Alison Wolf

Why do we need universities? Why not just sell academic courses and individual teaching skills car boot sale style?

Do we need universities, as opposed to scholars? Or further education colleges rather than teachers and trainers?

The answer seems obvious; but I have never believed in historical inevitability, and I wondered just this in Jersey recently. I was there discussing what the island's industries needed from its education system and whether they were getting it. This is hardly a novel topic, but Jersey, because it is so small, helps clear one's head.

By modern standards, Jersey is not small. It is tiny: 87,000 people outside the European Union, with their own government and laws. It has nothing we would recognise as a welfare state, but it does have a range of government offices: police, courts, customs officers and a full public education system.

Like most people, my word association went "Jersey-Bergerac-offshore trusts". In so far as I thought about it, I assumed that the big banks had taken themselves off to Jersey in pursuit of low taxes. In fact, Jersey's financial services industry was home grown. Indeed, the island reinvents itself regularly, with Japanese thoroughness: from French-speaking subsistence farmers and fishermen to producers of high value-added agriculture (remember Jersey cows?); then to mass tourism; and then to financial services.

With two-thirds of the workforce now in financial services, Jersey is used to importing the vast proportion of its goods and services. Obviously it does not run its own medical or veterinary school, but it maintains a full range of secondary schools as well as a sizeable further education college.

Which also seems obvious - but is it? Why, indeed, did developed countries all have schools (as opposed to teachers) well before education was nationalised or compulsory? With all Jersey's wealth, why not give families the money to buy in the teaching they want, the way middle-class parents do with music teachers?

Sixty years ago, Chicago University's Ronald Coase - an early example of Britain's brain-drain - asked exactly the same question about firms. His 20 brief pages of explanation, The Nature of the Firm , won him the 1991 Nobel prize for economics, despite lacking a single equation. Much of what he says applies just as well to educational institutions. "Classical" economics sees the price mechanism as the most effective way of allocating resources without the need for some central planner; and argues that competitive economies will be more efficient and richer than those that are centrally planned. But firms are centrally planned institutions in which people give orders rather than buy from and sell to each other. Employees are told to do things. There are clear limits, but most of us have that magic clause in our contracts requiring us to "carry out such additional duties as may reasonably be required". If the market is so efficient, why are so many of us wage slaves? Why not trade freely, as individuals, car boot sale style?

Coase's great insight was that buying and selling things is not cost free: on the contrary, what now get called "transaction costs" can be high and wearying. It can be far more effective to hire someone's services for a longish period of time than to draw up a contract with them for every single activity they carry out. Of course, large organisations generate their own internal costs and inefficiencies, but the argument applies well beyond private industry.

Universities and colleges exist in large part because, as big institutions, they can move staff around to cover classes, cut or expand options, merge non-viable teaching groups, and guarantee (more or less) that what they offer will run. Compare that with the nightmare of trying to find enough like-minded people to put on a course, and still losing the teacher to a better offer the night before it starts. So even Jersey needs institutions.

The island also highlights another point. Its competing firms, all worried about the "poaching" of staff and ideas, are as close to a textbook as real life comes. It seems hardly surprising, therefore, that the financial services sector has done a pretty poor job of setting up collaborative training activities, even though it knows it must go upmarket to survive. Yet the island's equally competitive builders have just completely and successfully regenerated their apprenticeship scheme. The key difference is that the latter have a long-established network of shared activities and meetings on neutral ground. The island's college sits at the very hub of that construction network: financial services has no equivalent.

Discussions on education and industry are usually about skills for individual students, and research and consultancy for individual firms.

Jersey reminded me that universities and colleges really are more than individuals interacting; they are, essentially, institutions.

Alison Wolf is professor of management at King's College London.