Why it makes economic sense to pay us economists more

ECONOMISTS ARE worried. There are not enough of them. The Bank of England and the Treasury are having to turn overseas for theirs, hiring Italians, Spaniards and Australians. And the Royal Economic Society and the Centre for Economic Policy Research are holding a crisis meeting today to discuss what to do about the fact that virtually nobody in the country wants to enrol for a PhD in the subject, much less stay on as an academic afterwards and teach the next generation.

New research spelling out the shortage of professional economists is just one corner of an emerging picture of academic decline in Britain. David Cannadine, an eminent historian who recently returned to the UK from Yale, created a furore by claiming that British universities could no longer claim to be world class. Fewer and fewer students in the sciences go on to take a doctorate. Of those that do, about half move across the Atlantic and most of the rest get jobs in the City.

In other words, the nation's intellectual seed corn is either scattered elsewhere or failing to germinate altogether. When the existing generation of academics retires there will be nobody to replace them. Our universities can no longer compete in the same league as the best in the world in many subjects. The implications for the future of British education and, consequently, the British economy are dire.

The new research on economists identifies low pay as the main explanation. A typical private sector economist earns a salary of pounds 53,000, compared with pounds 34,000 at the top of the senior lecturer scale in universities. Just a handful of the top professors of economics can make more than, say, pounds 70,000, and then only if their salaries are topped up by consultancies, and across the UK only about two dozen make more than pounds 50,000 a year. All except the most junior City economists would earn as much or more. Predictably, the decline and imminent extinction of the PhD has led to many calls for extra funding for higher education. It seems obvious: raise the salaries to bring supply of academics in line with demand. After all, nobody doubts that universities have been underfunded and thoroughly demoralised for more than a decade.

Unfortunately, the economics of the academic drought are rather more uncomfortable than this. The problem is not so much that average university pay is too low because of stingy governments, but rather that there is no genuine competition in the academic job market.

The university system remains, along with other parts of the public sector, a centrally planned economy. It is no surprise that there are specific shortages. The real problem for certain departments - including economics, engineering and many natural sciences - is that they have to pay their lecturers and professors the same as the medieval historians and sociologists. And they have to pay their best people the same as their worst. There are rigid pay scales for all academics regardless of their subject or even their talent. A report into higher education pay by Sir Michael Bett last week concluded that national pay scales should stay but that all academic pay needed to be increased by around 20 per cent. Utter nonsense.What the academic job market needs is a strong dose of deregulation. Not a cumbersome performance-related pay scheme that will involve forms and assessments and internecine rows in the common room, but the complete abolition of centrally planned pay scales in universities. There is no single national market for academics; there are global markets for particular skills. University departments have to be able to pay what it takes to attract the best candidates if they want to establish themselves as world- class centres of excellence in their subject.

But there is an even more uncomfortable corollary for the cosy but crumbling British university system. If the UK is to develop centres of excellence, they will have to be allowed to raise the funding they need. There are many ways of fund-raising, and some universities have thrown themselves energetically into the task through appeals to alumni and commercial enterprises. There is no reason why this should not go much further.

But the most obvious way is to allow the best universities to charge higher tuition fees. Some, like the London School of Economics, are privately itching to do this (the LSE is, after all, packed with underpaid economics professors). But none wants to be the first to argue such an unpopular case. The parallel with the US is inexact, for members of its Ivy League are private institutions with very large endowments to fund generous means- tested scholarships. Students are admitted to Harvard on merit, and once accepted the scholarship office assesses their financial needs. Even the Oxford and Cambridge colleges would not have enough money to finance all deserving students in this way if they started to charge premium fees.

So if there is a need for increased public funding of higher education, among all the other causes deserving of government money, it is for the provision of scholarships. This, not equal pay and more of it for academics, is the right place for egalitarianism. It is the only way to guarantee a future for world-class scholarship in the UK.

World-class scholarship is, of course, outrageously elitist. Only the best need apply. The best young scholars will only embark on an academic career if they think it will be intellectually rewarding. That means gathering the most brilliant academics together in a few places, for ideas feed on other ideas. The much-mocked Oxbridge senior common room at its best provided the necessary intellectual stimulus, and the top American university departments still do.

The best academics also need salaries that reflect the emergence of stars in the intellectual arena as well as in finance, sports, music and all the rest of the economy. If British universities cannot pay star salaries, then they will never again attract star performers.

The damage caused in the row over plans to introduce a pounds 1,000 tuition fee and the innate hostility to Oxbridge elitism make it unlikely that the Government would accept this basic economic principle. Ipso facto, a majority of today's academics will oppose it.

On the other hand, we economists meeting in crisis session today are almost certain to see the merits of the case for inequality. Sadly, however, we lie somewhere between estate agents and lawyers in the public's esteem. Being right is no guarantee of popularity.