Midwest Economy Blog

Higher Education and Chicago’s Development

March 13, 2007

With economic growth lagging in many Midwest communities, institutions of higher education are being asked to play a bigger role in their surrounding regional economies. This past fall, the Chicago Fed held a conference addressing the role of higher education in promoting regional growth and development.

In what ways does higher education fit into the regional development picture? The ways discussed at the conference were many and varied; certainly, one size does not fit all. In places ranging from Silicon Valley to Route 128 in Boston and even to Fargo, North Dakota, universities are transferring technology to industrial facilities in adjacent industrial parks and to fledgling high tech firms. In other places, including Akron, Ohio, and Rochester, New York, universities are active in helping redirect mature but declining local industries into new products and markets. And Indiana’s Purdue University has embarked on an ambitious engagement and outreach mission along several fronts: teaching, discovery, community outreach, and identifying local targets of economic development.

While the conference did not address the university role in Chicago’s growth and development, our outstanding business schools have clearly played a key role. Today, among many fine business programs, the city touts the perpetual top ten national ranking of Northwestern’s Kellogg School of Management and the University of Chicago’s GSB, along with the frequent top ten ranking of Depaul University’s evening MBA program. As we look at Chicago’s industrial and business history, we see how these schools continually pump new life into Chicago’s economy.

For example, advanced business services and corporate headquarters activities are today the hallmark of Chicago’s economy. The city gave birth to some of the most prominent management consulting (NAICS 54161) firms and today continues to host a very significant number of such companies. Chicago ranks third in the U.S. among metropolitan areas in number of management consulting firms, and second in concentration of such firms, at some 120% above the national average.

How did this come about? Writing in the Encyclopedia of Chicago, Christopher McKenna describes the genesis of this Chicago-born industry. “Arthur Andersen, a professor of Accounting at Northwestern University, founded his eponymous firm in 1913. … Arthur Andersen & Co. began to specialize in financial investigations, the forerunner of the modern consulting industry.” And, “instead of employing local banking staff, New York and Boston financiers hired Chicago consultants to analyze the management of Midwestern companies in which they planned to invest.”

Andersen’s initiative was quickly followed in 1914 by Edwin Booz, a recent graduate of Northwestern in psychology. The company eventually became Booz Allen & Hamilton. So too, James O. McKinsey, an expert in cost accounting at the University of Chicago, founded a consulting practice (in 1926) that split off into the firm bearing his name as well as into A.T. Kearney. All became world-wide bulwark companies in what is now a global industry of great strategic importance to the world’s largest companies and businesses.

Jump ahead 50 years to the early 1970s. Chicago’s risk management and risk exchange community was re-invigorated when Leo Melamed, one-time Chairman of the Chicago Mercantile Exchange, launched contract trading in international currencies. Also in the 1970s, a former professor at the University of California at Berkeley, Richard Sandor, helped develop the Chicago Board of Trade’s U.S. Treasury futures contract trading.

Today, Chicago is a global leader in financial futures and options trading, with a 23% global share in exchange-traded contracts measured by volume. In addition to direct employment at Chicago’s exchanges and associated clearing operations, trading activity gives rise to ancillary employment in various Chicago businesses such as banking, brokerage, law, business publication, and computer systems and software.

For this industry too, the University of Chicago figures prominently in the story of its birth. University mentors both espoused the social value of trading financial instruments and also developed mathematical pricing models of assets that served as the basis for some trading. As recently described by Leo Melamed, Nobel Laureate and University of Chicago economist, Milton Friedman was a notable inspiration, teacher, and consultant to the launch of currency futures trading in the early 1970s.

Today, Richard Sandor remains busy in Chicago developing a new industry that addresses global climate change by capping polluting air emissions among member firms and then trading credits for pollution reduction among these firms.

Meanwhile, students from Chicago area business schools, such as Joe Mansueto of Morningstar, have recently grown new industries, this one centering on the tracking and analysis of mutual fund products.

In contrast to places such as the Stanford-Silicon Valley area, Chicago is not especially recognized for research and science-based commercial spinoffs from its universities. But several local universities are attempting to marry their business curriculums with their science and engineering activity. For one, the College of Business at the University of Illinois Chicago (UIC) is training future business leaders by encouraging them to construct business plans for inventions and intellectual property coming out of UIC labs. One recent sale of note involves a product that will possibly halve the time it takes orthodonic devices to straighten teeth.

What does this history imply for public policy? For starters, if we are to interfere effectively for purposes of economic development, we surely must understand the nexus among our assets and institutions. Chicago is clearly a “business town,” and its business schools have not only supported the business climate by training graduates for local companies but also indirectly by spinning off new businesses and industries.

But in considering issues of greatly enhanced public support or subsidy, it would be a mistake to attribute too much to universities alone. That is because causation goes both ways. While Chicago’s business schools have spawned much local growth, so too has local business growth created and supported the growth of universities and business school programs.

A city’s assets and institutions are best thought of, perhaps, as enjoying a symbiotic relationship. Accordingly, local public policy should start by strengthening inter-connections among local enterprises and enterprising people. Government likely has no great ability to pick and choose which particular connections to strengthen. And so, the primary course should be to provide desired and cost-effective public services and infrastructure, especially in transportation and communication. Restrained yet well-designed regulation and taxation should be another part of the mix.

Next, public-private programs and civic partnerships may be helpful in drawing closer social and cooperative connections among our diverse Chicago communities, industries, and civic institutions. As Chicago’s business history has shown, some amazing successes can arise from enterprising partners in a dynamic city.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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