Anthony Giddens is renowned for having furnished new Labour with the 'third way' but, asks Harriet Swain, will he leave a similar imprint on the London School of Economics when he retires next year?

When Anthony Giddens retires as director of the London School of Economics next year, he will leave something of a "new LSE". In the five years of his directorship, an extensive building programme has helped to push the gross value of the school's land and buildings from about ?80 million to ?143 million. The number of students has gone up by 1,000 to 7,644, with plans to recruit nearly 1,000 more - particularly lucrative postgraduates - by 2010. The percentage of overseas students has risen from 44 per cent to 47 per cent, with the rest being from the European Union and the UK. This allows the LSE to rely on funding council grants for a mere 18 per cent of its income. When Giddens arrived in January 1997, it was more than 26 per cent.

Since he is an architect of what some regard as one of the most influential reforming political philosophies of recent years, Giddens's ability to prompt change is to be expected. But how far do the innovations he has introduced at the LSE comply with this philosophy? Under Giddens, has the LSE begun to embody any of the principles of his notorious "third way"?

This question has no easy answer. For a start, few people agree on what the third way actually is. Indeed, this is one of the main criticisms levelled at it. Former deputy leader of the Labour Party Lord Hattersley, a strident critic of the notion, has compared it with a "lingerie store - customers mix and match to meet their personal taste". Former LSE director Ralf Dahrendorf has described it as a politics that speaks of the need for hard choices but then avoids them by trying to please everybody. Historian David Starkey, who used to be based at the LSE, has described it as looking like mere expediency - "what matters is what works".

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Giddens is dismissive of his detractors, arguing that the value of the third-way agenda is demonstrated by how widely it has been picked up by centre-left governments across the world. "No feasible alternative to the third way exists," he wrote earlier this year, "at least for now."

His own definitions range from the simple "the new social democracy", through a set of values - equality, protection of the vulnerable, freedom as autonomy, no rights without responsibilities, no authority without democracy, cosmopolitan pluralism, philosophic conservatism - to a more detailed combination of features. These, he has described as: reforms to make government more responsive and accountable; a pragmatic view of privatisation; maintenance of fiscal discipline and a balanced budget; sound macroeconomic governance geared to low inflation and steady economic growth; active labour-market policies coupled with job-creation strategies; environmentally sound policies that are positive for economic growth; and an internationalist outlook, given concrete form by support for the EU and its enlargement.

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Many of these relate specifically to governments - but not all. And aspects such as the pragmatic view of privatisation, internationalist outlook, environmentally sound policies, not to mention, cosmopolitan pluralism and philosophic conservatism relate closely to the direction of developments at the LSE.

Take the school's subsidiary Enterprise LSE. This has been trading since 1993, but in the past five years has stepped up the pace. In early 1998, when chief executive Peter Hirst arrived, revenues were about ?500,000, with about ?100,000 going to the school as profit. This year, they are forecast to be nearly ?4 million, with about ?500,000 going to the school. These revenues come through consultancies, software packages, market analysis and executive education, all provided by about one-third of the LSE's 350 academics, who have collectively boosted their pay packets this year by more than ?2.5 million.

ELSE also helps with business start-ups and developments by individual academics, as well as other business initiatives. For example, it is in the process of setting up a recruitment service for LSE students and alumni, whereby employers pay a proportion of a starting salary to ELSE after a successful placement. An example of a third-way job-creation strategy, perhaps?

"In the past three or four years, we have shown that there is not a conflict of interest between being a top-quality research institution and being aware of and able to respond to the needs of end-users in either business or government," Hirst says. While he hesitates to describe this as third way - "because that is strictly in the political arena" - he concedes that the label fits "in the sense of being at the forefront of rethinking some of the old paradigms".

