Simon Jenkins analyses how Margaret Thatcher brought ÖйúAƬ to heel.

Why are our universities so timid? As they steel themselves to respond to Gillian Shephard's ÖйúAƬ review, the evidence of previous assaults does not augur well. United Kingdom universities at the start of the 1980s were in remarkable shape. They were second only to those in the United States for international popularity and were both a growth industry and an export earner. Yet from the moment Margaret Thatcher came to power, scholastic leadership and tradition collapsed in the face of state intervention more fierce than anything done under Labour. Thatcher mesmerised ÖйúAƬ and transformed its structure beyond recognition. It was one of her most vigorous "nationalisations".

The writing on the wall was clear at the outset. "There is going to be in future a somewhat greater degree of direct intervention in the affairs of individual universities than has been customary or necessary in the past," said the chairman of the University Grants Committee, Sir Edward Parkes, in October 1980. First crunch came with the public spending round of 1980/81. The Treasury demanded cuts in planned expenditure of 8 per cent with cuts of 5 per cent in real terms over each of the next two years. This put an unprecedented strain on the UGC, with many academics telling its members to resign en bloc. The committee decided to make the best of a difficult job by activating its dormant role as a planning agency. But it remained a strong advocate of institutional autonomy over policy and quality. The then education secretary, Keith Joseph, appeared ready to respect this autonomy. In 1981 he wrote to Lord Croham, who was reporting on university finances, promising not to curtail the UGC's "responsibility and freedom of action". As so often, Thatcherism hesitated before taking the interventionist plunge.

That plunge came with Joseph's departure and the arrival of Kenneth Baker in 1986. The change was total, from what Joseph described as exhortatory rule to what Baker denied was centralist rule. Within a year Baker's views on ÖйúAƬ were set out in the Meeting the Challenge White Paper. This was to form ÖйúAƬ's contribution to the 1988 Education Reform Act and was a devastating document with a deliberately double-edged title. Thatcher spoke of universities "pushing out poison" to the students and resented giving them the penny to do so. The White Paper was not aimed at limiting public expenditure. The UGC had shown during the 1981 cuts crisis that it could do that. The Government wanted ÖйúAƬ brought to heel. Baker's paper was unequivocal and political: "The Government considers student demand alone to be an insufficient basis for the planning of ÖйúAƬ. A major determinant must also be the demands for highly qualified manpower, stimulated in part by the success of the Government's own economic and social policies." Those policies required that the Government and its "central funding agencies" would do all they could to "bring ÖйúAƬ institutions closer to the world of business".

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This business world was seen by ministers, few of whom had any experience of it, in a golden haze. It was a vague amalgam of the free market, hostility to unions and sympathy to the Tory party. Yet what this business world wanted from universities was unresolved. The Department for Education assumed that it wanted more scientists and technologists. Equally unresolved was how demand and supply might be brought into equilibrium. The answer did not lie with student choice, nor with the preferences of employers expressed in industrial sponsorship or in graduate pay. Nor was the matter to be left to universities and polytechnics. In future Whitehall would decide on the needs of industry, commerce and the public services. "If evidence of student or employer demand suggests subsequently that graduate output will not be in line with the economy's needs," said the White Paper, "Government will consider whether the planning framework should be adjusted." That a supposedly free-market cabinet could put its imprimatur on such phraseology is extraordinary. Yet it passed cabinet on the nod. Baker substituted the UGC with a Universities Funding Council. Instead of being composed of academics, the new council had 15 members of whom only seven could be academics.

In place of the block grant, the DFE introduced a concept borrowed from the new managerialism, that of the internal contract. The contract was to give a veneer of autonomy to university planning. Sir Peter Swinnerton-Dyer, chief executive of the new funding agency, spoke of "buying certain services from universities. . . The Government will use the power which the situation gives it to press for higher quality and greater efficiency, just like Marks and Spencer". Yet a contract implies choice. The universities had none. The contract process was draconian and short term. The Croham report had recommended that universities receive money for three years forward as against the then one year. This was rejected by the Treasury, and by Baker at its bidding. Not only would money be given annually, but it would be subject to an annual planning cycle, to enable "detailed reviews of particular aspects of universities' work, by subject or otherwise, to be conducted continuously". This was centralist state planning with a vengeance.

