Report By Mark Atkinson (Economics Correspondent, The Observer)

Money is never far from economists' minds, but participants at the Royal Economic Society's Annual Conference were even more preoccupied with the subject than usual - and not in an academic sense. University economists had just learnt that their government research grant was to be cut by 25% as a result of the 1996 Research Assessment Exercise (RAE). And this in a year when the UK contingent had confirmed its high international standing, second only to North America, by being awarded half of the 1996 Nobel Prizes for Economics.

The anger expressed by David Hendry (Oxford University), who chaired the RAE panel, was understandable. ‘It's quite unimaginable how the Higher Education Funding Council for England (HEFCE) cannot regard us as one of the top UK research disciplines,’ he protested on the opening evening of the conference. He said he had been left gasping at the rationale, or lack of it, behind the HEFCE decision. Later, he warned that one of the consequences of the proposed cuts could be the loss of 250 university posts.

The irony could not have been clearer. Just before Professor Hendry had spoken, Guiseppe Bertola (University of Turin) had delivered the Review of Economic Studies lecture on ‘Job Security and Labour Income Risk’. The juxtaposition of the two economists’ remarks helped to crystallise one of the main themes of the conference: the economics of higher education. A session devoted to the subject drew one of the biggest audiences of the conference. It was also the topic addressed by keynote speaker Sir Ron Dearing, the former Post Office chairman who is conducting an inquiry into the funding of higher education.

The Invited Special Session on the economics of higher education stirred up strong feelings. With participation rates in higher education now up to 30% from 5% in the early 1960s and both main political parties reluctant to raise the level of general taxation, it is clear that a new way of funding higher education must be found.

Bruce Chapman (Australian National University) presented some lessons from his country's experiences with income contingent charges. Australia's Higher Education Contribution Scheme (HECS) allows students to pay their fees for attending university when they start earning the average income of all Australians. Chapman said the scheme was administratively efficient, profitable (HECS currently generates well in excess of 10% per year of all higher education operating costs), and had no effect on the socio-economic mix of the student body. In general, the student body is made up of a disproportionate number of people from relatively well-off backgrounds, who get an extra leg up from higher education. Not charging the direct beneficiaries means that the bill has to picked up by all taxpayers, whether they benefit from higher education or not.

In a similar vein, Nicholas Barr (London School of Economics) advocated a combination of privately financed student loans and price differentiation between universities. He argued that in a mass system, the only potential funding source that was large enough and not grossly inequitable was a system of loans that allowed students to borrow against future earnings. If students were able to borrow from the private sector, the injection of funds into higher education would be immediate and substantial. Public capital was much harder to raise.

Meanwhile, Barr noted, it was right that universities themselves should be able to vary their charges. In an elite system, it was possible to assume that all universities were of equal quality, that degrees were worth the same, and that universities could be funded equally. But in a mass system, this myth was no longer sustainable. The characteristics, quality and costs of different degrees at different institutions varied much more widely. Not to reflect that in the prices they were able to charge was inefficient and wasteful because lower quality institutions were over-funded and high quality ones under-funded.

Sir Ron Dearing's report on higher education is due to be published in July. His appearance at the RES conference just under four months before publication day was therefore keenly anticipated. The imminence of the election, however, prevented him from making any dramatic disclosures. But he spoke in general terms about the private and public returns of higher education and left few in the audience in any doubt that he thought the burden of paying for it should be shared between the two. The only question that remains is where the balance should be struck.

According to a paper by Colm Harmon (University College Dublin) and Ian Walker (Keele University), the private returns to higher education in the UK are very high, at about 15% on average. Sir Ron said it was quite rationale for ‘Ron and Mary’ to be queuing up to acquire some of those benefits. But the public returns, in the form of improving the economy's global competitiveness and attracting inward investment were much harder to measure. Sir Ron found it difficult to say that there were not any returns to society from greater availability of higher education, but he pleaded with the audience to give him some quantifiable examples. The implication of his request was that he would use the information to ensure that society paid its fair share of the expanding higher education bill.

Conference participants were not only interested in examining what was going on in their own profession. They were equally concerned with events in the outside world, where the six week general election campaign, the longest in recent history, was just getting underway. Not that the politicians were listening: as always during a campaign, they were more concerned with political point-scoring than detailed policy discussions. But in a year or so from now, some of the ideas discussed in Stoke-on-Trent may well be filtering through into the policy-making process.

A broad diversity of subjects was discussed during the four days spent as guests of Staffordshire University, the first ‘new’ university to host the RES conference. Under the heading of public policy, for example, there were papers on the effect of earnings on marriage and divorce, by Carol Propper, Simon Burgess and Arnstein Aassve (Bristol University); how economic performance influences voting in general elections, by Colin Wren (Newcastle University) and Daniel Dorling (Bristol University); and the negative impact on the labour market of high levels of home ownership, by Andrew Henley (University of Wales, Aberystwyth).

Under the heading of macroeconomics, participants were treated to papers on the advantages of letting the Bank of England set the UK's inflation target, by Anton Muscatelli (Glasgow University); and how demand management reduces economic growth, by Keith Blackburn and George Bratsiotis (Manchester University).

Under international trade and investment, there were papers on the growth effects of European economic integration, by Rasha Torstensson (University of Lund); the permanent damage done to the UK's industrial base by monetarism, by Bob Anderton (National Institute of Economic and Social Research); and the costs to consumers of EU anti-dumping policies, by Tim Lloyd, Oliver Morrissey and Geoff Reed (Nottingham University).

