I’d like to talk tonight about some issues that transcend, I’m convinced, the economic issues that I had a chance to grapple with when I was at the Treasury. At the Treasury, our job was to make the nation’s economic system work well, to appropriately manage the government’s finances and our national currency, to support and oversee a healthy financial system, to support the global economy and to ensure, in short, that the invisible hand worked well. All of that is profoundly important, and certainly the well-being of millions of people is compromised when those functions are not performed well.
One thing became very clear to me in working with emerging economies, something I’m convinced that it is no less true for the United States — that no set of macroeconomic policies, no matter how wise, will succeed in an economy that does not have the right foundation. And with a sound foundation for inclusive growth well in place, the tasks of avoiding budget deficits, containing inflation, resisting perfectionism and maintaining financial stability become that much easier. And it is in providing a strong skeleton on which that invisible hand rests that universities make an enormous contribution to our national economy. That has always been the case, but I’m convinced that as we move into the new economy in the future, an economy that is idea-driven rather than power- or production-driven, it becomes that much more the case.
Anyone who doubts the importance of a university’s fundamental product — good thinking and the capacity to think — should read an unlikely economic classic of our times, Moneyball. It is hard to imagine a more traditional activity less associated with scholarship, and yet that book demonstrates powerfully how the tools of analysis harnessed to the question of recruiting baseball players and managing baseball strategy can produce spectacular results — teams that consistently, with a third of the payroll, outperform teams with payrolls three times as great.
Ultimately, any market economy rests on a strong skeleton that needs to have a foundation of four pillars: ideas, international stability, inclusion, and intangible values. And universities make a great contribution to our national life in all of these respects. Ideas — every study of economic growth reveals that its dominant source is not growth in physical capital. It’s not even the growth in productivity that comes from a more educated workforce. It is innovations and ideas that drive our economy. Think about this city. A major industry, if not the major industry in this city, is the trading of futures and options now, dominantly, on financial products. That idea emerged from Milton Friedman in the late 1960s as a byproduct of quite abstract economic research.
Yesterday’s newspaper reported that two-thirds of American welfare spending now goes to those who work, in contrast to the situation 10 years ago when only one-third went to those who worked. That revolution in our national policy is not unrelated to the fact that the governor of Arkansas, between 1990 and 1992, carried around the paper written by a Harvard professor titled “Making Work Pay” as the solution to our poverty problem.
Jim Farrell was kind enough to refer to the now diminishing presence of my autograph on pieces of paper that you all carry around. You carry those pieces of paper around after you get them from an ATM machine. Secure transactions on those ATM machines would not be possible without encryption, and encryption, in turn, is derived from powerful and highly abstract research in the most abstract branch of knowledge, mathematics, and the most abstract branch of mathematics, number theory, on the factorization on prime numbers that was carried out in the late 1980s.
And the most dramatic example is the one that will be coming to your minds, the power of biomedical research. It’s been estimated by Kevin Murphy and Robert Topel at the University of Chicago that if you compare the social benefit of all of the economic progress and increases in standard of living that have taken place over the last century, and the benefit of the improvements in life span and health that have come out of scientific research in the life sciences, that those two are of roughly equal value — that most of us would actually prefer to have the health experience of a person born today and the standard of living that went with America in 1950s than to have the standard of living that goes with today and the health experience that goes with 1950. And that is a product of a small base of research.
Now, when people talk about ideas, they often use the phrase “intellectual property.” I’m convinced that that is a profoundly misleading term. It is profoundly misleading because whenever you think about property, you think about something that if one person has it, another person cannot. Only one person can wear my shoes at a time. Only one person can farm a given plot of land. But my use of quantum mechanics in no way interferes with your use of quantum mechanics. That captures something very profound about a market economy. Because if something is made freely available, it is very difficult to capture a return from making it freely available. And if in order to make its production economic, access is restricted and sold, something very important is lost. Suppose someone had patented quantum mechanics or patented the idea of DNA, think what would have been lost. That is the reason that for the most basic search for truth we cannot rely on market mechanisms. We need to foster social mechanisms that are based on very different principles, the kinds of principles of open inquiry that under-gird America’s universities.
