Until it was repeated several times in one of Harold Wilson's speeches, I thought that the adjective "pragmatic" was always followed by the noun "sanction", and that together the two words described the arrangement that Emperor Charles VI of Austria made for his daughter Maria Theresa to succeed him on the Hapsburg throne. As the innovation had resulted in the War of the Austrian Succession, it seemed a strange adjective for the recently elected prime minister to choose as the definition of his attitude towards policy formation. I now realise that he was reasserting Labour's ancient distaste for what was pejoratively known as "ideological speculation". In 1964, the movement was made up of practical men and women who had neither time nor the taste for theorising. They wanted to get on with the job.
Wilson was leading a party that, in the years before the Second World War, had been built (though it didn't realise it) on firm philosophical foundations. Today, Herbert Morrison's assertion that "socialism is whatever the Labour Party is doing at the time" sounds ridiculous, but when the claim was made, it was far nearer the truth than it now seems. G D H Cole described the policy of "the British working-class movement" as "socialism without doctrine . . . a broad movement on behalf of the bottom dog". He meant that Labour was a class-based party with a programme that reflected the interests of the class on which it depended. That consistent response to the needs of the disadvantaged and dispossessed gave Labour's policies an intellectual and ideological coherence that, with the passage of time and the disappearance of class-based politics, they have lost.
For years, impatience with "theorising" increased with the size, severity and visibility of the "practical" problems that the "bottom dogs" faced. Paradoxically, in the 1930s and 1940s, when Labour possessed an underlying philosophy, it was not necessary to justify creating a health service, clearing the slums and reducing unemployment. Now that those needs are not so obvious, Labour requires a theory to live by - something to follow the resounding declaration: "I believe . . ." Yet, circumstances have conspired to make it a party that is doctrine-free.
The poor are always with us, but they make up a diminished percentage of the population and no longer prick the national conscience. There are certainly not enough of them either to guarantee election victory or to provide self-evident reasons for making an attack on poverty the party's first priority. Labour, like the rest of Britain, has become middle class. And Tony Blair, who boasted that he despised ideological politics, absorbed through his pores the ideology of the prosperous suburbs. Philosophy, like nature, abhors a vacuum. In the absence of an ethical framework within which its programme could be constructed, his government inevitably reflected the perceived interests of its social base.
The 10 per cent income tax rate was abolished so that the 22 per cent rate could be reduced by 2 points. The best that can be said about the philosophy that this tax policy exemplifies is that it represented a crude utilitarianism - the greatest possible advantage for the largest possible number of people. Unfortunately, the minority that could not be accommodated was the poor. At first glance, the attitude symbolised by Blair's refusal to express regret that the income gap between rich and poor had widened looked like a technique for winning elections, but it was also a formula for creating the impression that the party had no sense of direction. Governments that have no guiding star to follow end up in opposition. Parties with no sense of direction dwindle and die.
The achievements of the postwar government - the greatest peacetime administration in British history - went a significant distance towards realising Clement Attlee's hope that Labour would end the class war rather than win it. In 1954, Tony Crosland could write with justification that the "most characteristic features of capitalism have all disappeared: the absolute rule of private property, the subjection of all of economic life to market influences, the domination of the profit motive, the neutrality of government, typical laissez-faire division of income and the ideology of individual rights".
Enter the markets
If the brave new world that Crosland described ever existed, it was destroyed by Margaret Thatcher. But Crosland's redefinition of the socialist objective is as right and relevant now as it was in 1956, when he published The Future of Socialism. Labour, he argued, should be more concerned with the structure of society and less so with the organisation of the economy. Fifty years ago, that view was rejected by the party as too reactionary. New Labour later found it too radical. Both errors were the result of the contempt for ideas that Dick Crossman identified as the cause of the party's 1951 election defeat. Labour, he wrote, "lost its way not only because it lacked maps of the country it was crossing, but because it thought maps unnecessary for experienced travellers" and repudiated socialist theory as "dangerous Teutonic verbiage".
