Because his real audience is the television viewer and the tabloid reader, Tony Blair makes few, if any, concessions to the traditional discourse of the labour movement. But I believe that his Third Way can be seen as a modern extension of the "libertarian socialist" tradition. It is a tradition that goes back to the origins of socialism but, to the left's great historic disadvantage, it lost out to something very different.

This was the statist, or top-down, vision of socialism; it was shared by Marxist-Leninists at the revolutionary end of the spectrum and social democrats at the reformist end. The state, in this view, would bring about change - dictatorially, according to the revolutionaries; bureaucratically, according to the reformists. Such centralism left little or no scope for individual empowerment and local control; on the contrary, the state socialists saw these as obstacles to the grand design of a better society and its noble ideal of equality.

Libertarian socialism, by contrast, emphasises decentralisation, democracy and popular sovereignty and it refuses to accept that collectivism means subjugating individual liberty. Its pedigree goes back to the English civil war and to the Levellers, the Agitators and the Diggers, the radical activists of that era, who argued for the abolition of the House of Lords, the democratic reform of the judiciary and the army, workplace democracy and common ownership. Such ideas were later taken up by the early trade unions, the co-operatives and the friendly societies - examples of working people combining collectively from the bottom upwards. In the period just before the first world war, syndicalist ideas, emphasising direct action and industrial democracy, were widespread in the trade union movement.

In 1917 G D H Cole observed that the greatest evil in society was not poverty, but slavery. In other words, powerlessness is the overriding issue for socialism. Neither equality nor freedom can be achieved without empowerment. Paternal government, however well-intentioned, is insufficient because it breeds dependence.

Yet from the first world war onwards, the movement was towards state control and state ownership. Even the municipal socialism of Bernard Shaw and the young Sidney Webb became suspect. As far as both the Labour and Conservative parties were concerned, local authorities, instead of being autonomous agencies for "bottom-up" democracy, were conduits through which the state dispensed services efficiently. By 1942, the political scientist Joseph Schumpeter could write: "What may be termed centralist socialism seems to me to hold the field so clearly that it would be a waste of space to consider other forms."

Not until the 1960s did the "new left" revive libertarian socialist ideas. At the same time, amid growing British trade union militancy, and especially shop steward power, we also saw a revival of interest in workers' control. Feminism offered a further challenge to male-dominated centralised control. And in the 1970s municipal socialism came back, absorbing many of the "extra- parliamentary activists" who were children of the new left.

The Labour left, however, lost its way in the 1980s and a recovery of the broader libertarian socialist tradition is now imperative. Today's libertarian socialists believe that, without decentralisation of power, it becomes impossible to achieve either individual liberty or greater equality. If we are to have economic justice and a broadly egalitarian society, each citizen must be empowered - at work, in the home, in the neighbourhood and as a consumer. The British system offers only a limited form of democracy; the libertarian socialist wants a "participatory democracy" in which there is the greatest possible involvement of citizens. Similarly, in the Third Way devolution of power stems from a pluralist conception of democracy. Unless democratic power is dispersed, socialism cannot take root.

Libertarian socialists, in contrast to classical liberals, want not just participatory government but also a participatory economy and a participatory society. In this respect, the focus on the state was actually counterproductive. When you have centralised public provision (whether under capitalism or communism), people's obligations to the state increase and they lose their obligations to their neighbours. They become clients of the state, rather than autonomous citizens, passive recipients rather than active co-operators. That is why we have run-down, untidy council estates, with urine-ridden lifts, graffiti and disputatious neighbours.

High-quality public provision remains a priority for socialism. But it should complement rather than replace individual autonomy. That is why the government wants a welfare culture that is based not on dependency but on empowerment, and that is the thinking behind the New Deal and the working families tax credit.

But power can only be spread downwards if we have a fair distribution of opportunities, resources, wealth and income. This is where socialism becomes the essential counterpart to a libertarianism that could otherwise be right-wing. It means trying to spread resources more evenly between prosperous and poor regions and areas, between the dominant and subordinate classes, between rich and poor, men and women, white and black, able and disabled. Hence the case for minimum levels of public provision in housing, transport, social services, daycare, home helps, and so on. Hence, too, the case for a minimum wage - a matter partly for the law, but partly also for enforcement through trade union pressure. That is another example of the Third Way: empowerment from below through support for trade unionism.

