Charles Leadbeater discovers that Blair and Brown owe a surprising debt to a Tory guru of the 1970s, but warns that they must learn from his failures

He was Margaret Thatcher's Mad Monk, the high priest of the free market, the first true believer who converted the future prime minister to radical right-wing ideas. Keith Joseph's wild, staring eyes made him the perfect target for demonisation by the left in the 1970s; exorcism seemed more appropriate than debate. Among the young Labour idealists who heckled him on university campuses - protesters closed his meetings on four occasions in 1976 alone - there must have been many who are now at the heart of new Labour. To this day, the mention of Joseph's name probably makes their stomachs turn. It will disturb them even more if I suggest that - even though ministers have probably never read a word he wrote - Joseph was one of new Labour's intellectual godfathers.

Joseph, who died in 1994, goes unmourned and is hardly remembered even by his own party. Yet a huge amount of what has become conventional political wisdom can be traced back to Joseph's burst of intellectual energy in the mid-1970s, when he was a lone voice announcing that the Keynesian postwar settlement was, as he put it, "grinding into a dead end". In that insight Joseph was well ahead of the pack. It is uncanny how many of the themes of the new Labour government were prefigured in his speeches and pamphlets (which are still available from the Centre for Policy Studies). I do not wish to overstate the case - Joseph would never have introduced a minimum wage, the fairness at work proposals or the windfall tax, for example - but consider the following.

First, Joseph recognised early that macroeconomic stability - "monetary continence" he called it - was essential for growth and a prerequisite for the supply-side reforms needed to improve productivity. This is precisely the formulation now endorsed by Gordon Brown. In a hugely controversial speech in Preston in 1974 Joseph argued that the use of demand-management to create more jobs was stoking up inflation and delaying restructuring (a line now echoed by Gerhard Schroder's advisers in Germany). The speech foreshadowed the preoccupation that all governments have had ever since with inflation, yet at the time it won Joseph opprobrium from all quarters (though it was a speech later in the same year, which appeared to suggest that the lower classes should have fewer children, that finally put paid to his chances of becoming prime minister).

Joseph never believed that monetarism was a magic cure- all. "Monetary control is a pre-essential for everything else we need and want to do; an opportunity to tackle the real problems: labour shortage in one place, unemployed in another; exaggerated expectations, inefficiencies, frictions and distortions." Again, it could be Brown and Tony Blair arguing for macroeconomic stability so that they can tackle training, education and investment.

Second, Joseph attacked the "dependency culture" of long-term welfare benefits. In 1972 he said this had helped to create a "cycle of deprivation" in poor families. The evidence was at best patchy, but the "cycle of deprivation" mutated in the 1980s into Charles Murray's underclass and from there into new Labour's advocacy of an active approach to welfare in which rights go with responsibilities. Joseph told the Oxford Union in 1975: "We spend more on welfare without achieving well-being while creating dangerous levels of dependency." The line could have been lifted from a Blair or Brown speech about the shortcomings of the welfare state.

Third, Joseph recognised that any government was severely circumscribed by the international economy and that the pace of change was accelerating. Blair warns European socialist parties to innovate or die: if you try to stand still in a world of rapid change, you end up going backwards. Joseph said much the same. In Stranded on the Middle Ground, a collection of speeches published in 1976, Joseph talked about the Tories' mistakes in power: "We were motivated by the desire to maintain stability at all costs. But stability can be won only by riding the waves, not by drifting with them. Stability entails controlling events, not surrendering to them. By sacrificing our ideas, our instincts, our better judgements to the quest for stability, we ended up sacrificing stability to convenience."

Fourth, Joseph championed entrepreneurship, throughout society, to create wealth. He did not believe in the market as an abstract mechanism that would automatically reconcile supply and demand. As he put it in Conditions for Fuller Employment in 1978: "The market creates the framework: but it is people who act within it. The endless adaptation of production to consumption, of supply to demand, is not achieved automatically. Resources do not allocate themselves: they have to be organised by people, above all the entrepreneur." The government's white paper on competitiveness, published in December when Peter Mandelson was secretary of state for trade and industry, speaks the same language.