That view persists. An attempt in 1988 to set out Labour's "aims and values" was allocated half an hour of discussion time at conference. The debate collapsed, through lack of speakers, after 20 minutes. Yet there is a body of thought available to politicians who are wise enough to realise the importance of coherence and consistency. The context in which they are set is outdated, but the principles are not. To suggest that they are "old-fashioned" is like claiming that the Sermon on the Mount provides no moral guidance to a sophisticated society. The fundamental, and timeless, truths have to be applied to contemporary conditions.
T H Green, Eduard Bernstein and R H Tawney were followed by Crosland and, eventually, John Rawls who, though certainly not a socialist, takes credit for reasserting that true freedom is inseparable from, not inimical to, greater equality. During the 13 years of Labour government, how many cabinet ministers even considered that proposition? Blair became an advocate of meritocracy even before he read the book that - by describing the depredations of such a society - added that description of self-justifying inequality to the English language.
However, for "New Labour" successfully to replicate the Militant Tendency's plan to be the cuckoo in Labour's nest, its begetters had to claim that they were fundamentally different from their predecessors. But there was no Mill or Marx with the genius to provide them with a genuinely new idea. The result was the policy built on the foundations of sand that Hillary Clinton described to the New York Times in 1993. The Third Way, she said, would "marry conservatism with liberalism, capitalism and statism, and provide practically everything". Despite the attempts of some academics, who should have known better, to make sense of such nonsense, the vacuity of the concept is indisputable. And when it drove out the good idea of redistributive social democracy, it left an open space that was filled by the most ironic development in the Labour Party's history - the resolute support for the philosophy, as well as the economic prescriptions, of what is called the Chicago School.
Nobody should doubt that markets - the ark of the Chicago covenant - are essential to democracy, as well as commercial and industrial efficiency. Perhaps they are right and necessary in most of the economy. But there are some areas - particularly the provision of public services - in which the profit motive, on which markets are based, is supremely inappropriate. There are others - including, as we now know to our cost, the financial sector - where they serve the public interest only if they are carefully regulated. In the absence of a coherent theory of its own, New Labour swallowed hook, line and sinker the mystical Chicago School view that markets are universally beneficial and, as well as improving economic performance, provide an ethical way of distributing scarce resources.
New Labour's "choice agenda" was the market by another name. Chicago School economists are frank about the results of that process. Those who go into the market with the most advantage always come out with more. That is why the best-equipped hospitals and most successful schools are, under the choice agenda, filled by the middle classes. Supporting such an innovation was a strange way for a social-democratic party to behave. The reason (it is not an excuse) for such deviant conduct is clear. Ministers had no yardstick against which to measure individual policy initiatives. So they adopted ideas that seemed plausible and popular among the elusive target voters.
Proponents of the unrestricted market certainly have one lesson to teach social democrats. It is the political importance of conviction - an idea in which to believe without doubt or qualification, in good times as well as in bad.
At the height of the global crisis, caused by the greed of the bankers and the fundamental instability of the free market, the devotees of the market gave bland assurances that it would solve its own problems. Demand and supply would return to balance. In the process, millions of jobs would be lost, millions of owner-occupiers would be evicted and the whole world would become poorer. But the market would correct itself in the economic version of the Carthaginian peace. It creates a wilderness and its proponents call it equilibrium. The market and those who support it are, by definition, always right.
Labour's overt enthusiasm for "more millionaires" or, in its populist form, Blair's defence of David Beckham's annual earnings - a figure that Blair himself may now have exceeded - was partly the result of an instinctive identification with the well-to-do. But that middle-class reflex turned into policy because Labour ministers had no consistent theory of income distribution and, in consequence, accepted the free-market justification of self-interest.