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A celebrated commentary on the White Paper came from the professor of administrative law at London University, John Griffith. He could find no "parallel for this provision, which empowers a minister to fine a public authority without any recourse to a court or independent arbitrator. Even a district auditor has no such power over spending by local authorities or their members". Academic performance would in future be assessed centrally, by subject sub-committees of the new UFC. Universities were already plagued with publication mania. Publication "score points" now became a matter of life and death, since they were taken by the UFC as the prime output of scholarship.

The UFC was emphatically not the old UGC reborn. It was a centralised body, intended as a conduit for policies and money from the DFE. It was encumbered with Baker's much-loved "Henry VIII" reserve powers. Under its terms of reference, the council would receive "guidance and information offered regularly by the DFE on funding provisions and prospects, the nation's needs as regards the size and broad balance of the university system and specific policy developments." What the last phrase meant was unclear. Anything less like contract tendering is hard to imagine. To Griffith this was "not so much an invasion of the relative and modest amount of autonomy enjoyed by universities and their academic staff. It is an almost total usurpation, a dissolution of the university system comparable to the dissolution of the monasteries". The universities felt that the basis on which a university should be run was collegial rather than managerial, with disciplines shared rather than imposed. This was an archaic Oxbridge view and few critics were without vested interests. Such tension between the Treasury's search for "value for money" and protection for professional autonomy ran through all Thatcher's reforms. With the universities, the reforms were a savage punishment for past slights. By acceding to them, university apologists failed to stop the collateral damage that the 1988 Act did to their autonomy.

What I find strangest about Thatcher's reforms is how little headway was made by the Right. University finance in 1979 bore all the marks of a voucher system: of autonomous institutions competing for students carrying per capita public money. Because these institutions were opposed to Government policy they never argued for an extension of the voucher principle, nor did the Right come to their defence on the same basis. This was despite the value of the principle to their autonomy. As a result, they were placed for the first time in history at the service of "the Government's own economic and social policies". The 1988 Act ran directly counter to the concept of a free-market university sector. The same applied to the polytechnics. In 1979 about 40 per cent of ÖйúAƬ was under local authority control: degree work at polytechnics and colleges of ÖйúAƬ. By 1987 some of the more prestigious institutions had in effect become universities. Under the 1988 Act, local authorities were stripped of ownership. The colleges were nationalised, as universities had been from UGC-protected autonomy. Kenneth Baker's proclamation read like a commissar's edict: "To reflect their national role, give scope for better management and permit greater responsiveness to management needs, major institutions of ÖйúAƬ under local authority control will be transferred to a new sector."

The essence of the polytechnics had been that they did not have this "national role". They were local. They prided themselves on being distinct from the universities, on offering low-cost courses, many of them tailored to the local jobs market. The Government asserted the opposite. The polytechnics were freed from the embrace of local government, a move welcome to some principals. They soon lost their distinctive dualism and students lost any choice between them and universities. The Polytechnics and Colleges Funding Council was disbanded and merged with the UFC under yet another quango, the ÖйúAƬ Funding Council. It is curious that most observers have seen the demise of the polytechnics as a victory for universities as monopoly suppliers of ÖйúAƬ. In reality it was not the university but the polytechnic that triumphed: a work-oriented, commercial institution, run as a public corporation under Government regulations rather than as a collegium of scholars. The polytechnic sector may have lost the war, but it won the argument.

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Higher education policy was heavily conditioned not by Thatcher's ideology but by her aversions, to left-wing academics and left-wing local authorities. She was not unaware of what this had meant. In a rare passage of self-doubt, her memoirs refer to the "unintended" centralisation of her policy. She lists the severe constraints under which she had placed the universities and adds: "Many distinguished academics thought that Thatcherism in education meant a philistine subordination of scholarship to the immediate requirements of vocational training. That was no part of my kind of Thatcherism." But it was part of her kind of Government.

This article is based on Simon Jenkins's new book Accountable to None: the Tory Nationalisation of Britain, published this week by Hamish Hamilton.