The Tredegar Workmen’s Medical Aid Society was a mini self-help medical co-operative established in the late 19th century on the principle that anyone in Tredegar should get free health as they needed. It is always credited as giving Nye Bevan, who worked there and sat on its board, the inspiration for the NHS. But it also inspired the author AJ Cronin, who also worked there, to write his 1937 bestseller The Citadel.

It was this book, more than any other, that persuaded the English middle class that far from socialist, a national health system based on the same co-operative principles of mutuality was what everyone needed. Health was a lottery and those unfortunate to suffer illness should receive free help from, in effect, a vastly upscaled version of what worked in Tredegar.

Cronin’s hero was an idealistic Dr Manson, who works in a fictional self-help hospital in a town in the Welsh valleys, but whose talent propels him to London, where he becomes temporarily seduced by the fleshpots of private practice. But appalled by the ethics of doctors driven only by personal enrichment, and the way the then medical establishment protects them, he risks all to accuse an incompetent surgeon of murder; he vindictively countersues.

The scenes at the resulting hearing are Cronin’s finest writing – and Manson wins. But what is most telling, causing a sensation at the time, is the vivid portrayal of the incompatibility of values – profit-maximising as opposed to co-operatively organised medicine. It wasn’t only the soldiers in 1945 who voted for the NHS – it was their officers who had read The Citadel. It spoke to a lived truth. Values stood behind how health was delivered.

In the wave after wave of attacks on the NHS launched by the right, the issue of values is brushed aside. The monopoly of the NHS must be broken. Forget the principles of the co-operative: in practice, runs the argument, it becomes an inefficient monopoly of production and delivery that must be challenged by private sector competition. The NHS can still be free at the point of use, but the structures that provide health must be the closest simulacrum to a market as possible. The NHS can be reduced to a brand that houses a hyperefficient network of private sector deliverers competing for contracts.

Companies can’t deliver more for less and still make a return on capital: it is the fantasy land of the right

Hence the Andrew Lansley health “reforms” in 2012 that compelled the NHS to outsource delivery. But the same thinking informed the Tories’ engagement across the public sector. Thus justice secretary Chris Grayling’s probation service “reforms” in 2013 and the normally sane Philip Hammond, as defence secretary, agreeing that army recruitment could be contracted out to Capita in 2012. Tory antipathy to the public sector was given free rein, the lush public outsourcing industry was turbo-boosted – and the public sector fragmented.

Last week saw the death knell of all three “reforms” and with it a pillar of thinking that sustains the current Tory party. Thursday’s call by NHS England to repeal section 75 of Lansley’s Health and Social Care Act, which requires every significant contract worth cumulatively more than £600K to be outsourced in any circumstance, replacing them with a best value test, is a watershed. It will empower commissioners to weigh up whether the loss of an integrated, co-operative service by outsourcing offsets any short-term financial gain. A health system is a structure of interconnected moving parts that requires co-ordination, backed by the overriding principle that the alpha and omega of decision making is care, not maximum profit.

The scathing reports, also last week, from the National Audit Office on Grayling’s contracting out of probation and from the public accounts committee on the contracting out of army recruitment were the coup de grace for outsourcing. Probation, and the rehabilitation of offenders, is a vocation requiring patience, resources, dedication and emotional intelligence. If a private company is to enter the lists, it needs to be founded explicitly on those public benefit purposes and accorded necessary resource, otherwise outsourcing is bound to be a fiasco.

Grayling, an incompetent ideologue (see also his squandering of £33m of public money on the Brexit ferry fiasco), just believed the Tory mantras. His proposed community rehabilitation companies turned out to be a front for firms that overclaimed what was possible in absurdly demanding contracts focused only on hitting short-term targets. The result: ballooning reoffending rates. The whole scheme wound up early at a £500m cost to the taxpayer.

Similarly, the idea that young men and women could be persuaded to sign up for a career of service that might lead to death by an outsourcing company using digital platforms is plainly bonkers. You need former soldiers to explain to young people face to face what is involved, via recruitment offices owned by the armed services, or the system collapses into a mercenary relationship. We get paid to hire you; you get paid potentially to die. The deal that inspires is to want to serve your country, not Capita’s recruitment targets. Of course the firm is failing to recruit and the army has been hollowed out. Values matter. What’s more, none of it works as a business model. Companies can’t deliver more for less and still make a return: it is the fantasy land of the right. Outsourcing companies Carillion and Working Links have collapsed and overindebted Interserve is fighting for its life. The whole sector was founded on an impossibilism that is now being reversed.

Capitalism is not the answer to everything. Even on its own terms, markets have to be designed, companies carefully constituted, values asserted and incentives regulated. Privatisation cannot be unleashed, unfettered, on areas from health to army recruitment, which have duty and citizenship at their heart. We pay the taxes necessary to run the public services we want – and if we want diversity of delivery invite organisations with a charitable or public benefit mission to take part. The organisational principles and values of the Tredegar Workmen’s Medical Aid Society were right for then and right for now.

• Will Hutton is an Observer columnist