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In the "Londoner's Diary" section of yesterday's Evening Standard (Tuesday 30th June 1998), there is a story with the headline "Maggie's wonk to join New Labour". Apparently, Dr Madsen Pirie, President of the Adam Smith Institute, is about to join the Labour Party.

"I will probably join in a month or so" says the man who credits himself as an architect of the Thatcher Revolution of the 1980s—who cried up, even if he did not personally devise, policies like privatisation, contracting out, the internal market, and the Poll Tax.

"This Government has exceeded all my expectations" he continues gushingly. "It's even better than John Major's in terms of the free market. It's not quite as good as the Thatcher Government—yet—but it really is tremendous."

According to himself, Dr Pirie is one of the cleverest men in the world, with a senior position in MENSA to prove it; and he has never been known to doubt the truth or wisdom of anything he has said. I, on the other hand, have always rather doubted his wisdom and the connection between many of his statements and the truth. On this occasion, the doubts are so plain, they nearly express themselves.

What "free market" is Dr Pirie talking about? What had the Major Government to do with this "free market"? It signed the Maastricht Treaty. It deluged the country in a mass of regulations, making it a criminal offence to sell apples of less than a certain diameter, or to sell any of them if prewrapped by the pound. It increased taxes but still managed to double the national debt in five years—an achievement unique in time of peace. It made a virtual crime of using cash in amounts larger than £3,000, and turned every bank official in the country into a police spy. And that is Dr Pirie's "free market"?

Mr Blair's Government has been excellent so far by Labour Party standards. Even so, it has signed the European Social Chapter, and is bringing in a minimum wage law that will throw at least tens of thousands out of work and give big business yet another structural advantage over small business. And this also is the "free market"?

To be fair, the Adam Smith Institute has never been in the same business as the Libertarian Alliance or the Institute of Economic Affairs. It does not propagate ideas independent of who is in power, and wait for some political interest to take them up. Instead, it sells market solutions to statist problems. A typical Libertarian Alliance pamphlet on privatisation, for example, will explore the abstract justifications for getting government out of a certain area, and will describe the general benefits of doing so. An Adam Smith Institute report, on the other hand, will look at the technical questions of how to privatise—at what the shape of the new private activity ought to be, at what special interests need to be conciliated, and so forth. And the report will often only sketch out the details of a proposal that will be fully explained in direct consultancy with a company or ministry.

Since we now have a Labour Government, and are likely to have one for the next ten years or so, and since this Government is willing and even eager to work within the Thatcher settlement, it is understandable that Dr Pirie should wish to get himself on the best possible terms with the new order of things. Even before the last election, he was courting New Labour—publishing reports by Stephen Pollard and Frank Field, for example. His joining the Labour Party is neither surprising nor reprehensible.

My objection is not to what Dr Pirie is doing at the moment or what he is about to do. Rather, it is to the whole strategy of the Adam Smith Institute as developed since the early 1980s. It may be that Dr Pirie believes in limited government under the rule of law. Certainly, he has employed libertarians—I think of Nick Elliott. He has also commissioned several reports from me, and even published one of them under my own name—and paid good money for them. But I have to doubt whether his overall effect on British politics has been to do other than help entrench statism far more securely than it ever was in the past.

The old statism was at least mitigated by incompetence. The people in charge of it were paid too little to feel really important; and much of their energy was absorbed in disputes with stupid or malevolent union leaders. They presided over a system that was never very strong, and that failed to weather the storms of the 1970s.

As reconstructed in the 1980s—partly by the Adam Smith Institute —the new statism is different. It looks like private enterprise. It makes a profit. Those in charge of it are paid vast salaries, and smugly believe they are worth every penny.

Undoubtedly, there are benefits. We have the most open and deregulated telephone network in the world. The other utilities give better value for money than they did. The internal market in the National Health Service is beginning to cap the otherwise limitless rise in welfare budgets. Applied to policing, the same policies may be about to do the same for law enforcement.

But for all its external appearance, the reality is statism. And because it makes a profit, it is more stable than the old. It is also more pervasive. Look at these privatised companies, with their boards full of retired politicians, their cosy relationships with the regulators, their quick and easy ways to get whatever privileges they want. Just look at the favours they do in return. The case of John Gorman, reported in Private Eye—though hardly anywhere else —is a fine illustration of the network of personal ties that link these companies with the state sector they are supposed to have left. There are other stories—not so well reported—of favours traded. I hear of road protestors who find themselves with £500 Telecom bills, and whose homes are invaded at three in the morning by British Gas inspectors—using their powers of entry without warrant to search for "leaks".

As with National Socialism in Germany, the new statism is leading to the abolition of the distinction between public and private. Security companies, for example, are being awarded contracts to ferry defendants between prison and court, and in some cases to build and operate prisons. This has been sold to us on the—perfectly correct —grounds that it ensures better value for money. But it also involves grants of state powers of coercion to private organisations. All over the country, private companies are being given powers of surveillance and control greater than the Police used to possess.

