Bad news, Gordon: the world is going Blairite

How far can you trust the markets to deliver the right results? It is the great question facing not just this government but governments the world over.

Here in the UK it is part of the divide between Tony and Gordon, for the Prime Minister's instinct is to trust market signals, while the Chancellor's is to trust a centrally-administered policy, subsequently audited to make sure it gives value for money. But that is our worm's-eye view of a global debate. Just about every government is wrestling with the difficulty of delivering public services in a world where people have become accustomed to ever-greater choice. The private sector uses the markets not just to discover what people really want; it also uses them to squeeze down the resources needed to provide it. The public sector finds that much tougher.

The debate will feature large in the forthcoming election but it was given a new twist at the end of last week by Lord Browne, chief executive of BP and one of the country's most-admired business leaders. He was speaking at the Davos session entitled "Does business have a noble purpose?" in which he attacked the use of "pseudo-markets" in the public sector, saying that they were damaging professional people who probably should not be subject to them.

Boom! Here was an alpha businessman saying the Government's policy of introducing internal markets into areas such as health was misconceived: the Chancellor was right and the PM was wrong. Each camp jumped up to congratulate or condemn. Except that Lord Browne was not saying quite what he was reported as saying but rather something more measured and more interesting - and that he happens to be more of a Blairite than a Brownite.

His point was that the professional ethos was different from the market ethos and that the crude target-setting that was being introduced in some public sector services ran counter to that. Because people saw these pseudo- markets as a proxy for business values, the image of business was being damaged as a result. He could perhaps have made the further point that these were not real markets because the parameters were set top-down. Real markets were shaped by the signals that came from the bottom-up.

Still, it was a useful intervention in that it did focus attention on the pressure to make public sector services more responsive to consumer demand. The presumption that if people want something it might be a good idea to try to provide it has only recently taken hold in some parts of the public sector. I recall years ago a Tory minister explaining to me why the popular demand for having more police on the beat was misconceived. Statistically the chance of a police officer on the beat being within 100 yards of a crime was something like once every 70 years. Far more efficient, he said, to have them in a car and ready to respond wherever the crime happened.

The only trouble with this is that it ignores the possibility that if there are more police on the streets there might be fewer crimes in the first place. As William Bratton demonstrated in New York, making police visible cut the amount of crime that was committed - a lesson that London has only recently learnt. That actually was a good example of the "professional" approach to policing being wrong and the customers (by which I mean the general public, not the criminals) being right.

So making public services responsive to customer demand must be the right direction to head. But how?

It is helpful to stand back and see where we have got to over the past quarter century because the world's ideas of the proper boundaries of the state have changed radically. Not many people now argue that it is a good idea for government's to run airlines, banks or telecommunications services. But a generation ago, these were the norm in many countries that thought of themselves as market economies.

There are still arguments about activities such as postal services and broadcasting companies. (Intriguingly I see al-Jazeera, the hugely successful Arab TV station set up by the Qatar authorities in 1996, may be privatised - a great bit of venture capital investment if it is.) And there is a core of functions that most people would feel should remain in the control of the state, the armed forces being the most obvious example.

A generation ago, too, independent regulation of natural monopolies was in its infancy. Because these were mostly owned by the state, the state supposedly also provided the social controls. British Rail was answerable to Parliament. Since then, regulation has largely been separated from function: one of the few surviving examples of the two being combined is the BBC and that is not going to last long now.

Next, markets have developed hugely over the past few years. There are world auctions on the internet; people have much wider access to foreign markets; and people are more prepared and more able to travel abroad for services. Look at the way UK university education has become an international business, with a sharp rise in the number of foreign students in UK universities. That rise is partly an unintended consequence of the Government's policy to hold down university fees paid by UK students below their market cost: to cover their deficits, universities have been forced to recruit more foreign students who pay full fees.

All these changes have altered the role of the state everywhere and will go on doing so. The obvious bits have been done. No one suggests that British Airways should be renationalised and run like Air France. Or rather, what look now like obvious bits have been done, for they did not look so obvious at the time. The really interesting question surely is whether there are reforms that look tough now but will look obvious in another generation.

There is of course no consensus. Some countries, such as the US, will press forward on privatising pensions. Others will focus on health care. The balance of education globally is shifting more towards the market and away from the public sector, particularly at a university level. But it would be hard to deny that there is a general trend towards governments in the developed world trying to rely more on regulation and less on provision (and taxation) to achieve their objectives. I suppose you could say the world is going Blairite, not Brownite.

How far it does go will vary from country to country. A paper by Vito Tanzi, former head of fiscal affairs at the IMF, and published by the think-tank Politeia, suggests that the proportion of a country's income going through the state need not be more than about 30 per cent of GDP. At the moment, the US, Ireland and Australia are closest to that level. The US and Australia in particular achieve high levels of human development - much higher than France or Germany, where the state spends much more.

It would be nice if the UK were to remain an important player in this global game: balancing public service and professional ethics on the one hand, against the pressures and disciplines of the market on the other. Global competitiveness requires a competent and efficient public sector as well as a flexible and efficient private sector. I suspect this means having more of a real market in services such as health and education, rather than more of a pseudo one, but with the state both regulating the quality and making sure that everyone has full access.