Why American universities are the best in the world

List after list confirms it. The United States, by far, has the best and most prestigious universities in the world.

But it wasn’t always this way, and there was no guarantee that this outcome would happen. According to a new essay by W. Bentley MacLeod and Miguel Urquiola and published in the Journal of Economic Perspectives, a series of innovations at American universities combined with lots of funding accidentally created a system that valued research, promoted talent sorting, and provided lots of cash to fund bigger and better schools.

The three big ideas: Sorting, performance review, tenure

According to the authors, you would have hardly recognized any of the original colleges in the United States. Schools might have a hundred students and perhaps five poorly paid professors who taught several disparate classes at once. The curriculum was limited and excluded things like business or engineering. Most students, who could be as young as 14, learned by rote. Schools were set up by denomination, with most students selecting to go somewhere close to home that matched their particular stance on Christianity. Research efforts were minimal.

It wasn’t until after the Civil War that things began to change. Professors were hired for their expertise, schools began to specialize, and students started to pay less attention to the denomination of the school they wanted to attend. The number of colleges exploded, and things that worked in one were often taken up elsewhere.

The authors propose that this turnaround was made possible by the accidental convergence of a few things that America enjoyed and Europe lacked. Low entry requirements meant new schools with new ideas popped up all the time, the large number of schools allowed for more experimentation in how schools operated, and the variety of choices students and staff had led to self-sorting towards institutions that excelled in particular fields.

Some of the more famous cases of experimentation, Johns Hopkins and Cornell, sought to emulate the specialization of European schools, while others, such as the University of Chicago, prioritized hiring the most qualified staff — even when they were already working at other universities.

Over time, schools placed less emphasis on religious affiliation and began to focus on specialization. Admissions standards began to rise at some schools, sorting high-achieving (or high status) students into programs with highly qualified staff.

The effort to find and maintain high-quality staff led to the creation of performance review standards in different fields. These systems, which often had accomplished professors reviewing their peers, encouraged more high-quality research output. Those who performed well often gained secure contracts to teach and conduct research — that is, tenure — which further encouraged high achievement.

All of this was made possible by large amounts of state and private funding, the latter often from proud alumni.

In an interview with the American Economic Association, Professor Urquiola explained how agency theory sheds light on the role tenure played in this process:

“What became challenging for all these universities once they started emphasizing research is how to incentivize that activity. One thing that agency theory shows is that one way to achieve this is to create somewhat lumpy rewards. That is to say, rewards that don’t necessarily give you a little bit more for a little bit more output but rather create a big prize. Tenure has that flavor. It basically says if your research output is high enough you’re going to get a lifetime contract at this university. Tenure has a couple of benefits that come out of agency theory. One is that these types of lumpy rewards can be particularly good when you make people compete against each other. The emergence of it in the US, in fact, helped place the US on good footing to compete at research with Europe, which does not have that institution as much.”

Taken together, these factors created a virtuous cycle. The authors describe it as producing “resources to invest in research, which they could effectively incentivize; this helped attract strong students and funding, which could go into further reforms and enhancements.”

By the 1920s, the US had overtaken Germany — the European country with the strongest universities in the early 20th century — in the share of Nobel Prize winners and never looked back.

The side effect: Inequality

All of this does produce one side effect well known to Americans: inequality. While the greatest American schools do well across the board, many other schools are comparatively middling. The authors point to one ranking list which illustrates this. According to the Shanghai Ranking, 41 of the top 100 universities globally are American, but while 83 percent of public universities in Spain make the top 1000, only about 23 percent of American ones do.

This is partly the result of the American system being as sorted as it is, so the best researchers and students tend to go to the same places. The European model, on the other hand, ensures equality of resources between different schools within a country.

Today, universities on both sides of the Atlantic share ideas, but retain their own character. For instance, tenure, which so benefited American schools, exists in an altered form in Europe.

Why isn’t American K-12 education as good?

While this system has produced great universities, it’s difficult to apply these tools elsewhere. For example, performance evaluation has been refined for researchers at the university level, but there is still tremendous debate over what counts as high performance at the K-12 level.

Additionally, it’s possible for a country to dominate in university rankings with a handful of great schools. At the K-12 level, it would require thousands of schools performing at the peak of their abilities to get a similar result.

Until that happens, Americans can take pride that their universities — through a combination of competition, experimentation, and lots and lots of money — rose from small centers of rote learning to become the greatest research institutions in the history of the world.