I talked recently to a primary school head on a council estate in my constituency, Leicester West. She spoke despairingly of the situation faced by one of her families. The mother, she said, was regularly beaten by her husband. Despite the turmoil at home, she managed to get the children to school on time. But the oldest, a child of an earlier marriage, insisted on staying home to protect his mother. She was terrified that the child welfare officer would come round if he wasn't at school - and terrified that her husband would attack the boy if he stayed home. So he spent his days - and sometimes his nights as well - in the garden shed. The head phoned social services pleading for help for the mother. They'd taken her off their list, she was told, because of staff shortages.
Not that things were much better for the younger children. One of them has scarcely spoken since he entered school nearly five years ago. He is an elective mute. The youngest child has just started school and, says the head, is a lovely, bright kid. But what hope has he got?
Think of the gulf in life-chances between these children and those who come, not from the richest families, but from average, comfortably-off homes. That is inequality in Britain today.
As new Labour sees it, the old politics required a choice between economic efficiency and social justice. The old left and the new right chose different sides, but both were agreed that the choice had to be made. For us, however, it is central that the choice need not be made - indeed, it must not be made. Instead, the policies that are required in the interests of social justice are precisely the same as the policies needed for a successful modern economy.
But it's not so simple. There are real tensions between the speed of change in the global economy, and the social fabric; between the inegalitarian forces of the global economy and egalitarian values. Social justice may be good for economic dynamism. But is economic dynamism good for social justice?
That leads to another question: what happened to the idea of equality as Labour modernised itself? During the 1980s, it became increasingly clear that equality - one of the founding trinity of left values - had become hopelessly bogged down in theoretical discussions about equality of outcome. Worse still, Labour's belief in equality seemed to mean a bizarre combination of sameness and difference. We were seen to resent talent and to want to punish success, above all through taxing the rich "until the pips squeak", in Denis Healey's disastrous phrase. But we also appeared to support special treatment for various minorities, indeed for almost anyone other than traditional working-class Labour voters.
Because we couldn't find a way of rehabilitating equality, we talked about fairness. But equality lived on in our commitment to social justice. In the Social Justice Commission, we argued that social justice demands the reduction, or, better, the elimination, of unjustified inequalities. We cannot, for example, accept that a child of unemployed parents in my constituency is twice as likely as a child in the wealthy suburbs to be stillborn or to die in the first year of life.
But the distinction between justified and unjustified inequalities caused the most heated discussions within the commission. Some of our members found it utterly offensive that Luciano Pavarotti, for example, should earn extraordinary wealth. The rest of us believed that, provided the concert promoters and record producers weren't engaged in monopolistic abuses, then Pavarotti was entitled to the rewards of his success. We rejected the fundamentalist view of equality - that even exceptional talent, effort or risk cannot justify exceptional rewards.
But even justified inequalities - the world-class entrepreneur creating products people want to buy, for example - are still inequalities. They represent a challenge to any government committed to reducing inequality, tackling social exclusion, and creating an egalitarian culture of equal respect. If the ladder of rewards is stretching higher and higher at the top, then how do we narrow the differences in children's life-chances?
The knowledge-driven economy intensifies the forces of inequality in many ways. First, human capital brings growing returns. Young graduates earn, on average, about a third more than their non-graduate peers. By the time they reach their late 40s, graduates are earning 76 per cent more. In the USA, a graduate premium of 46 per cent in 1980 has stretched to 75 per cent in 1998. Intelligence (in its many forms), creativity and education are increasingly important. But they are not evenly distributed, by nature or nurture.
Second, the gap between top and bottom incomes within each education group is itself widening. The stars who play in the global marketplace command global incomes, whether they are lawyers, merchant bankers, footballers, pop stars or even academics. Those who are only a bit less gifted, or a bit less lucky, get nothing like as much. But this is not simply about individual talent or good fortune. The organisation matters, too. The senior manager or secretary working for an outstandingly successful company will be far better rewarded than the equally qualified senior manager or secretary who works in an average or poorly run firm.
Third, competition is more intense. Liberalisation, global markets, the transparency of the euro across 11 countries and, above all, the instant availability of information on digital networks are creating a powerfully, even harshly, competitive environment. That helps to improve productivity. But it also drives earnings closer to people's individual productivity and away from "the rate for the job". As markets become more competitive, cross-subsidies of all kinds are unwound - including transfers from the more to the less productive, and from richer to poorer customers.
