And lo, another great socialist shibboleth is cast off. Half a century after Lord Robbins proposed that university education in the UK should be free to anyone capable of benefiting from it, the descendants of John Stuart Mill and Adam Smith are back, applying free-market economics to education. But could their triumph also be their folly? Could today's reformers have lost their liberalism and forgotten the principles of laissez-faire?

The government's plan, simply put, is to withdraw almost all of the block grant that it awards to universities to support their teaching, about ?4 billion a year. As Stefan Collini, professor of English literature and intellectual history at the University of Cambridge, wrote in the London Review of Books last month: "This is more than simply a 'cut', even a draconian one: it signals a redefinition of higher education and the retreat of the state from financial responsibility for it."

But this is even more than an overturning of socialism and the post-war consensus: it is a reversal of the principles of classical liberalism and laissez-faire economics.

Mill says unambiguously in Principles of Political Economy (1848) that education "is one of those things which it is admissible in principle that a government should provide for its people", something "to which the reasons of the non-interference principle do not necessarily or universally extend".

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Education, then, is not a realm where the consumer should be anointed king. Rather, Mill says: "In the matter of education, the intervention of government is justifiable, because the case is not one in which the interests and judgement of the consumer are a sufficient security for the goodness of the commodity."

Some 160 years later, though, the UK's minister for education, Michael Gove, begs to differ, cheerfully trotting out bad arguments in support of the Browne Review. First and foremost, he says, students will not be put off going to university by triple the level of fees because they will make "a rational decision" about its advantages and benefits.

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Never mind that Mill himself says that the presumption in favour of individual judgement is legitimate only when it is based on "actual, and especially on present, personal experience". This is certainly not the case when choosing university courses.

The additional feature of the new academic order - that people should commit themselves to a lifetime of debt to participate in it - is particularly unjustified. Mill calls situations in which an individual attempts to decide irrevocably now what will be best for their interest at some future, distant point a "second exception" to the doctrine that "individuals are the best judges of their own interest". Mill even judges such contracts to be so unfair that they are unenforceable. (The Treasury's financial wheeze could yet come unstuck.)

It is true that Smith does suggest that universities can be made to provide proper courses simply by ensuring that the lecturers' employment depends on student satisfaction, and that their remuneration directly reflects their teaching skills - something, he says, that happens when students pay their tutors directly. Where this link is broken, Smith warns (recalling his own experiences at the University of Oxford), "slackness obtains". However, when students collectively pay fees to a university, there is no pressure on individual lecturers to perform.

In fact, for Smith, too, education is specifically excluded from the principles of laissez-faire. He sees it as a kind of essential "public work", an "infrastructure" for a successful economy that private enterprise is inadequate to perform.

One such function of universities is to provide training. Another, even more important, is, as economists put it, to "sort people": if you don't go to one, you are not sorted. Simply put, university degrees pretend to specify people's place in the hierarchy of employability. They distort the market. Smith himself wrote (does Lord Browne know?) that "a degree always has been, and despite all the regulations that can be made, always must be, a mere price of quackery".

Allowing mere "quackery" to drive events leads to problems. Uncontrolled market forces make university education the norm, disadvantaging poorer people, manual workers and so on, a point made recently by Alison Wolf, professor of public sector management at King's College London. Inevitably, the middle classes "swamp" education and distort both it and the economy. "Useful" further education courses are left under-resourced and unpopular while "useless" prestige courses and institutions soak up the money.

As universities and science minister David Willetts himself put it in his book, The Pinch: How The Baby Boomers Stole Their Children's Future - And How They Can Give It Back (2010): "The competition for jobs in the professions is like English tennis, a competitive game, but largely one the middle classes play against each other."

So what should free marketeers do, yet not accept this Browne-Tory-Lib Dem wheeze? Instead, they should support the closure of most institutions, with generous public financing for an elite few. But that's unjust! Yes, but I said this was the true market vision, not that it was a good idea.

