Parents, pupils and patients need to be promoted from pawns to powerful queens

The Conservative plan to abolish distance as a factor in schools admissions is one of those rather rare news items: a New Political Idea. At a time when politics is supposed to be boring and devoid of intellectual interest, it suggests that not everything is Blairite scorched earth.

The Conservative plan to abolish distance as a factor in schools admissions is one of those rather rare news items: a New Political Idea. At a time when politics is supposed to be boring and devoid of intellectual interest, it suggests that not everything is Blairite scorched earth.

It is a surprising policy from the Tories, because it would weaken the ability of the middle class to buy educational advantage through house prices. Ideologically, it is the sort of thing you might expect Labour to look at for its manifesto. Funnily enough, it is, broadly speaking, the sort of thing Labour is looking at.

The struggle over the Labour manifesto is possibly the most important and least-analysed political story of this spring. One of the curious features of the long election campaign is that the Tories have accepted Labour's spending plans on health and education, and not just for two years after the election, but for three. This is because Oliver Letwin, the shadow Chancellor, has pledged to stick to Labour's plans for two years, but from April 2006, which leaves the first year of a putative Conservative government, starting in May or June next year, also tied to Labour plans.

Thus the argument at the election is not going to be about how much to spend on health and education, the twin pillars of the modern welfare state, but about how to deliver better services within the same overall budgets. That is why the struggle over Labour's manifesto matters. There is a gathering tension in the Government between those around the Prime Minister who want more consumer choice in public services and the majority in the Labour Party who regard this as "marketisation" to be resisted.

The colour of Blair's thinking is evident from the party's pre-manifesto document published in November. It did not receive the attention it deserved because it was linked with the Big Conversation exercise, widely dismissed as a sham. But the questions highlighted in red throughout the text provide the best guide to the third term, as it is usually obvious what Blair's answer would be.

Take these four questions, for example. Should new technology be used to allow patients, through their GP, complete choice within the NHS, whether the NHS has contracted care from the public, private or voluntary sector? Are we prepared to see hospitals whose services are not chosen by patients either restart under new leadership or close? Should state secondary schools have more independence? Should we make it even easier for schools to expand or new schools to be established?

To those who complain that there is no sense of intellectual adventure in politics today, I say: watch this space. The amount of extra money being pumped into the health service and schools since 1999, when Gordon Brown turned the taps on, is beginning to mount. The NHS, which struggled for three decades to keep up with a rising demand for health care, is finally reaching the stage where capacity is increasing faster than demand. Teachers' pay is up and workload down, to the point that it becomes at least possible to ask: what is the best way to raise standards dramatically across the board?

This is where the battle is joined. On one side are those who think it is enough to rely on the altruism of public servants - doctors, nurses, teachers - to make best use of the greater resources; on the other are those who put more faith in market-style incentives.

Intellectually, the altruists are pathetically weak. It is a shame, for example, that Renewal, once the journal of the modernising avant-garde of New Labour, has been reborn as a mouthpiece of the internal opposition - the very negation of its original purpose. Its latest edition accuses Blair of suffering from a form of "political agoraphobia - a fear of open, public spaces in which non-market values might just prevail, where political and therefore collective power might just take precedence over individualised purchasing power." This is just clever, but empty, rhetoric.

By contrast, the marketisers have a more practical, credible and exciting vision. One of the most impressive intellectuals of the movement, Julian Le Grand, has been drafted in to 10 Downing Street. As a professor of social policy at the London School of Economics, his work on the ideology of the third term is of more than mere academic interest.

Admittedly, his book published last year is called Motivation, Agency and Public Policy. But its subtitle, Of Knight & Knaves, Pawns & Queens, is more beguiling and more descriptive of its central thesis, that public services ought to be designed on the assumption that their providers - doctors, teachers or bureaucrats - might be knaves rather than public-spirited knights. Thereby, parents, pupils and patients might be promoted from pawns to powerful queens.

His arguments are lively and original, but the most striking chapter is the epilogue in which he makes the left-wing case for market forces. He does not simply argue that markets should be reluctantly accepted as expedient, but that they should be celebrated in principle. The important feature of market exchange, he argues, is that it promotes respect for other people.

"To offer something in exchange is to make an effort to understand the needs and wants of the other party to the potential exchange and to persuade them that what is on offer will meet those needs or wants." The exploitation of labour or the intensification of poverty often wrought by capitalist markets should not confound the case for "quasi-markets" in public services in which consumers have purchasing power depending on their needs. An egalitarian defence of markets: now that is intellectual boldness.

The surprise sprung at the weekend by Tim Yeo, the Tory spokesman for education and health, suggests how tricky this territory is, and how important it is that the Labour Party is clear about its definitions. If it is not careful it will end up defending a real market in schools, where cash buys access to better education (through house prices in good catchment areas), while the Tories advocate a "quasi-market" in which poor people have as much clout as rich.

Equally, the Labour Party has got to realise that this country needs a real internal market in the NHS and to be proud of it. The Tories were right in principle about this, but they did not put the money in. Now that they have accepted Labour's generous spending plans, they might be able to get better value for money out of them if Labour slips back into its comfortable old assumptions.

This is not, or should not be, an argument about commercialisation. At its heart is the question of what is the most effective driver of change in big organisations. Is it direction from the top? The altruism of staff? Or power in the hands of the users of state services? To me, the answer is obvious. But Blair's place in history may depend on his ability to use the forthcoming manifesto to complete the revolution he and Gordon Brown have started.

j.rentoul@independent.co.uk