"In the next century, the engine of growth will be the process through which can economy creates, applies and extracts value from knowledge." So said Charles Leadbeater of Demos, allegedly Tony Blair's favourite thinker.
Higher education is essential to an economy based on and driven by knowledge. "A knowledge economy is one in which the generation and exploitation of knowledge has come to play the predominant part in the creation of wealth," stated last year's competitiveness white paper.
Last month, Demos published a paper on the growth of Britain's new cultural entrepreneurs - people working independently in multimedia, design, computer games and internet services. Cultural industries, the paper argued, could employ 1.5 million people and generate revenues of Pounds 80 billion, worth 6 per cent of the gross domestic product, by the end of the next decade. By contrast, the financial sector makes up about 10 per cent of the economy.
The paper described how the new independents are well educated - about 43 per cent of them have passed through higher education, compared to 22 per cent in the economy as a whole. This figure rocketed to 77 per cent for cultural workers aged between 20 and 34: "For younger people, higher education is increasingly the gateway to the newer more knowledge-intensive industries.
"It is important to the new independents because a period at university allows them to experiment; university towns deliver large audiences for experimental, cheaply produced culture and cultural entrepreneurs often meet their future partners and collaborators at college. Universities are incubators for cultural entrepreneurs," stated the paper.
Economist Danny Quah, director of the national economic performance programme at the London School of Economics, agrees that producing people capable of contributing to the knowledge economy requires the cultural experience of higher education: "It first exposes students to different cultures, to a degree that you would never get in a secondary school. Britain's higher education industry draws in students from China, from Singapore, and is a big money-earner. But it is the cultural aspect that is important."
So how should universities evolve to further benefit the knowledge economy? Professor Quah argues that they should offer broader studies: "A few years ago, if you were a good classics scholar you would make a good civil servant, but we restricted that to an elite. There is no such thing as the engineering knowledge economy or the astrophysics knowledge economy - it demands its citizens to have a broad range of knowledge," he said.
One of the main findings of the Demos research is that there is a "missing middle" in public policy. "Cultural entrepreneurs need to develop a mix of creative and business skills often at different stages of their careers. Education institutions are often too inflexible to deliver these skills as and when the entrepreneurs need them. The skills of cultural entrepreneurship, managing a rock band, for example, can be learned, but usually from experience and peers rather than in a classroom."
Universities could help plug the missing middle by providing more imaginative learning opportunities. "Often cultural entrepreneurs do not realise they need these skills until long after they have left college and started a business. That is why these additional and top-up skills need to be delivered in a flexible way, using distance learning and often taught by peers," states the paper.
"A lot of these companies are formed by people just out of university. What universities need to do is make the interface more porous, through incubators and allowing students to set up companies. Former students need the opportunity to go back and study a business module when they are or 28 years old and universities should look at becoming more modular," said Mr Leadbeater.
It is a point with which Sir Douglas Hague, associate fellow of Templeton College, Oxford, agrees: "Universities need to help people learn rather than tell them what they should know. There is no point in trying to force knowledge on entrepreneurs - they will come to you when they need it."
Another recent Demos pamphlet highlights Waterloo University in Canada's cooperative education programme. It integrates work-based learning into the more traditional university environment, allowing students to spend up to half their time applying their skills and knowledge in work-based environments.
The knowledge economy needs not only an educated workforce but an educated consumer base, according to Professor Quah. "I would make a double whammy case for higher education. The knowledge economy needs high-tech products and it also needs people who can use them. A skilled workforce is critical for both aspects and higher education is critical for a skilled workforce," he said.
Professor Quah draws parallels between the need for a society that can create a demand for high-tech products and the way in which a democratic society needs a vital, thinking population.
"We joke about how none of us can programme the clock on the VCR and we have to get our children to do it, but we shouldn't joke about it - it is symptomatic of the problems facing society. It is important that society can keep up a discourse," he said.
Reporting team: Alison Goddard, Tony Tysome, Alan Thomson, Olga Wojtas, Kam Patel
Next week: how the social benefits of higher education help the economy; maintaining the creative edge; the vice-chancellors' case.
* University with hotline to WIREd world
In 1994, two years after leaving university, Rowan Douglas founded WIRE "to act as a broker between those who have information - such as the universities - and those who need it".
The company provides online information analysis to clients, including "a significant proportion" of the insurance and reinsurance market's underwriters, brokers and exchangers. Five years later, more than 60 companies have used WIRE's services, 40 per cent of which were based overseas. WIRE has an annual turnover of Pounds 750,000.
"I had spent time in academia and in the City and I identified a gap - I realised that PhD theses should be repackaged and the information delivered quickly to the City," Mr Douglas said.
WIRE employs ten staff. As suggested by the Demos study of cultural entrepreneurs, most of them come from one of the two universities at which Mr Douglas studied.
The company is based at the University of Sussex's science park. "When I founded the company, I wanted an academic platform. Sussex offered me a visiting fellowship and a place in the science park so I set up here," said Mr Douglas.
The visiting fellowship at the Science Policy Research Unit allows Mr Douglas to pick up knowledge from a new vantage point: "It means you can adopt a different identity and talk about subjects from a non-business angle."
* Finding distant galaxies and nearby pubs
The experiment that Cambridge University radio astronomer Peter Duffett-Smith put forward two decades ago was about as "blue skies" as you can get.
He proposed linking up observations of distant galaxies made by a low frequency radio telescope in Cambridge with a mobile unit fitted into a camper van driven to Spain to get the necessary separation. And he was given Pounds 150,000 of public money to do this.
The project was a great success. For Dr Duffett-Smith's team, being able to add to our understanding of the distant reaches of the universe was sufficient justification for their endeavour.
But the story does not end there. For the UK economy, that Pounds 150,000 grant has proved a shrewd investment. For a start, all three of Dr Duffett-Smith's students learned a great deal from the experience. One has pursued a successful career in the electronics industry, another is still involved in university research.
Most significant, however, is Cursor, a remarkable piece of tracking technology that is causing a stir in the telecommunications world.
The basic scientific lessons learned in the radio astronomy project have been turned on their head to provide the technological insight to allow the location of mobile phones to be pinpointed to within 100m.
In trials this summer, the
system gave 150 users in Cambridge the ability to call a switchboard and receive directions on how to find the nearest chemist, cash machine, pub or whatever they required. It is a service the phone operators would love to offer their customers.
The first patent on Dr Duffett-Smith's technology was filed in February 1988. The spin-off company set up to exploit the technology now has 30 staff. More than Pounds 11 million of venture capital has been invested, and negotiations with a major mobile phone firm are under way.
Dr Duffett-Smith, who recently began five years' leave of absence from the Cavendish Laboratory to make the business a success, has every intention of returning to radio astronomy when that time is up.
"You cannot predict what the science might produce," Dr Duffett-Smith said. "The science we did was interesting though it could hardly be described as a 'breakthrough'. But then we had this serendipitous spin-off."
The point, Dr Duffett-Smith believes, is to
maintain a strong science base and to not erode the pure research that spurs insight and innovation.