Deep within a filing cabinet, I keep a copy of the 1998 Marxism Today special that just said "Wrong" on a cover adorned with a picture of Tony Blair. I thought of it while reading David Miliband in the New Statesman of 6 February.

Miliband proclaimed that Labour should "insist that the list of gains far outstripped the mistakes. After all, even David Cameron said on coming to office that Britain was better in 2010 than 1997."

What Miliband gets wrong is the idea that we judge a government's record on some balanced scorecard, rather than overall success or failure. Clement Attlee and Margaret Thatcher succeeded, whereas Harold Wilson, Edward Heath and John Major failed - even if they did some good things. What defines success is a legacy that others have to follow when they don't want to.

Even if we take the most modest definition of the New Labour project - that of humanising neoliberalism - it is a project now in ruins. Unemployment is soaring; the poor are being targeted and humiliated with housing benefit and a hundred other cuts; education and health are being broken up and commercialised. Democracy is weaker and inequality greater, while resistance comes from outside the Labour Party: Avaaz,
38 Degrees and UK Uncut.

Before you ask, "What did you expect, a revolution?" let's go back to Miliband, who was right when he said: "The role of social democrats is to take the values of ethical socialism and put them into practice in a gradual way."

Labour is a party of gradualism and pragmatism. It means slowly and cleverly heading in the right direction, not stupidly and quickly going in the wrong direction. New Labour broke the state in its manic attempt to set markets free and then prop them up when they inevitably failed. In the process, it destroyed its electoral base. The promise of 1997 ran through its fingers. That is why Cameron thought Britain was a better place in 2010 than 1997 - because Labour had failed, not because it had succeeded. Marxism Today has been proved right. Unless and until Labour recognises its failure, it cannot move on.

The core of this failure can be found in the rejection of the politics of a good society and the countervailing forces to make it happen. You can't humanise the market by giving in to it. You humanise it by moral arguments and political strength. That is why Ed Miliband is right to talk about responsible capitalism - but he now has to package it within a compelling vision of a good society and a progressive alliance of forces, parties and organisations that will deliver and sustain it.

Undead Labour

Labour has to reconnect with the centre of British politics but only in order to relocate it on a new, more left-wing common ground. The crisis of capitalism is an opportunity for Labour to demonstrate that it can tax and spend well and regulate the worst excesses of the market effectively while building a new and responsive state.

Labour is in what Antonio Gramsci called an "interregnum". The old is not yet dead; the new is not yet born. The party can be blighted for decades by a generation of politicians who refuse to admit they got it wrong. But failure is acceptable if you learn from it. To do the best for the country, Labour has to say it failed. Then it can move on.

Neal Lawson is chair of Compass