I have heard it argued that this is nothing to fear, because these companies will be more interested in making profits than in bothering the rest of us. I disagree. In legal theory, joint stock limited liability companies may exist solely to bring dividends to their shareholders. In reality, they are most often run to serve the personal interests of the directors, for whom higher profits are less important than being accepted into the establishment—and this can easily involve taking on and discharging coercive powers as enthusiastically as the politicians could ever want.

In some cases, privatisation is even raising up interests hostile to core elements of the libertarian agenda. Look at prison privatisation. When the Adam Smith Institute published Nick Elliott's Making Prisons Work in 1988, I gave it an enthusiastic review. Letting private companies build prisons, I agreed, would lead to big savings in public money. There would be the obvious savings in building and maintenance and staff costs. Then there would be the better treatment of the prisoners. Instead of stuck in cells, brought out for a few hours a day to pick oakum or stitch mailbags, they would be put to useful work. In some private American prisons, they were being trained to take airline reservations by telephone; and this was giving them an actual skill that would be in demand on their release. Going straight would in future, I believed, be much easier than in the past, when prisoners were thrown out into the world with no marketable skills and no one with an interest in using those skills. With less reoffending, there would be less need for prisons, and lower insurance premiums for householders, and lower policing bills. The only losers would be a few thousand screws, many of whom were notorious for their idleness and sadism.

All this I still accept. But I now realise that there are other considerations. In a free society—one without "victimless" crimes—who would be the most likely prisoners? The answer is the incompetent and the incorrigible. They would be those absolutely unwilling or incapable to earn an honest living. These are not the people best suited to taking airline reservations or doing repetitive bulk wordprocessing jobs. Take out the thousands of underclass youths, steered into crime by the corrupting effects of welfare and by the regulations that prevent the humbler kinds of enterprise. In particular, take out the drug dealers —for the most part intelligent entrepreneurs, attracted into the market by the high rewards that flow from prohibition. Take these out, and the prison companies would be far less profitable.

Therefore another interest hostile to drug legalisation. The coalition already opposed is strong enough—all those bureaucrats and policemen—and now secret service agents—employed to fight the "War on Drugs", all those bankers grown rich on illegally laundering the proceeds, all those politicians bought up by the banks to spray out lies whenever someone suggests legalisation. Add the private prison companies, and we have an even stronger coalition.

This is not to deny that prisons or other state activities should ever be privatised. I believe strongly that they should. My ideal society in one in which the Government takes and spends less than five per cent of the national income, and does little beside running the higher civil courts, and the criminal courts, and providing a minimal national defence. The problem is the order in which the reductions in activity ought to be made. They ought to be made in a manner that allows each to be naturally followed by another. As proposed by the Adam Smith Institute, they are being made in a manner that entrenches the existing system. The result has not been to stop our establishment from doing certain things, but to ensure that it does them well.

Notice how it devised the Poll Tax—a scheme that might have cut down on local government waste, but only at the expense of tagging the whole adult population. Notice its endorsement of video cameras in public places—another scheme that might save money only at the expense of our liberties. The rhetoric is liberal: the reality is that we are being given progressively more of the government we pay for. The Adam Smith Institute has enabled the transformation of social democracy from a system that was always on the verge of collapse into one that is both stable and moderately prosperous—one that yields enough to enrich the farmers and to keep the cattle well-fed.

There is no sinister purpose behind this. The Adam Smith Institute is nothing unique. It is just the most prominent and successful gathering place for a strand of degraded liberalism that is very strong within our movement as a whole. Its view of events is a kind of economic determinism that any Old Marxist would find agreeable. The only thing that matters to such liberals is the economic "base". All else is merely "superstructure. Change the base, they argue—let there be enough privatisation and deregulation and tax cutting—and nothing else matters to the final outcome.

As said, even by this narrow criterion, the judgement must be hostile. There has been no diminution in the economic power of the State, only a change in its mode of operation. But regardless of the facts, this view is as crude a mistake as can be imagined. Markets are a necessary condition for the existence of a free society—but they are not sufficient condition. Political despotism is perfectly compatible with the existence of a reasonably market economy. The latter can mitigate the worst effects of the former. Unlike under socialism, disobedience need not be attended by starvation. But looking at the Hellenistic monarchies of antiquity, or the Italian city states of the late Renaissance, or Chile under General Pinochet, or Syria under President Assad, the ability to buy and sell without restraint has never magically created due process in criminal trials, or allowed state actions to be criticised in public without risk.

Yes, I have written for the Adam Smith Institute. I hold many of its people in high regard. I have enjoyed many of its Christmas gatherings—though no more after this appears on the Internet, I suspect! But it has done nothing on the whole to promote liberty in the past 21 years. Every one of the panegyrics on Hayek that I find in its Catalogue is more than balanced by advocacies of the kind of market reform that simply strengthens the hand of the statist enemy. Dr Pirie may pride himself on the number of solutions he has provided. In truth, he is part of the problem.

I wish him joy personally of his conversion to New Labour. It is, after all, only a shift of position rather then of ground. Even so, if I had any choice of Labour Party luminaries, I would much prefer to have the old ones back. The wearers of donkey jackets and CND badges made more threatening noises, but were considerably less dangerous to everything that I love about this country.