This includes the insistence that high marginal rates of taxes reduce rather than increase government revenue - a view that, as well as enjoying the academic respectability of a proprietary name (the Laffer curve), is said to have been confirmed by the experience of the 1980s. But the tax take increased not because rates were reduced, but because gross incomes increased - hugely. At the beginning of the decade, the chairman of the nationalised telephone corporation was paid £57,000 a year. At the end, the chairman of the private company was paid £374,000. Over the same period, the Barclays Bank chairman's salary rose from £106,000 to £825,000.
That pattern was reproduced in industry after industry. During the next five years top salaries increased again - usually by about 100 per cent, and have continued to rise at about the same rate. Lacking ideological conviction and intellectual confidence, Labour failed both to condemn the inequity inherent in the market system and to take decisive action to remedy its consequences.
Yet the final days of the Labour government were the ideal moment to seize the initiative, with the failures of the market tragically evident. What is more, there was an increasing acceptance that, even if the market worked in the way that Friedrich Hayek claimed, the better society that most people want to see has not been achieved simply by an annual growth in GDP. Nor can it be. The idea that overall increases in national prosperity automatically solve the problems that social disadvantage causes the poor and prosperous alike is just another version of the "trickle-down effect" - a fraud perpetrated by the rich to give a bogus moral justification for getting richer. Social diseases can be cured only by a conscious policy of redistribution which reduces the disparities of wealth and power within the community.
In their book The Spirit Level, Richard Wilkinson and Kate Pickett demonstrate that inequality harms the interests of the rich as well as the poor - not only in the long term, by creating an unproductive underclass, but here and now, by destroying the fabric of society. What Crosland in 1956 regarded as self-evident has now been confirmed empirically. The importance of Wilkinson's and Pickett's work is affirmed by the fury with which right-wing commentators have denounced them.
The conclusions by Pickett and Wilkinson are worth repeating. In tables that compare the incidence of social disease in developed countries, Britain comes out at, or very near, the top every time. Only the United States has a higher level of unwanted teenage pregnancies and a greater frequency of mental illness.
Only the US and Portugal have lower levels of adult literacy and numeracy, a greater incidence of illegal drug use, and more youth and childhood violence. Only in the same two countries is there a higher percentage of children overweight and a greater proportion of adults obese. Our record in life expectancy and infant mortality is, comparatively speaking, better. But only just. Singapore, Portugal and the US have worse records than Britain.
The three countries with the greatest disparities of income between rich and poor are the same as those that suffer most from social disease - Singapore, Portugal and Britain. In fact, there is a direct and absolute correlation between inequality and the prevalence of the social detriments that scar modern society and that - above almost all else - the public wants to see eliminated. Only greater equality achieves that objective. That requires a positive programme of redistribution - an essential element of socialism.
That process was described by Hayek as "agreements by the majority on sharing out the booty gained by overwhelming a minority of fellow citizens or deciding how much is to be taken from them". It is Hayek's economic philosophy that has guided our view of economic management during the past 30 years.
Hayek wrote as if the only threat to our liberty were the power of the state. The socialist philosophers recognised the tyranny that is exercised by private power and wealth and concluded that only the state can provide protection against it. But Labour is now in danger of being browbeaten into accepting the populist view that the best government is the least government. If its leaders read T H Green, they would not only have the intellectual confidence to refute that nonsense, they would also be able to quote examples - dating back to Gladstone's Irish Land Acts of 1870 and 1881 - to illustrate the state's essential role in redressing the balance of power between the weak individual citizen and wealthy vested interest.
For Labour to win the next election, it has to campaign on a distinctive idea of its own. There can be no more apologies for social democracy or attempts to steal the Tories' clothes. The party has to believe in both the righteousness and the potential popularity of social democracy. Only a leader who realises that Labour needs a philosophy to guide its policy and programme will inspire the essential self-confidence.
Roy Hattersley was deputy leader of the Labour Party from 1983-92. His latest book is “David Lloyd George: the Great Outsider" (Little, Brown, £25)