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The trouble with today's discussion is that such distinctions seem to have been lost. Take Vernon Bogdanor's piece for Times Higher Education ("Can we afford not to spend more?", 28 October), largely in praise of the proposed changes.

"It is the market, not the state, that should decide how many are to go to university," he proclaims devoutly. Oh my! What an unreconstructed follower of Milton Friedman: through capitalism will surely come freedom.

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Yet all the while, universities are in no sense a true "market". In fact, it would be hard to find a worse case for the application of such principles.

Under Lord Browne's peculiar reform, sought-after universities will now be encouraged to charge more, enhancing their status and their sorting function, while less popular ones will be obliged to experiment with new "minimum" standards of teaching in a desperate bid to reduce costs. (That improves quality, of course.) Briskly defying the laws of classical economics, demand will increase for expensive universities and drop away for cheap ones.

The coalition suggests that correspondence-course degrees on The Open University model are one way for English universities to continue delivering degrees while spending a lot less. But most students want to go to real universities, to study in real, not virtual, environments. Likewise, employers prefer "real" graduates.

These preferences may be irrational, but the reasons for choices do not matter in economics. You can't buck the market, remember.

Courses with less teaching, fewer lectures and fewer essays are popular. (I still have the wounds from savage student feedback after I asked my classes to read at least one chapter of philosophy a week.) Courses with no exams go down well, too.

But we mustn't allow snooty value judgements to intrude: in a proper market, only purchasing decisions count. The fact that most of the "top" universities are housed in grand old buildings in refined old cities with dynamic cultural centres may say more about why they are popular with students and associated in the public mind with "posh" than does the number of computers in their labs or the size of their seminar groups. Consumers want to have a good time and end up with pieces of paper that employers think prove they are smart.

No wonder Bogdanor had to resort in the end to arguments about "economic necessity".

One of the great survivors of philosophical thought is the idea that an "is" does not and never must be made to justify an "ought". Many people still pay lip service to that tradition today - but not politicians. Instead, facts are seized upon to impose values, science to trump ethics. In every crisis lies an opportunity. Rahm Emanuel, Barack Obama's unlamented former policy wizard and White House chief of staff, put it succinctly: "You never want a serious crisis to go to waste." A crisis is never bad news for a shrewd politician: it is an opportunity to implement an agenda.

This is what Jean-Paul Sartre calls "bad faith". Crisis management lurches between savage cuts and grandiose schemes with scarcely a pause for reflection. Even as we cut education to the bone, there will still be cash found to keep the financial markets afloat. There will still be ?1 billion for research into pumping carbon dioxide into holes under the North Sea. There's always money for launching wars or propping up overstretched financial institutions, because of course they are not exactly choices (let alone market ones), but responses to crises.

That's why we hear the words "national interest" echoing once again in the corridors of power. All these policies are emergency strategies that seem to sideline ethics while adopting a high moral tone. Higher fees for students are about a "fair" distribution of the financial burden in times of shortage. High energy bills are our duty to help save the planet from overheating. Money for war is really being spent promoting democracy and human rights. Yet, in a world where each year 2 million people die from a lack of clean water, where drones can blow up villagers from the other side of the world, it's all about priorities, and priorities are ultimately set by values, not facts.

Meanwhile, the real "problem" in education today, we are told, is that children from poor backgrounds, with uneducated parents and no books at home, get inferior A-level grades. This is why even the most socially minded elite universities have to keep selecting children from public school - they are the ones with four or five A* results.

It is true: poor children often go to schools that produce unimpressive exam scores. But is that cause or effect? Clearly, it must be a bit of both. As a result of earlier reforms, children with educated middle-class parents attend the same schools, often choosing where they go by reference to exam results. Head teachers, equally, seek children from middle-class homes in order to maintain their schools' exam scores. It is a "market" situation now, yes - but it is no solution to social inequality.

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So what is? The government has one answer: scrapping free school meals for 500,000 primary school children. This will not only provide a convenient pot of money for virtuously struggling schools, but by withdrawing the "state intervention" is a new way of correcting another wicked distortion of "the market".