As the role of basic knowledge becomes increasingly important, this will only be more important in the future. Think of what developments at Stanford meant for the information technology industries in northern California during the 1990s. We hope very much that in collaboration with MIT, the kinds of joint ventures that we are sponsoring that harness science will not just make a great contribution to conceptual understanding in the life sciences, not just make a great contribution to human health through the understandings that result, but also make a great contribution to the health of the Boston economic area.
There’s a second requisite for a healthy economy and that is that a healthy economy must be embedded in a stable international system. If one thinks about the darkest decades of economic performance in this country over the last two centuries, they are associated with profound difficulties in the international system.
We face as a nation now a profound challenge in the conduct of our foreign policy. On the one hand, we are right to be committed to our values of freedom and democracy, and at least in my view, we are right to see strength as an ultimate guarantor of stability in international affairs. We compromise our values only at our peril. At the same time, history teaches, in ways that cannot seriously be doubted, that no nation, no matter how strong, can stand alone in the world without friends and without allies. This commitment to our values that we should not compromise and our need to be in cooperative ventures with other countries poses the difficult dilemma in the conduct of U.S. foreign policy. We will never attain an ideal solution. But to pose the problem in terms of our values and our need for cooperation is to recognize that, ultimately, the most effective and important way in which we can succeed is to promote our values and to persuade others of their validity. And here, we have no resource as strong as our great universities that have an opportunity to shape the perspectives of hundreds of thousands of potential leaders of foreign nations at a time in their lives when their thinking is still malleable.
I was struck again and again and again during my years in government by how often I would go off and see the deputy finance minister of a country, or the person who ran its tax system, or the finance minister, and he would discuss whatever business we were to discuss and then would say, are you the same Larry Summers who used to teach economics at Harvard? And would then talk about his year at one of our international affairs centers, or would talk about his visit to Princeton or the University of Chicago or Northwestern and how he had studied economics during those years and encountered some paper that I had written and how the experience of studying in the United States had changed in a very profound way his perspective on the United States and caused us to understand. Promoting more of that understanding would be a bargain at 10 times the price.
Equally, there is still, even as our society globalizes, too many whose view of the rest of the world is suggested by the very senior congressional leader who was asked a couple of years ago whether he planned to go abroad during the congressional recess. This leader paused for a moment and then said, `no, I’ve been there`. Surely, enabling a far higher fraction of our young people to spend time abroad will promote foreign understanding of our country and will promote our understanding of foreign countries.
You know, perhaps the greatest threat Harvard has faced to its position of strength in its 360-some-year history came in the very early years of the republic, when George Washington was determined to start a national university in the nation’s capitol that would be the leading site for thinking and teaching in the United States. He was insistent on making it a major theme of his farewell address and Alexander Hamilton talked him out of it because he thought it would be inappropriate to a farewell address. And Washington put it in his will, but it never quite happened. He gave as his rationale precisely the understandings that would be achieved when people of very different backgrounds worked and studied next to each other. It might have been a good thing for the nation if it had happened. I think from the point of view of the Harvard franchise, it was a rather good thing that it did not happen. But George Washington was right in his emphasis on the role of education in promoting international understanding.
There is a third value which is crucial to the credibility to the American example in the world that I’m convinced is essential to the stability of our country for the long-term, and that is the challenge of including everyone in economic success. Something very important happened this year when the Supreme Court wisely upheld universities’ commitment to building classes that were diverse as an important part of our educational mission. At the same time, Justice O’Connor, in her opinion, wisely recognized that the true test, the thing that people will look at when they judge the time when we were alive 200 years from now, will not be what race-conscious or poverty-conscious admissions policies universities maintained for a given set of decades. The ultimate challenge will lie in what we are able, or what we are not able, to do to promote universally successful education.