Of the plenary sessions, Jim Rollo's intriguingly titled lecture ‘The Economist as Policy Adviser: Mr Keynes' Dentist’ deserves a particular mention. Rollo, who is chief economic adviser at the Foreign and Commonwealth Office (FCO), was restricted in what he could say by the election: like all civil servants in the run-up to polling day, he was under strict orders not to compromise his political neutrality. So a detailed insight into FCO thinking on European monetary union, the burning foreign economic policy issue of the moment, was unfortunately out of the question.

Nevertheless, Rollo gave an amusing account of his job, which he described as ‘a life of process and continually dealing with similar problems and not knowing if you have made a difference’. The title of his lecture, incidentally, came from a remark by Keynes: ‘If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid’. Rollo said the quotation suited his Calvinist way of thinking.

But it was George Akerlof's Harry Johnson lecture, ‘Men without Children’, at the end of the conference that really stole the show. Akerlof (University of California, Berkeley and Brookings Institution), who is married to Janet Yellen, the chair of President Clinton's Council of Economic Advisers, argued powerfully and persuasively that it was the breakdown of marriage which was primarily responsible for the big increase in single motherhood in the United States in the last 30 years rather than the generosity of welfare payments, as conservatives contend. The correct policy response was, therefore, to show compassion to single mothers by making sure they had adequate benefits, not repeatedly to cut their welfare payments in the mistaken belief that it will encourage them to find work. That merely compounded their difficulties. Akerlof 's lecture was given a warm reception, not least by RES President Tony Atkinson, who found it ‘impressive and powerful’.

One of the innovations of this year's conference was that it was the first to take place after the establishment of the RES Women's Committee, at that point only in transitional form but soon to get permanent status. The Committee hosted one of the Invited Special Sessions, which ran in parallel each day with seven others: Young Economists, Labour Economics, Macroeconomics, Public Policy, Econometrics and Computing, Microeconomics and Applications, and International Economics. The Women in the Economics Profession session began with a paper by Mary Morgan (London School of Economics) on the history of modelling in economics, which produced some interesting slides depicting what looked more like bizarre medical instruments. Carol Propper followed with a paper on poverty dynamics.

Then came Penelope Rowlatt (National Economic Research Associates), who posed the question of whether moribund state-owned industries could be revitalised without surrendering ownership to the private sector. She suggested it was perfectly possible to commercialise such industries, provide appropriate incentives for their managers and give them a corporate identity without necessarily having to sell shares. That way you enjoyed all the benefits of privatisation without the drawbacks, including leaving firms vulnerable to takeovers, the threat of which is not always the best way of maximising returns to shareholders, as the work of Andy Dickerson (University of Kent) and others has shown.

Rowlatt noted that such a policy would also prevent public outcries about over-generous share options. A separate paper by Haizhou Huang (London School of Economics) and Javier Suarez (University of Madrid), delivered at one of the Microeconomics sessions, found that stock options were very often too costly for shareholders, particularly in the heavily regulated industries such as utilities. Rowlatt said she knew of no example of a state-owned industry being restructured without it being sold off to the private sector. But, who knows, her half-way house model of privatisation could become one for the future.

After Penelope Rowlatt came her daughter Amanda Rowlatt from the Treasury, who concluded that there had been a gender bias against women at Great George Street in the past but that it was no longer a problem. That is more than could be said, however, for the economics profession as a whole. The session finished with a presentation of the results of a Women's Committee questionnaire which, among other things, found that there are three times as many male economics professors as female professors. By the time of the 1998 RES Annual Conference, due to be held at Warwick, the Women's Committee will be in full swing, but Denise Osborn (Manchester University) is anxious that it should not become a women's ghetto. To that end, she is looking for a male representative to sit on the committee.

The Labour Economics sessions were always challenging, tackling a range of important issues, including wages, unions, employment and unemployment, and skills and training. Simon Parker (Durham University), for example, examined the dramatic increase in self-employment in the 1980s - from 2.2 million at the start of the decade to 3.3 million at the end - and found that it was due both to the prospect of greater financial rewards and, somewhat surprisingly, to lower risks.

Jonathan Thomas (University College London) looked at unemployment among ethnic minorities, who are overwhelmingly concentrated in declining inner city areas. He found that the longer unemployment spells endured by them was linked to a reluctance to commute long distances between home and work. Why ethnic minorities focused on jobs near to home jobs was an open question. But Thomas suggested it may have something to do with a perception that suburban employees were more likely to discriminate against them. Hence seeking more distant work was pointless. Ethnic minorities may also fear a higher risk of racial harassment or violence in a predominantly white suburban area, he said: over 20 years after the 1976 Race Relations Act, further legal measures may still be in order.

A well-timed paper which chimed with the developing political debate came from Alison Booth (Essex University) and Monojit Chatterji (Dundee University). As it was being delivered, the Tories were attempting to capitalise on the public's perceived hostility to unions by warning that Labour's plans to legislate on union recognition would herald a return to the strike-bound 1970s. It was to become a recurrent theme throughout the election campaign. But Booth and Chatterji challenged the notion that unions were an entirely negative economic influence. They suggested that local trade unions helped to overcome the natural tendency among firms to under-invest in training and should therefore be encouraged, not denigrated, given the widespread belief that the UK workforce is under-trained relative to its competitors. Labour was always on the defensive over the union issue during the campaign: Booth and Chatterji's paper might have given it a powerful weapon.