Speech at Fringe Meeting, Conservative Party Conference
Robert Skidelsky
Hansard | Friday, October 20, 2000

The late Lord Beloff ended a speech he gave at St. Andrews University in 1995 by saying 'I would like to see some major British universities looking for endowments...to end their relationship with the state'. I am extremely glad our Party has now committed itself to an endowment policy, in revival of the ancient tradition wherby monarchs and churches gave universities the financial sinews of independence.
I don't propose, though, to follow Theresa May down this path today, but instead to devote my few minutes to doing something which may be unique at party conferences -which is to give an elementary lesson in economics. Not because I think that in economics we will find the whole clue to the riddle of higher education, but because I am continually depressed by the economic illiteracy of those who pronounce on the problems of the universities, present company of course excepted. My tools are a blackboard, a piece of chalk, and a simple supply and demand diagram.
The demand curve shows how much of a service will be demanded at different prices. It slopes downwards, because the lower the price, the greater the quantity demanded.
The supply curve shows how much of a service will be supplied at different prices. It slopes upwards because the higher the price the greater the quantity of the service supplied.
At the intersection of the two curves, the quantity sellers supply is exactly balanced by quantity consumers demand.
Suppose the demand for higher education goes up -demand curve shifts to the right. There is now a situation of excess demand, A-B. Sellers of education will charge more, new sellers will come in, and a new equilibrium is established at E 1. We can call this a market-led expansion of higher education.
But the expansion of university education has not been entirely, or even mainly, market-led. It has been government-led. How have governments engineered it? By deliberately under-pricing the cost of education to young people. They have charged students a government price (until recently almost zero for most students) making up the difference between the government price and the actual price of a university education by means of a subsidy. This can be depicted thus.We now have a situation of government-generated excess demand, X-Y.
This government-generated excess demand has been met by a government-generated increase in supply. More teachers, buildings, books, facilities have become available to meet the increased demand, and the government-led equilibrium is established at GQ, or government quantity. But how? The market-response to a fall in price is normally a fall in supply. Without the subsidy, the excess demand would have been eliminated by a left-ward shift in the demand curve, with a new equilibrium at Q1. Instead the government has extended the per capita subsidy to the increased number of students, but at a steadily diminishing rate. It has forced down the supply price of a university education by reducing teachers' pay relatively to other professions, and worsening other facilities -all summed up in the phrase reducing the unit of resource. This can be shown The shaded triange represents the degree of worsening of the conditions of university education.
This is not what the universities wanted. They would have liked a higher subsidy to attract more teachers of the old quality into the business. Instead they got a lower subsidy.
What will be, already is, the upshot? The best teachers leave the profession, or go abroad.Their place is taken by inferior teachers. So a new supply curve established, with university teachers willing to sell their services at a lower price, and more students getting a worse education. 'More means worse' in every sense.