In the second of our open letters to the Dearing committee of inquiry into higher education, Robert Skidelsky (left) advises Sir Ron to resign and argues that the Government should continue to starve universities of money. This would allow market forces to shape the sector. Universities could levy fees, and most could charge market rates for courses.This would create a handful of world-class universities and force the others to focus on their strengths such as serving the local community. Universities might then regain some autonomy.

As you start your inquiry into the finance of higher education, you will hear two stories. The first, authorised by the Committee of Vice Chancellors and Principals, is a tale of heroic struggle to meet government targets for the expansion of higher education in the face of dwindling revenues. The facts are well known. In 1962 there were 125,000 students at 25 universities; today there are more than one million at 100 universities. Yet in the same period, the staff:student ratio has gone down from one in eight to one in 16; since 1989 public money per student has fallen by 25 per cent. If the Government is unwilling to provide more money, universities will have to start charging their students tuition fees. The main purpose of your committee, it is widely believed, is to devise some kind of student loan scheme: universities get more money now, graduates pay back later.

The second, unofficial, story is different. The real problem is growing state control over the university system, exercised through a philistine cost-benefit analysis which excludes unmeasurable cultural goods. The universities allowed themselves to be co-opted into a national plan to expand student numbers - virtually without limit - in order to "solve" social and economic problems. By accepting a national duty to improve the stock of "human capital", rather than to provide a certain kind of education for those fitted for it, they were bound to lose control over their practices, and indeed over the very definition of what a university is. The upgrading of 45 polytechnics to universities in 1992 obliterated the final line between further and higher education. Universities today are part of an unbroken thread of "continuing" education stretching from nursery to grave. They exist to serve the needs of society as determined by the government of the day.

The Government's control over resources is, of course, the meeting point of the two stories. This has enabled the Government both to manipulate the level of resources supplied (and thus the demand) for post-school education, and impose such conditions for the allocation of these resources as the Government sees fit. The state has created a mass university system out of a collection of heterogeneous post-school educational institutions, whose revenues it can determine at will, and distribute through various funding formulae. It uses its powers both to depress the amount of money it spends per student and - research money aside - to equalise it across the system, so that all universities get poorer at roughly the same rate.

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The interesting point is that this scheme of central planning was imposed on legally independent private sector institutions. In theory, universities could have opted out of expansion, set their own fees, retained control over their own practices. Instead they accepted successive Government plans for higher education and carried them out. This was not just because they had got themselves into a position of total financial dependence on the state. Their leaders, and probably most of their staff, shared the goals of expansion and equalisation of higher education, and trusted the Government to finance them generously and with a light regulatory touch.

So what could they have done? They might have tried much harder to preserve, secure, or negotiate the financial basis of independence - by ensuring, for example, that at least half their income came from private sources or endowments. They should have foreseen that governments would not finance university expansion on the scale which had supported a smaller university establishment; and that an increasingly indigent paymaster would impose increasingly onerous conditions for receipt of funds. Instead, their reliance on that classic British institution - the University Grants Committee - to keep them in pocket, coupled with their belief that higher education should be free at the point of consumption, blunted their sense that it was dangerous to rely too much on the state.

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The universities might also have tested the argument that there was a vast unmet demand for university education by charging fees. As you well know, there is no limit to the demand for free services. A proper pricing policy for different types of post-school institution would have revealed the levels of demand for different types of post-school education.

Finally, universities should have been much more sceptical of the argument that the continuous expansion of university education was necessary to keep Britain economically competitive. The economic returns to anything but basic education are highly debatable. Even if it is intuitively plausible to suppose, as the CBI does, that "to maintain and improve Britain's position in an increasingly competitive world nothing short of a skills revolution is needed", there is no reason to think that the necessary skills are best acquired through a university education. Sweden, Germany, Denmark, and Switzerland, which are among the most successful postwar economies, had less than 10 per cent of 18 to 19-year-olds in "higher" education in 1991, compared to our 20 per cent. Where they scored heavily was in school attainment and post-school vocational training.