Fourth, global capital and business can move to wherever they will find the highest rewards. Governments have to compete for mobile investment. If taxes on business or individuals are too high, those who make corporate decisions will go elsewhere.
Fifth, stock market growth, particularly in the USA, is creating extraordinary capital gains for investors.
The sixth effect is the sheer scale of disruption. It is wrong to think that the new economy replaces manufacturing with services. Manufacturing is itself being transformed by the application of new technologies and new knowledge, so that the boundaries between services and manufacturing are increasingly blurred. The old industries don't disappear in the knowledge economy. But their nature changes and, as global competition intensifies, the old jobs disappear. We see the results in deteriorating health, rising crime and drug-taking in many once strongly knit communities. There is some worrying evidence that communities or even regions that were particularly dependent upon one or two industries and employers find it most difficult to generate the new, smaller and more varied enterprises of the knowledge economy.
And the changes don't end with the disappearance of some of our old industries. They are a permanent feature of the new economy. Jobs are created faster, but also lost faster. More businesses start, but more fail, too. In periods of intense change, the most vulnerable are those with poor health, little money, out-of-date skills, low self-confidence.
Not every advanced economy has seen the same increase in inequality. Indeed, it has been more extreme in the UK in the 1980s than almost anywhere else. Germany and France both suggest that successful economies can live with far less inequality than Britain or the USA. But the forces of inequality are powerful, and as the continental economies become more exposed to global stock markets, and to competition from the new economies of central and eastern Europe, it would be surprising if we didn't see some of the same results there, too.
So what kind of equality do we want? Equal respect for each other requires that each of us should have the greatest possible opportunity to find and fulfil our potential. We want the widest possible choice and control in our lives - a sense that, instead of being passive victims of uncontrollable forces, we are active authors.
There are circumstances when the social security system - and only the social security system - can sustain or expand personal autonomy: the profoundly disabled person enabled to move into his own home and employ his own carers; the retired person whose employment never provided a second pension; the frail elderly person whose savings cannot provide for residential care; the parent taking time off to care for young children; the unemployed person who needs to get the skills that will secure a new job.
But that is only part of the story. If the equal respect we want for ourselves and each other implies personal autonomy and social connection, then how we get our money matters, too, not just how much we get. Higher social security benefits do not change the conditions that lock people in poverty and social exclusion. They do not enable the 21 year old who cannot read the instructions on a medicine bottle to get a job. They do not help a parent and her children to learn to read. They do little to improve the self-esteem of the young mother who was neglected or abused by her own parents. They enable a family to spend more but they don't increase its chances of earning and saving in future.
The latest research suggests an extraordinarily close connection between inequality and ill-health. But inequality of power - power over one's own life - turns out to matter as well as inequality in money. More money, wherever it comes from, improves people's health. But lasting health improvements lie in tackling the lack of self-esteem and sense of powerlessness that underlie teenage pregnancy, drug and alcohol abuse, vulnerability to heart disease and so on.
The new economy is dynamic; but poverty is dynamic, too. I am thinking, for example, of Karen, a lone mother in my constituency. When I first met her, she was at home with a baby - young, isolated and bored. Then she started a course at the local college - mainly because they offered a creche. "I was so terrified, I used to creep in to pick up my assignment and then I'd rush out again and hope no one would notice me." Now she is on a university access course. "My little boy is in school. I can pick him up and study when he's asleep. It's not easy, in fact it's jolly hard work. And I haven't got any more money - yet. But I'm going to be able to give us both a much better life - and it's good for him to see his mum going out and doing things."
I am thinking of the Grameen Bank in Bangladesh. The inspiration of one man, the bank now connects hundreds of thousands of savers, mainly women, who contribute a few pence a week. It's not enough to make any difference individually. But when a dozen women saved for a year, they had enough for one of them to borrow and buy a sewing-machine. That became a micro-business.
Because human capital is the prime source of wealth creation in the new economy, investment in human capital becomes an economic necessity rather than a social cost. Once a stable economic framework is secured, the way to grow the economy is to grow the labour force - literally, by drawing more and more people into employment; metaphorically, by expanding the capacity and productivity of each person employed.