Fifth, Joseph understood the limits of free markets in public services, especially when he was a minister. At health and social security under Ted Heath, Joseph presided over a larger increase in state spending than Labour had managed. Under Thatcher, as a highly interventionist education secretary, particularly concerned about non-academic children, he started many of the state-driven changes to schooling that we are still enacting today: higher standards in reading, writing and maths; local management of schools; changes to teachers' employment practices. Further, he resisted the argument for "vouchers" touted by his friends on the right. According to Andrew Denham, lecturer in politics at Nottingham University (whose biography of Joseph, written with Mark Garnett, will be published next year), this was not just because he recognised vouchers would be politically unworkable: "Joseph also had moral worries about vouchers. He recognised education was not just a consumer good and that freedom of choice might lead some parents to make choices that would disadvantage their children. He thought there was a case for some state paternalism in areas such as education."

Joseph's background may have played a critical role in this. He came from a wealthy, established and extended Jewish family which, according to Denham, had a strong tradition of public service and a sense of obligation to those less fortunate. In practice, if not in theory, Joseph recognised the role of the state in improving social welfare. He would not, when it came to it, press ahead with the large-scale privatisation of either health or education. If the Tory right studied what Joseph did, as well as what he said, they might not have got themselves into their present mess.

What new Labour ingested from Joseph above all, albeit unconsciously, was the recognition that the postwar consensus, and everything that went with it, was gone for ever. In Monetarism is Not Enough (1976) Joseph warned against "this man-made chaos, the divorce of work from production, of cost from benefit, of reward from performance . . . we are moving into the make-believe economy where we make motor cars that no one wants and put three men on a train . . . when only one is needed. This is going through the motions, keeping up appearances, window-dressing a fraudulent facade."

What are we to make of this unexpected contiguity between Joseph's writings and new Labour's themes? Many would see it as further evidence of how much new Labour has "caved in" to the right. That is far too simplistic. Joseph, like Blair and Brown, espoused a politics imbued with a strong ethic of responsibility and public service. He, like them, came from a religious background. He, like them, saw himself in a tradition of British radical reformers, who entered politics to challenge the conventional wisdom of their own parties and above all to translate ideas into action.

But Joseph is significant not just for his articulation of themes that still concern politicians 20 years later, but also for how he failed. He was a politician who took ideas seriously. That meant he was, as Denham puts it, an intellectual politician rather than an instinctual one. He appeared so cold, logical, analytical and detached that he lacked any feeling for those who lost out from his policies. The politician of ideas became an ideologue. By the end of Joseph's career, Thatcherism was not an analysis of society and a set of remedies, but simply whatever Thatcher did. Joseph stopped asking big questions and instead became chief defender of the faith. The Joseph of 1974 would have railed against the monetary incontinence of the Lawson boom of the late 1980s but instead he passed over such failings mutely. And the lack of feeling eventually put people off not just him but Thatcherism as a whole.

Therein perhaps lies another lesson for Blair. A government needs independent thinkers to challenge them and keep them honest. Political parties start making mistakes when they are apparently at their most successful, when their view of the world goes unchallenged. Joseph was at his most potent as a voice in the wilderness, in the 1970s. Fifteen years later, at the height of his power, that capacity for insight had deserted him.

Most important of all, he was never able to marry his interventionist reflexes as a minister with his free-market ideas and rhetoric. Had he been able to do so, he might have bequeathed a Conservatism capable of blending the best of the public and the private. The historic failing of Conservatism in the 1980s and 1990s was that it was incapable of such a marriage. New Labour's starting point, therefore, was Joseph's failure. And new Labour's task now is to show how a market society, which prizes choice, innovation and competition, also needs strong civic institutions, an effective public sector and a sense of common purpose.

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