You may ask: what is in a name? If calling all post-18 educational institutions universities makes staff and students feel good, what is wrong with that? The answer is that the title of the institution does not matter much, provided the different types of institutions labelled universities offer different types of educational services. But this has not happened - largely for the reasons which led to the vogue for comprehensive schools. It is our accursed class system which has done the damage. The elites have never been too concerned with what happened to post-school education provided they could get their children into Oxford or Cambridge. And to thinkers of the Left it seemed plain as a pikestaff that what they called "educational failure" was caused by social class - for which the remedy was a "common" post-school education which would neutralise class background. In the absence of a robust appreciation that individuals differ in ability, aptitude, and interest, the inherited diversity of post-18 education was bound to break down, just as the divisions between grammar, technical, and secondary schools were swept away by the comprehensive school revolution.

It may be argued that, unlike state schools, universities control their admissions, and there is a clear pecking order based on the A-level grades of student applicants. But it will not have escaped you that there is a contradiction between selecting students on academic merit, and equalising, as far as possible, the quality and quantity of teaching resources per student across the system. The salaries and conditions our best universities offer their staff have ceased to be competitive by world standards. And there are strong ideological pressures at work to "soften" student entry requirements - of which the chief is to remove A-level grades as the basis of entry. In other words, the remaining barriers to the comprehensivisation of the universities have started to crumble.

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In this situation, Sir Ron, you are once more called upon to do your famous act of squaring all possible circles. You will be expected to provide more money for the universities - but in a way which minimises extra government charges. You will be called upon to channel more research money towards the elite universities, but not discriminate "unfairly" between different institutions. You are expected to accept the principle that students should make a contribution to their tuition fees, but not that fees be set by market demand. Nor should they disfavour students from poorer families. I dare say you will accept some variant of the tuition loan scheme being actively canvassed by the vice chancellors. The Government will provide the extra money "up front", but will get it back over many years in the form of "income contingent" repayments, or a graduate tax. Everyone will sing your praises. Sir Ron has done it again!

But you won't have - and you will know it. You and your committee will not produce a great state paper as the Robbins report, for all its flaws, was. You will do nothing to secure for Britain a handful of world-class universities. You will do nothing to extract universities from the entangling web of bureaucratic controls: in fact you will probably insist that funds are distributed according to ever more tightly defined "output" measures. You will create the illusion of student contributions, while saddling governments with the reality of uncollectable debts. But you will succeed in your primary aim - the primary purpose for which you were appointed - which is to head off a revolt by the top universities against the policies which have landed them in their present mess.

My dear Sir Ron, if you appreciated all this, you would immediately resign, and accept the peerage which you have richly deserved. This would at least create some sort of space for realistic solutions to disclose themselves, because the Government would never find a replacement with your unique abilities.

What would then happen? Those universities which could afford to would charge fees that would start to reflect the value to students of the services they are offered. An annual surcharge of, say, Pounds 300 per student would bring in several million extra pounds to the average-sized university. Fees could be set at a level which allowed recycling a proportion of fee income to poorer students. The more of their income universities started to get from private sources, the less control the Government would be able to claim over them. At the very least some universities would regain their ability to negotiate a new concordat with the state. Other universities would have to be more realistic about their prospects. Some would become local universities to which students in the area would continue after leaving their schools or tertiary colleges. Others would focus on their areas of strength. Most would be able to charge market rates for at least some courses. In this way a more varied system would gradually reestablish itself.

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There is also no reason why students should not take out loans from banks based on their parents' income and their own job prospects. Local authorities could provide a limited number of means-tested state scholarships to cover the difference between the tuition grants they pay and what universities charge. A third source of finance might be a state-guaranteed loan scheme, again made available on a means-tested basis. The key thing is to stop trying to engineer "solutions" from the centre, and allow events to take their course. If that happens, at least there will be a chance that both stories I started with would end happily. Let the Government continue to starve all universities of money. Some of them might find the courage to recover their independence, rediscover their true vocation, and give a lead to the rest.

Lord Skidelsky is chairman of theSocial Market Foundation and professor of political economy, Warwick University:not the LSE as stated last week.

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Next week's open letter to the Dearing inquiry will be from Tony Wood, vice chancellor of the University of Luton.