This is not so much wealth creation first, redistribution next; rather, it is redistribution through wealth creation. The result is that, in the new economy, social and economic policy are no longer separate. Childcare, skill-building and community development are as much part of economic policy as managing interest rates and taxation. Indeed, the central aim of all domestic policy must be to build the capacity of individuals and families, communities and businesses, to survive and thrive, both economically and socially.
The best anti-poverty programme, then, is steady growth and high employment. That is why new Labour, which inherited an economy where borrowing had risen to £28 billion and the national debt had doubled, has put so much emphasis on bringing the public finances under control.
In America, too, it was the cuts in government debt, starting in 1993, that allowed interest rates to come down and to stay down and thus to help drive higher investment. The most startling result has been the growth in jobs. African-American and Hispanic unemployment are both at their lowest levels ever. Unemployment as a whole, throughout 1999, averaged 4.2 per cent.
The view from the European left has been that the millions of jobs created in the USA are merely "McJobs" - low-paid, insecure, dead-end. That is simply not the case. Low-skilled service jobs account for just over one-fifth of American employment, a figure that has remained constant for the last 20 years. The biggest employment growth since 1993 has come in the highest-paid jobs. More than five million new jobs were created in five years in professional, executive and managerial positions while in the lowest-earnings group, the job growth has been more than 2 million, and in the middle-earnings group only around 1.6 million.
From the 1970s to the early 1990s, the USA experienced slower growth and widening inequality. For the bottom 60 per cent of Americans, incomes fell and the numbers in poverty grew. Since 1993, the poverty rate has fallen for all groups - fallen to the lowest rate on record for African-Americans and their children, as well as for Hispanic lone-parent families. And incomes have grown for the lowest-paid as well as the highest.
Here in the UK, with a much shorter period of stability behind us, unemployment has fallen to a 20-year low. Youth unemployment fell by 9 per cent last year, long-term unemployment by 13 per cent. And the number of people in work is higher than ever before. All those fears of "the end of work" seem rather dated now. We certainly shouldn't assume that the knowledge-driven economy has to be short on jobs. It is much more likely to suffer from a shortage of skilled and educated people, thus driving up their remuneration further. That is why investment in human capital, to create the widest possible spread of skill and education, itself contributes to equality. There is a double gain: every unskilled worker who becomes a skilled worker earns more; but he or she also ceases to compete for unskilled jobs, reducing the downward pressure on wages at the bottom of the labour market.
Should we also be reducing inequality by reducing the wealth and incomes of the rich? Only in the sense that fair taxes are the contribution we all make to living in a decent society. And fair taxes, where those with the most contribute the most, allow us to invest in the potential of the poor. But we rejected years ago - on principle, as well as practical grounds - the idea that penal taxes are good in themselves simply because they reduce the income gap. They would infringe individual liberty, damage incentives and wealth creation, and cause a flight of capital and talent.
As we explore what kind of equality we want, we need to understand the connection between equality and difference. Egalitarianism, and equal respect, do not mean equal outcomes. They cannot. Nor do they mean identical treatment.
As Jack Straw has argued, the left has long been comfortable with the idea of special treatment for children with special needs - when special needs are a source of disadvantage. But it opposed special treatment for children with special gifts. I always thought Neil Kinnock got it right when he said that our educational system should provide a floor below which no one should fall, but no ceiling upon how far anyone's talents and abilities could take them.
We're providing the floor, by raising basic standards. Now we are lifting the ceiling on what people can achieve - for instance, through the school enrichment programme called Excellence in Cities and through the specialist comprehensive schools.
Our critics on the left are quick to accuse us of promoting elitism. And there is a kind of elitism with which we are too familiar in Britain - one that is wholly hostile to egalitarianism. That is the elitism of the public schools and inherited peerages, the elitism of white men and entrenched privilege.
There is a different position, which may still be called "elitism" but which involves nurturing and celebrating outstanding gifts. That is not hostile to egalitarianism, but essential to it. This may seem a paradox. But if we really mean that we respect each other equally, then we must respect what makes each of us different, as well as what we all have in common, our humanity.
The writer is minister for small business and e-commerce. This essay is based on a recent lecture at St Antony's College, Oxford