1949, Hutchins steadfastly refused to capitulate to red-baiters who attacked faculty members. Hutchins could say, with a straight face: I do not need to tell you what the public thinks about universities. You know as well as I that the public is wrong.


His principled stands were not without consequences. Chicago’s ranking among leading research universities slipped with Hutchins’ apprehensions about federal research grants.


Nonetheless, the intellectual environment he fostered at the University of Chicago promoted independent thinking without fear of political authority. This appealed to many outstanding scholars and undoubtedly contributed to the rise of the Chicago School of Economics, whose key members he had personally recruited.


Under Milton Friedman’s intellectual leadership of the Economics Department, the “Chicago Economic View” was developed and eventually became dominant. Both Ronald Reagan and Margaret Thatcher credited Friedman’s ideas for turning the tide away from state intervention and towards freedom and free markets. Harvard economist Andrei Shleifer has called the years 1980-2005 the “Era of Milton Friedman.


Hutchins’ university transformed intellectual thought and public opinion in favor of limited government, free markets, and economic globalization. The remarkable success of the Chicago School was due in large part to the fact that it was able to take a leading role both in scientific research and in providing a rationale for free markets.


The rapid pace of economic globalization since 1990 is as much due to the “information and communications technology revolution” coming out of Terman’s Silicon Valley as is the intellectual climate fostered by Friedman’s Chicago School of Economics. Together, these forces have helped to accelerate the economic transformation of the US and beyond — a billion people in the world have escaped poverty.


Berkeley, Stanford and Chicago


Soviet communism collapsed both because its intellectual and economic logic were bankrupt and because it failed to compete against the capitalist economic machine. Berkeley, Stanford and Chicago exemplified three different pathways to academic success during the Cold War.


Berkeley ascended primarily with the support of federal research grants. This transformed the university into a campus of research laboratories led by teams of grant-seeking scientists and supported by graduate students


Stanford’s scientists and engineers took things a step further and encouraged undergraduate and graduate students to found new technology companies, enabling the formation of mutually-supportive institutional arrangements between the university and private industry. The university became a partner not only of government and the state, but also of business and the market.


At Chicago, Hutchins’ apprehensions about losing institutional autonomy and academic freedom under the weight of federal research contracts created a different type of university that sounded an awakening call in defense of individual liberty and free competition in private markets. Columnist George F. Will, writing in 1991, summed up the combined influence of economists Milton Friedman, Friedrich von Hayek, George Stigler and Ronald Coase: “The Cold War is over and the University of Chicago won it.”


These three young universities, all founded in the second half of 19th century, contributed to America’s global economic rise and the winning of the Cold War. They each pursued different pathways, symbolizing the multifaceted influence of the research university in the modern era.

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