William and his troublesome aunt

Perhaps only PG Wodehouse could do justice to the apprehension with which William Hague and his fiancee Ffion Jenkins must be awaiting Margaret Thatcher's visit to the Conservative conference this week. She will descend on Blackpool like a disapproving great aunt, performing an irksome but necessary duty and requiring a great fuss to be made of her in the process. Will she dare to mention the young people's sleeping arrangements which have so horrified her?

Unfortunately, the great Baroness's visit is the least of Mr Hague's troubles. The greatest is the abject failure of large, shell-shocked sections of the Conservative Party to understand the reasons for the defeat on 1 May.

The first evidence of this failure is the obsession with organisation and image as the means of recovery. It is essential for Mr Hague to democratise the party organisation. Both the other main parties have shown conclusively that the chance to exercise some modest influence over who runs the party is the minimum potential recruits expect in return for the subscriptions. The bitterer the argument he has in taking on the vested interests on the 1922 committee and elsewhere in the party who oppose this, the better it will be for his image in the country. Secondly, the Centre for Policy Studies makes a telling point in their new pamphlet about the way in which Tory culture, as well as ideology, has propelled a "missing generation" into the arms of the Labour Party. When the pamphlet points out that almost the only place you can meet someone wearing a tweed jacket and tie is a local Conservative association, or that for many Tories "Kenneth Clarke's love of jazz music gives him the allure of a dangerous modernist", it is on to something important that needs more than a baseball cap to put right.

But those Tories who say that they lost the general election merely because they were divided are in danger of committing them to a different version of the huge error made by the Labour left after 1983. Of course divisions inflicted devastating damage on Labour in 1983, as on the Tories in 1997. But which was the bigger catastrophe? That Jim Callaghan dared to attack Labour's unilateralist defence policy? Or that the party fought the election with a leader, and on a platform and record, unacceptable to the British electorate in the first place?

Where the parallel with Labour in the 1980s breaks down, however, is that the one policy which Hague has so far ditched in response to the defeat is one which was unquestionably right, and shown to be right by the election result. It is one thing to rule out European monetary union entry in the first wave, as Gordon Brown soon will. It is quite another to close off at least for a decade the option of joining in the national interest if it succeeds. Robin Cook understands this. So do some of the brighter, not conventionally pro-European MPs. So even, it appears, does the Shadow Chancellor Peter Lilley, who has been dropping hints about the need for pragmatism. Last week the Shadow Cabinet nevertheless endorsed the policy.

But EMU is illustrative of a much bigger problem: the failure to recognise the scale of the huge shift on 1 May. Even the shadow minister David Willetts, who has thought more about this than many of his colleagues, may be underestimating the speed at which Blair has travelled. Debating the proposition "Is Conservatism Dead?" with the philosopher John Gray drew several potential lines between New Labour and the Tories. Take just two: Willetts believes Labour's education policy is bewitched by its respect for local education authorities. Yet there is a growing debate within the government over precisely what their role should be. He condemns Labour's alleged fixation with training and says Tories believe that a low paid job, perhaps any job, is a much better rung on the ladder to another. Yet Gordon Brown says much the same.

Let's close our eyes for a moment and fantasise about a couple of ways in which the Tories could compete as a reforming party with Blairite Labour. It might take up George Walden's idea of luring some of the best private schools back into the state sector; not having hang-ups about a measure of academic selection, it might at last begin a belated assault on the British class system. On the constitution it might promote the rebuilding of local government, giving it new freedoms and responsibilities. It would provide a more Conservative and more popular solution to the English question left by Scottish and Welsh devolution than regional assemblies or the English Parliament now being talked about on the Tory right. It would certainly bring disillusioned ex-Tory councillors back into active membership. Then it might go further. As Disraeli did in the 1867 Reform Act (overcoming in the process the deeply reactionary Lord Cranborne of his day, as William Hague would have to overcome the Lord Cranborne of his) Hague might outflank Blair, this time on reform of the Lords. He would press for the early replacement of an appointed Lords with an elected second chamber and come up with a means of doing it before the government.

Fantasy indeed. The problem for now is not overtaking Blair but catching up. Modernisation has to do with a lot more than membership or organisation or campaigning skills. What the Tories need most of all to comprehend is the failures as well as the successes of their 18 years, including the Thatcher years, just as Blair realised their successes as well as their failures. When Ian Gilmour returns after nearly 15 years of exile from the Tory citadel and makes a powerful appeal for the party to start the long march back to one nation politics as it did after 1945, he deserves to be listened to with respect. The nationalistic right has nowhere else to go than the Tory party; the middle ground, lost to Blair on 1 May, is where elections, are won and lost. Moreover, Blair's victory has enabled him to press ahead with modernising reforms from which Thatcher shrunk, whether in welfare, or the law, or the delivery of public services, because he's trusted, as she never was, to have an idealistic purpose bigger than saving money or shrinking the state. Perhaps the most symbolic indication that Hague could give of grasping this is to lift the ludicrous Tory taboo on saying that crime has something to do with unemployment and social breakdown.

Hague was the second best choice out of the half dozen or so available candidates for the leadership. But he has assets: he is clever. He has at his disposal one of the brightest intake of new MPs for a long time - currently being treated as uppity fourth formers by the Tory whips' office. And perhaps he can, on the Nixon-recognising-Red-China principle, do from the right what Kenneth Clarke might possibly have been unable to do from the left without splitting his party in two: break, finally and publicly, with what Alan Clark called last weekend the "merciless economic Darwinism" of Margaret Thatcher. Here's hoping.