Thursday 2 May 2024


Sir Oliver Hart is the Lewis P. and Linda L. Geyser University Professor at Harvard University and a Nobel laureate in economic sciences. Luigi Zingales is the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business. He co-hosts the Capitalisn’t podcast. They write:

Student protests are roiling college campuses across the nation. Some of the goals of these protests are beyond what universities can deliver, such as a ceasefire in Gaza. But others—like divestment from companies doing business in Israel—are not. As one Columbia University student interviewed by NPR stated: “Essentially, this is our tuition dollars that are going to the death and displacement through both fast and slow violence in Gaza through the genocide right now, and the slower displacement throughout Occupied Palestine.”

The student, who asked NPR to identify her as “Soda,” gets the direction of causality wrong. It isn’t her tuition dollars that get invested in arms manufacturers, but her tuition discount that is funded by those investments: Columbia spends more than her tuition in providing services to students like her and finances the difference with donations and the return on the endowment. Nevertheless, whether you agree with her political position or not, Soda raises the following fundamental question: Should investment decisions be made without ethical consideration?

The conventional view, often associated with Milton Friedman, is that they should. Regardless of your non-financial goals, you always want to maximize your financial return, because the proceeds from that increased return allow you to better achieve your non-financial goals. This “Separation Theorem”—financial goals can be partitioned from non-financial ones—is the stated or unstated reason why university endowments are run the way they are.

The theorem is very convenient, not least because it makes life easy for endowment managers. But as we showed in a 2017 paper, it is wrong. Consider a decision by Harvard University about whether to divest from companies that produce sneakers with child labor or that rely on animal testing for their beauty products. Doing so would reduce Harvard’s investment return, and as a consequence, Harvard would have less money to spend on cutting-edge research. In some cases, the social value of the foregone research will be less than the costs of being associated with the use of child labor or animal testing, in which case Harvard should divest. But in other cases, the calculation will go the other way, in which case the university shouldn’t divest. A careful balancing of the costs and benefits is required: One can’t simply assume the answer. 

The Separation Theorem buries moral questions beneath technocratic ones. This has allowed universities to be secretive about how they invest their money, because they don’t feel any need to be accountable to alumni, faculty, and students for the social and political consequences of their investments. Once one recognizes the limitations of the theorem, however, the case for transparency becomes strong. Just as some consumers want to know that their sneakers aren’t produced by child labor, so students have the right to know that their lab equipment and fellowship aren’t financed by selling opioids or guns.

Transparency doesn’t imply that a small minority of very vocal students has the right to decide where universities invest or how they engage with the companies they invest in. First, all the various constituencies, from the other students to the faculty and the alumni, need to be listened to. Second, the costs need to be factored in. Students need to be confronted with moral questions, such as whether Columbia being associated with defense contractors is worth the tuition discount.

Reasonable people can disagree about the answers. Yet investment decisions can’t be left in the hands of professionals who are compensated based on financial performance. That is tantamount to abandoning any moral values in the name of the god Mammon, something very unfitting for higher-education institutions that should lead by example. Whether one agrees or disagrees with the Gaza protesters, they are right about one thing: We should live by the values we believe in.


  1. Compact is hugely welcome.

    1. It is one of the best things to have happened in years.