Yes, but apart from council houses and Europe, what did Thatcher do for us?

Neil and Glenys Kinnock came to visit Robert Harris, the writer, at his Oxfordshire home five months before the 1997 election. Harris noted a touch of "exiled melancholy" about the former Labour leader, as Kinnock declared his confidence that the party was heading for a historic victory without him.

Neil and Glenys Kinnock came to visit Robert Harris, the writer, at his Oxfordshire home five months before the 1997 election. Harris noted a touch of "exiled melancholy" about the former Labour leader, as Kinnock declared his confidence that the party was heading for a historic victory without him.

Peter Mandelson, the other guest, tactfully sought his former boss's opinions about the conduct of the coming campaign. Harris, on the other hand, airily said that the trouble for Labour in the 1980s had been that the Tories had been right - about Europe, unions, privatisation, the economy - everything. According to his biographer Donald Macintyre, "Mandelson froze with horror." He need not have worried. Kinnock nodded. "Absolutely right," he said quietly.

It was an early and rather highly charged version of a New Labour parlour game, based on the Monty Python sketch "What Have the Romans Ever Done for Us?"

This was a game that could be played by two or more Labour modernisers, such as research assistants to MPs or researchers for left-wing think-tanks, in any of the bars of SW1. The youngest player started by saying: "We may be right-wing in traditional Labour terms, but we all hate what Thatcher did to the country."

To which any other player said: "Apart from selling council houses." Everyone then took turns to list the good things she did. And the game ended when one player said: "Yes, but apart from council houses, the Falklands, Europe, the unions ... (the longer the list, the more points scored), we hate everything Thatcher did."

It is not played much any more, for the simple reason that most Labour apparatchiks are too young to remember Margaret Thatcher. But tomorrow is the 25th anniversary of her election and those of us who are old enough to remember 3 May 1979 (it was my first vote in a general election, and I voted for James Callaghan, avuncular decency party) are playing it again. She still matters, which is one measure of her historical importance, because she shaped New Labour. Neil Kinnock's election as leader was the start of New Labour, because it marked a determination by the party to understand the catastrophe that befell it 25 years ago tomorrow. The journey of modernisation that culminated in Blair's election as Prime Minister was essentially one of coming to terms with Thatcher's dominance.

Kinnock's assent to Harris's sweeping capitulation was echoed, in muted form, by Blair himself. He cleverly courted the back-seat driver who, by 1997, had got out of John Major's car altogether. There were things "the 1980s got right", he wrote in The Sun during the election. Such assiduous stroking of the Lady and her supporters produced one of the few sticky moments - which was not very sticky at all, of course - of that campaign. David Dimbleby asked him if he thought the British people had been right to vote Conservative in 1983, the year he was elected to the Commons.

The rational answer was yes. But the more honest answer was no. What many of Blair's critics do not understand is that he is tribal Labour. Indeed, the whole point about the New Labour revolution is that it was carried out by a group of people who had rejected the Social Democratic breakaway and were so loyal to the Labour Party that they were prepared to do almost anything to help it to win.

In the course of that effort, which lasted a very long time, many of the preconceptions of the New Labour core, including Blair, were altered as if by glacial forces. It was a process of re-education driven by the irresistible logic of a first-past-the-post electoral system which rewards parties that control the centre ground. Thatcher was able to avoid that logic herself for so long only because her opponents divided.

But it is simply wrong to see New Labour as a surrender to Thatcherism. Since he has been Prime Minister, Blair has been more confident about distinguishing himself from Thatcher. The one thing for which he is robust in criticising her is social division. This is not simply a matter of tone and party labels, although it was the divisiveness of her political style as much as the widening gap between rich and poor to which he objected. (Curiously, her anti-Europeanism does not really count, because it was a late development.)

The second volume of John Campbell's outstanding biography of her, covering her 11 years in power, provides an overview of her record from a liberal perspective. The one big error of her first term was the reckless pursuit of an economic theory called monetarism. It failed to control inflation, but had the effect of causing mass unemployment. Eventually, that did bring inflation down but the misery it caused and the lasting damage it did to millions of people were unforgivable. The Thatcher legend, that will be retold many times tomorrow, is that this was a necessary scourging. It was a form of psychological shock therapy for a nation dangerously dependent on state socialism.

That never made sense, and was one of the aspects of the Thatcher legacy that New Labour, to its credit, never accepted. Indeed, one of its more effective slogans was that, by pushing up unemployment and long-term sickness, the Conservatives were putting up the "bills of economic failure".

The truth is, then, that Harris and Kinnock went too far, possibly for effect, in conceding that the Tories got "everything" right in the 1980s. Most of the things that they did get right would have been done by James Callaghan, had he been re-elected. If the Falkland Islands had been invaded under a Labour government, it would have had to try to take them back - after all, it was Michael Foot's denunciation of Thatcher that launched the task force.

And Labour, led by Callaghan and Denis Healey, had already turned its back on simplified Keynesianism. Like Thatcher, they would have been driven to privatisation by the need to raise money. Callaghan's could have ended up like the New Zealand Labour government, which did many of the same things - although the limits of the historical counterfactual would be reached before he got there, because the Labour Party, still in the grips of Bennite delusion, would have split.

People may criticise New Labour for its timidity in closing the gap between rich and poor. Robin Cook does. In his memoir he complains: "Blair has halted and reversed the electoral advance of the right, but he has failed to displace their ideological hegemony by building a new centre-left consensus around social cohesion."

I respectfully disagree. By his rhetoric of social inclusion, and by his policies of moderate social democracy, Blair marks a sharp departure from Thatcherism. Twenty-five years after the start of her reign, we can finally say goodbye to her and the damage she did to this country.