In an elitist era, the Duke of Wellington famously observed that the Battle of Waterloo was won on the playing fields of Eton. The battle for America’s future will be won or will be lost in the public schools of this country. Universities have a great stake in the success of those public schools, and we all, as citizens, have a great stake. Some things that are important for the public schools are things we know. The New York Times reports this morning that in a major high school in the Bronx lunch begins at 9:21 a.m. because of overcrowding, and classes are held in the principal’s office. We all know the statistics on how far behind too many kids lag. None of us know the answer to these questions completely, although from what I’ve been able to learn and from what I’ve been told by Ellen Lagemann, who we were able to recruit to Harvard from the Spencer Foundation in Chicago, Arne Duncan knows more of the answers than just about anybody else. You are a remarkable example, Arne.
But it seems to me that we in universities have a terribly important role to play in this. If you look at the history of medicine, in 1880, the occupation of being a doctor was about as prestigious, was about as respected, as the occupation of being a barber. And it was very different 30 years later. And if you ask the reason why, it has a great deal to do with what happened in American universities, with what medical schools became — places that were grounded in science, places where the faculty actually did research and learned things, and when they learned things, they were able to teach them and that raised the prestige of the profession, which in turn raised the quality of the people who went into it, which in turn improved the performance, which in turn raised the prestige of the profession still further. That is a dynamic that we very much need in the educational profession. I hope the day will come when as many of America’s first-rate minds are thinking about how to educate our kids better as are thinking about how to exploit anomalies in the term structure of interest rates, and that is a value that great universities can work to inculcate.
The great surgeon Osler was asked around 1910 at what point in the history of medicine did he think a random patient seeing a random doctor had a better than even chance of being made better off. And Osler paused for a moment and then he said, oh, about 15 years from now. Sometimes I worry that the same may be true in the questions of the application of social science to policy, and we need to make that happen as rapidly as possible. There are many elements, and I don’t presume to understand most of them, but I can tell you this. If we took the same attitude towards rigorous evaluation in medicine that we take in education, people would still be being treated with leeches. I will tell you this — that it is every bit as much neglect of a child to expose that child to a curriculum whose effectiveness has not been tested, measured, or evaluated in decades as it is to ask that child to go to school in a classroom with chipping paint. Here, too, America’s universities can and increasingly are making a great contribution.
There’s a final aspect of the foundation of a successful economy that is very important, and it’s one that is perhaps most important but at the same time most difficult to think about, and that is the intangible, non-measurable values that pervade that economy and that pervade the behavior of those who participate in the economy. For it is the irony of the market system that while its very success depends on harnessing the power of self-interest, its very sustainability depends upon people’s willingness to engage in acts that are not self-interested. What you have seen at Enron, at the New York Stock Exchange, and in too many other places suggests that there have been failures in inculcating the right values.
Now, some believe that this is as simple as being a matter of better ethics education. And certainly, better ethics education has its part. But I would suggest to you that you do not need to go to Harvard to learn that it is wrong to burn a material subpoenaed document. You do not need to go to any great professional school to understand that if you are purchasing a product from another company, or you are purchasing a financial service from another company, you should not accept direct compensation or generous gifts in any form from that company. Yet, we have seen that these precepts are sometimes honored but sometimes not. I wonder, as we educate our students — and this will certainly be an important issue as we review our curriculum at Harvard — whether we don’t need always to remember that education is about learning the right answer, but it needs also to be about doing the right thing. And as we inculcate values, as we recognize virtue, and as we respond to problems, sending a signal of the kind of values that we want our society to have, at the time in their lives, between the ages of 18 and 25, when our students’ views are probably most susceptible to change, whether we do not have an enormous impact in that way.
If you look at the long sweep of history, what happens in universities can often be a leading indicator for what happens in broader societies — the destruction of Arab universities as centers of learning centuries ago, the problems of German universities in the first half of this century, the difficulties of British universities in the post-war period, the renaissance in American higher education with the spread of availability, meritocracy, and a deep commitment to research in the post-war period in United States and the commitment to higher education that had been made by the most rapidly growing societies in east Asia. We, as Americans, need to ponder not just the management of our economy, but the foundation on which it rests. As we ponder those questions of foundation, I am convinced we will increasingly be led back to America’s universities.
Thank you very much for the chance to be with you.