There is no one-size-fits-all solutionto saving strategically important subjects, says Howard Newby

This year, Charles Clarke, the Education Secretary, has written not one but two letters to the chairman of the Higher Education Funding Council for England. Notwithstanding the burden on the Christmas post and in defiance of public spending efficiency imperatives, we are to receive not only the customary grant letter, but have also received an "advice letter" on a range of topics including "strategically important subjects".

The issues go back to the 2003 White Paper and the subsequent Higher Education Act. One important aspect of the legislation was a desire to grant higher education institutions greater autonomy from the state, exposing them more to market forces.

Universities and colleges are, quite rightly, seen as arbiters of their own affairs within the resources granted to them. Their senior managers are encouraged to invest (and disinvest) in response to the demands of their customers and clients - principally students and employers - and to focus their efforts on their established strengths.

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It is not entirely clear how the individual institutional interests of 130 universities and colleges add up to an overall national interest. There may well be cases where the fluctuating (and somewhat fashion-driven) pattern of student demand may not be sufficient to sustain capacity in some subjects over the medium-to-long term.

These concerns are not new. For some time, Hefce has supported a range of "minority subjects" (those attracting fewer than than 100 full-time students) to retain national capacity in them - for research as well as teaching. Many are so-called exotic languages. The sector has been willing to see a small amount top-sliced from general teaching funding to support them.

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What is new is that some subjects hitherto regarded as core disciplines have been exhibiting some of the same tendencies. These include physics, chemistry, most branches of engineering, mathematics and modern languages.

All have suffered precipitate declines in student demand - for example, a one-third reduction in the number of chemistry undergraduates in six years.

So should we regard this as an inevitable example of market forces or - as in the case of minority subjects - intervene in some way to sustain capacity? And if we are to intervene, how is this to be achieved without constraining the autonomy of institutions or introducing a bureaucratic second-guessing of student demand?

There is unlikely to be a one-size-fits-all solution. We need to establish whether the problem is principally on the demand side or on the supply side. The support of minority subjects is an attempt to deal with the supply side, to retain national capacity almost irrespective of student demand. The area studies included in the advice letter, such as former Soviet Central Asia or the accession states in Europe, would fall into this category.

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Others are obviously demand-side problems. The closure of chemistry and physics departments, in many cases, falls into this category. There are plenty of such departments in existence, but the trends are worrying.

More needs to be done to stimulate demand, and many of the answers involve working with schools. Moreover, adequacy of provision at national level does not always imply sufficiency at regional level. And regional access is important given the tendency of students, especially those from poor families, to study closer to home.

It is impossible to ignore all this. So what is to be done? Mr Clarke has indicated that there is no extra money, and, in any case, throwing more resources on the supply side to address a demand-side problem will achieve little: increasing the unit of resource for chemistry will not, on its own, produce a single extra chemistry student. Offering an open-ended subsidy will simply encourage institutions to engage in internal transfer pricing to ensure that every "strategically important" subject is duly loss-making.

We cannot alter teaching funding to cater for the needs of those who shout loudest. In the end, demand-side problems are best dealt with by stimulating demand. Supply-side intervention should be addressing supply-side inadequacies. A case-by-case approach is necessary and Hefce will no doubt be called on to lubricate change.

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No one wants a heavy-handed set of prescriptions that tells institutions what to teach and when. The Hefce board will be looking at these issues and we will need to strike up a strategic dialogue with the sector to arrive at sustainable solutions that are also in the public interest.

Sir Howard Newby is chief executive of Hefce.