LSE academics are careful to state that the LSE cannot be an institution of the third way. "It would be difficult for the LSE to say we ascribe to third-way values because that implicitly implies that we don't subscribe to other kinds of values or value systems," says Julian Le Grand, professor of social policy. "The thing about a university is it should not be acting to a particular credo or system." But he does say that it has "some of the characteristics of the new world in which we live, such as entrepreneurialism and globalisation". Even the "environmentally sound policies" mentioned in Giddens's definition of the third way could be said to have been picked up in the emphasis in new LSE building work on creating a pedestrianised campus. So are the new multidisciplinary centres, such as the Centre for Analysis of Risk and Regulation, Media@lse, the Centre for the Study of Global Governance, perhaps examples of "cosmopolitan pluralism"?

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Howard Glennerster, professor of social administration, says: "You could put together a programme of work and priorities that to some extent reflects the third way - but then the school is much bigger than a set of principles of that sort, and there are a lot of people in the school who would fundamentally disagree with them. The school has been forced to become what is predominantly a privately funded institution because of actions by the last government."

Certainly, the LSE is not the only institution to have a global and environmental outlook or "a pragmatic view of privatisation" - from private finance initiative projects at the University of East Anglia and Falmouth College of Arts, to health consultancies provided by university medical schools. Michael Yuille, chair of the British University Finance Directors Group, says that most universities have subsidiary companies of one sort or another. The fact that the LSE has gone further down this route than many others is, suggests Glennerster, more because its international standing and research links have allowed it to do so than because of its management philosophy. "As a social policy institution, it has to interact with the City and big institutions of all sorts," he says. "Whether you call that philosophy or need is a nit-picking distinction."

Where, for whatever reason, it has followed third-way principles, has the LSE found them useful? Le Grand is upbeat. It has managed to combine research excellence and entrepreneurialism in a way that is perhaps unique, he says. Few would deny that the profits ploughed into the school from ELSE or summer schools, or the ?45 million raised so far in the Campaign for the LSE, which aims to raise ?100 million by July 2005, will be useful. And the campus certainly looks better for its revamp, helped considerably by the Lionel Robbins library building designed by Sir Norman Foster.

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Yet this extensive building programme has been funded through public money and bank loans rather than through private investment. In fact, the school is still seeking about ?5 million from "naming opportunities" - sponsorship from private individuals - to help pay for the building. The school's latest accounts predicted general reserve deficits, although these are expected to improve through restructuring student-fee income.

Furthermore, Hirst admits that the number of business opportunities the school generates cannot increase indefinitely. "It is something we are alert to - how big this could grow before you have problems balancing workloads with academic mainstream activities," he says. It is considered acceptable for academics to devote about a day a week to consultancy and other such activities, while ELSE helps those working on time-consuming projects to buy extra time from the institution. But they must also meet the needs not only of their research commitments but of an increasingly demanding student body that is expanding all the time.

This is where the "pragmatic view of privatisation" has really taken off in a very new Labour way - student fees. Managers of the school have identified these as essential for generating annual surpluses large enough to improve the campus and recruit top staff. They are exploring the possibility of eventually pushing up student numbers to about 10,000, concentrating on postgraduates, with a new premium fee band about 30 per cent higher than the existing highest band. But again, this policy is not sustainable indefinitely, and there have already been complaints that concentrating recruitment on overseas and postgraduate students is keeping out well-qualified British students who cannot afford the fees.

Giddens's alignment with a particular political credo - and especially with a political party - was questioned by some within the school, although most recognised the benefits of the resulting publicity. And one LSE academic suggests that where Giddens may have proved most successful, and indeed most "new Labour", is not in introducing a radically "new LSE" but in tweaking the old one into the direction he favours without undermining its innate conservatism.

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Meanwhile, the third way's predominance in political circles seems to have faded quietly. Giddens bemoaned this himself earlier in the year when he warned the government against returning to the "tax-and-spend" policy of previous Labour governments. Whoever takes over at the school - The Sunday Times tipped Kenneth Clarke as a possible contender - is likely to keep their distance from the label. Whether this will mean anything in terms of concrete change at the institution is another question.