Andrew Oswald: We should charge more in tuition fees

Talk about higher university fees is back. Lord Mandelson made an important speech last week – important for us in the UK's universities and for the First Secretary.

I was heartened to listen to him emphasise that the function of a university is "not limited to – or even primarily about – economic outcomes". It is odd that such things even have to be said. I do not know a single economics professor who supports the view from the research councils that research funding proposals should be evaluated by their economic impact.

His remarks reminded me of something else about economists. They are aware that the quickest way to depress the quality of something is to cap its price.

Think of newspapers and cars. Imagine that, as with the price of university courses, the Labour Party decided to pass legislation requiring that no newspaper in the UK will be allowed to sell at more than 5p and no new British motor car at more than £1,000.

This, let us say, is pushed through in the name of fairness and social justice (commonly heard words in the debate on higher education).

Would these steps produce a just and happy country? Not in the slightest. They would instead allow us to repent at leisure while shivering on frosty winter pavements waiting for the AA to arrive to fix the Trabant with nothing in the pocket worth reading to pass the time. The first rule of economics is: prices exist for good reasons and even dictators cannot fight them for long.

Lord Mandelson was right to emphasise excellence in teaching. His speech made me think of a friend and co-author. Let us call him Steve. Steve is a brilliantly lucid and engaging speaker, who works at Hamilton College. No, not in Lanarkshire. This is in New York State.

Hamilton is one of the most selective liberal arts colleges in the United States, and my young friend Steve earns a good salary as a junior professor there. He is a superb researcher, with a PhD from one of the world's famous universities, but he also puts a tremendous amount of effort into his teaching.

How can that all add up? The reason will become apparent if you click on their website. Hamilton charges £39,000 a year in fees. Room and board are extra. If you think this grossly unfair on Americans, you should know that huge numbers of the students are given financial aid by the college, and that last year alone half of all previous Hamilton students donated money back to their alma mater.

In the UK, despite much talk of wanting higher teaching standards in higher education, and of encouraging charity, we have systematically blocked the conditions necessary for such colleges to thrive.

I agree with Lord Mandelson about the importance of access. One of the cleverest students in my circle of friends at university was a few years older than me because he had left school at the age of 16. He could tell extraordinarily gripping stories about what it was like to work in a coal mine, and I do not mean figuratively. He got a full grant.

We should reinstate such grants, on a large scale, if we actually care about social justice. They ought to be paid for by charging a sensibly high price to the hundreds of thousands of UK undergraduates who can afford it.

I do not agree with some of the reactions to Mandelson's speech. Wendy Piatt, director general of the Russell Group, reputedly said: "We welcome the recognition ... that our universities have a central role in helping the UK out of the recession."

This is like saying that Premier League football clubs have a central role to play in the provision of tomato ketchup. One does not know whether to say "you cannot be serious about this statement Wendy" or to say "I think there is something wrong with your word processor because it appears to be deleting parts of sentences and randomly joining up the remaining phrases."

At the moment, a lot of people in universities appear willing to say silly things because they are trendy and therefore will get us short-term approbation. That is not a safe strategy, because universities are in the knowledge business, and if people do not wish to hear that, then we just have to keep explaining calmly why we are, and why we are, and why we are.

The writer is Professor of Economics at the University of Warwick