Yes, but does it work? On Monday evening Gordon Brown made an extremely important speech seeking to define the frontier between the public and private sectors: where the market should determine how resources should be allocated, and where this should be done by the state.

It is a huge issue because as the Chancellor pointed out, it covers just about every aspect of government activity and controversy: health care, the universities, the PFI, economic reform in Europe, and so on.

It is also a complex issue because it encompasses both the actual provision of a service (should the state provide health care, as in the NHS?); the guarantee of access to that service (as in most healthcare systems on the Continent); and the acceptable frontier of government regulation.

These are questions that different countries – and different generations – answer in different ways. Indeed I think the way the countries change their answers over time is more interesting than the snapshot of any particular place at any particular moment. Policies that to one generation seemed quite normal – to retain food rationing in peacetime or to have a centrally-determined pay freeze – seem quaint, even absurd, to the next one.

In his speech Gordon Brown sought to define where the boundaries should be. To concertina his thoughts, for most consumer goods the market will signal preferences and adjust to demand – so they should be left to get on with it. Where markets are not functioning property, one should look at ways of making them do better, for example by removing barriers to competition.

OK, you may think, but how do you use these principles to justify simultaneously handing over the Tube to PFI, yet keeping the NHS in its present form?

That, unsurprisingly, is what this speech is really about: justifying the policy on the NHS and justifying the PFI. His argument on the first is that you can best guarantee equality of access by having both public provision and public finance. On the PFI, his argument is that it is the duty of the public sector to get the most efficient service and the merit of the PFI is that companies gaining these contracts are responsible for any failures that may ensue.

Finally he argued that this approach was not a centralising one, for there were large numbers of enabling initiatives. He cited "Sure Start for the under-fours, the Children's Fund, IT Learning Centres, Healthy Living Centres, the New Deal for jobs, the New Deal for Communities, as well as the Safer Communities Initiative, Communities Against Drugs, the Futurebuilders programme and gift aid..."

So there. The trouble is that this is not what most people see in their daily lives. Taxation has risen by about three percentage points of GDP and it finds it hard to see value for that. It does not perceive the NHS as a model of efficiency. It does not see the PFI improving services. It worries about having to pay for something that was previously free – university education. It sees rising congestion and poor maintenance on the roads and let's not talk about the railways.

No, let's. The amount of taxpayers' money being put into the railways, £30bn, is roughly the same as 18 months' growth of our economy. In other words, all the additional wealth generated by all of us for more than a year, which would normally be going into increasing living standards and future investment, is being directed at one project. But were all the gains expected by the authorities to happen – a 25 per cent rise or thereabouts in usage – that would be equivalent to about a year's natural growth in road traffic.

So there is a disconnection. On the one hand there is a thoughtful and decent Chancellor of the Exchequer who really does want to improve public services and is throwing huge amounts of taxpayers' money to try and do so. On the other there is the perception that much of this is going into a huge black hole, with money being wasted on services that at best stay the same and at worst, continue to deteriorate.

This is quite alarming because we are reaching a stage where ministers simply are not credible. This is not because they are bad people or bad ministers, or indeed that we are a bad electorate. It is because they are bound to fail.

There are three main reasons why. The first is that we have all become accustomed to better private sector services. For example supermarkets now are much better than they were even 10 years ago. They look better; they are better at fine-tuning their operations to meet our needs. But the job they are doing is much simpler than that of most government agencies. So they can use market targets to measure their achievements rather than the complicated ones that the Treasury is trying to impose on the departments.

The more diverse we become in our needs and aspirations the more complicated the task of meeting those needs. We signal those needs through the market, to which the private sector can respond. The public sector, on the other hand, cannot. So the public sector will always appear to be less nimble and responsive.

The second is that, given demographic changes, the burden on state services will rise in relation to the resources available. The proportion of people of working age, who have to pay the taxation to support the Government, is shrinking relative to those who are of retirement age. So for any given level of taxation the service provided by the public sector will deteriorate. And there is nothing than can be done about this except by getting more people into the workforce, mostly by persuading people to retire later. That does not solve the problem; it merely makes it more manageable.

The third is that as societies get richer they tend to spend more money on four main activities: leisure and entertainment; financial services – including pensions; health care; and education.

The first of those is mostly in the private sector – there is only the rump of nationalised airlines left on the Continent – so that is not an issue for the state. The second is a two-tier system, with a lot of private sector activity but with the state as a fall-back, on pensions at least. And the last two (in Britain at least) are largely in the hands of the state.

So two and a half of the fastest-growing four services we want to buy are financed to a large extent by taxation. So if we want more of them, as we do, we have to pay more tax. But the people who want or need to have these services may not be the same people who have to pay. Result: this natural shift in demand means that taxes have to rise and/or we feel dissatisfied by the services available. It is a recipe for inevitable disappointment.

This is not the fault of the Government, or any government. But it does mean that politicians in every developed country will have to rethink the whole role of the state over the next few years. And the question they should seek to answer is not the theoretical one of the optimal boundary between state and market. Rather it is the practical one: what works?