Again, the Third Way recognises that capitalism too easily allows small groups to control or even rig markets. Instead of getting the goods and services they want, people have the products that suit the interests of private capital thrust upon them, as happened with private pensions under the Tories. If choice and aspiration are to be real for the many, not just for the privileged few, we need active government to intervene and curb market excess. But the old left syllogism that markets equal capitalism and the absence of markets equals socialism is utterly simplistic. Where markets offer the best way, they should operate. That is why a Third Way Labour government works in partnership with business to invest in the skills and modern infrastructure that market forces alone cannot provide.

That is also why Labour is legislating for fairness and rights at work. But partnership needs to go further by encouraging industrial democracy. This is one of the keys to the high productivity, investment and wealth needed for economic success, because it helps generate the team-working and commitment that are so important in complex modern production systems.

In 1952 Aneurin Bevan argued: "Industrial democracy is the counterpart of political freedom. Liberty and responsibility must march together. They must be joined together in the workshop as in the legislative assembly." At that time, such criticism of nationalisation was not popular on the left. But Bevan was simply echoing the call, made 40 years earlier by the South Wales miners, for industrial democracy under public ownership. Today, the only successful mine under workers' self-management, Tower Colliery, is in the South Wales coalfield.

That is one example of what I call the Welsh Third Way. In the 1984-85 miners' strike, the South Wales valleys maintained the strongest cohesion, self-discipline and support of any across Britain. The whole of Wales helped the mining communities create an alternative welfare state, a resistance movement which was not defending the past but, as Raymond Williams suggested, trying to build a new, more humane social order. There is, too, a strong commitment to community enterprise in the old mining valleys - for example, Amman Valley Enterprise and the DOVE workshop in the Dulais Valley, both of which sprang from the women's support networks around the strike. Antur Teifi, which promotes local enterprise in rural west Wales, is one of many examples of how the Welsh "social economy" has revived the spirit of Robert Owen's co-operative movement. And the partnership principle works much better in Wales than in England, where the culture of community and co-operation has traditionally been weaker. That is why inward investors have found Wales so attractive.

This is the context for the National Assembly. Devolution is not - or rather must not be - a nationalistic imperative. I would otherwise have no interest in it. As a Pretoria boy turned Neath man, how could I be a "nationalist"? The doctrine of nationalism is anathema to a socialist and is, in any case, redundant in the modern age. The very notion of separatism is incomprehensible in an era of global economic forces and global regional markets such as Europe. Nationalism (as opposed to pride in the common culture of nationhood) is inherently narrow, parochial and backward-looking.

So the ideological imperative for devolution is not nationalism but the notion of a new common citizenship. Libertarian socialists want Wales to be a model "participatory democracy" that engages all its citizens. The strong Labour culture in Wales was founded in close communities and a style of politics that interacted comfortably with the local rugby club, the pensioners' club or the Labour club. All these remain relatively strong, but they are under challenge from more modern, individualistic lifestyles, the fragmentation of community life and social stress. People do not go down to the welfare hall for bingo as much as they did. Saturday night in the rugby club lounge is no longer the weekly meeting place for the whole village. So Labour must change, linking more effectively into other groups in civic society, such as school governors, and making more efforts to reach individuals through newsletters and house visits.

Labour will only continue to prosper in Wales if it charts a distinctive Welsh Third Way. That means adopting a positive libertarian socialist platform that works in partnership with interest groups such as business, the trade unions, the voluntary sector and environmental organisations; that enhances rather than diminishes the role of local government and community councils; that is tolerant rather than tribal; and has a vision of a modern, self- confident Wales with a dynamic, high-quality economy and a culture that is proud of its past but not trapped in it.

If we can move in this direction, then not only will Wales succeed, but we could also help reinvigorate the Third Way and give it a fresh impetus and greater popular legitimacy across Britain.

The writer is under-secretary of state for Wales. This article is based on "A Welsh Third Way?", a Tribune pamphlet published next week, £2.50 (inc p&p) from Tribune Publications, 308 Gray's Inn Road, London WC1X 8DY