In opposition, new Labour emphasised the need to reinvigorate the relationship between state and citizen. In practice, it has largely accepted the redundancy of political action in favour of economic action. It has convinced itself that in an individualised and consumerist age, the state must remodel citizenship according to market mechanisms. What the citizen should get from the state, the government has decided, is the sleek delivery of the private sector. But in trying to consumerise politics, it has pulled the rug from under those who still want to act as citizens and to participate in remaking their political community.

While constitutional reform is a series of unconnected dots, which themselves bear no relation to public sector reform, consumerisation runs as a strong thread through new Labour's policies. Blairism has not produced a democratic vision of a reformed British state, based on a clearer idea of the public realm.

New Labour, many of us believed, came into being to change the paternalism and centralism of old Labour and put in place a politics based on empowerment, democracy and pluralism, with devolution, a written constitution, a fully reformed House of Lords and, crucially, electoral reform. It is now clear that Blairism will do nothing of the sort. Instead, it seems committed to a unique blend of old political statism and new marketisation.

Unlike the Thatcherites, Blairites have good intentions: they are genuinely concerned about fairness and inclusiveness. But they seem unwilling to believe in the intrinsic value of the public domain. Rather, they calculate that there is an economic return on "good citizenship". Citizenship is thus relegated to a minor (albeit important) supportive role of socialisation for employment. The "good citizen" is nothing more than a good worker and good consumer. The public sector will be "saved" by the techniques, values and resources of the private sector allied to a strong central state. Commercialised managerialism, competition in the form of quasi-markets, and private finance initiatives will form the bedrock of modernisation. In reconnecting people to the public sector, new Labour gives them the right of exit from the services it offers, rather than the right to a voice in how they operate and develop. Instead of encouraging engagement, it emphasises the market option of disengagement.

True, new Labour has experimented with certain forms of participation and devolved governance - the New Deal for Communities is one example. But such initiatives are episodic and are often justified in purely instrumental terms that give no indication that Labour believes in active citizenship as a part of a better society. More importantly, they clash fundamentally with the dominant themes of markets and central control.

Because of its acquiescence to the competitive forces of globalisation, Blairism has enslaved itself to a form of economic determinism that would put the most orthodox Marxist to shame. It has, in effect, equated economic efficiency with social justice. The state's old role of providing collective insurance against poverty or misfortune has been usurped by the market. As long as people can find work, new Labour reasons, all will be well; they can then buy their own protection against old age and short periods of unemployment. The role of the state is therefore relegated from ensuring a basic quality of life to ensuring employability. Thus the historic goal of social democracy, to make markets the servants of people, has been inverted. And if markets equate with efficiency, the inevitable implication is that non-market spheres equate with inefficiency. While the market is promoted, the public domain is castigated as out of date.

The most enduring legacies of left-of-centre governments are the collective institutions they bequeath. From the NHS to the Open University, Labour at its best created non-market spaces where the values of liberty, equality and community could thrive. But the logic of maximising efficiency in a globally competitive market is that you strip out mediating institutions and close the gap between producers and consumers. That way, you get the optimal market outcomes because consumers can judge the proper value of everything without distortions. It is therefore no accident that local gov- ernment is marginalised, that trade unions are seen only as nuisance-value, that the Labour Party itself is allowed to wither on the vine. Nor is it an accident that new (or revived) collective institutions, such as mutual societies (surely the embodiment of any Third Way worth its name), have not been systematically encouraged. Blairism tends to see debate, discussion, voting, compromising, learning and failing - the very stuff of politics and democracy - as messy processes that delay decisions and create uncertainty, doubt and confusion.

Success in a global economy, Blairites think, cannot wait for such niceties. The market, by contrast, is simple and ruthless. Even where the public domain triumphs over the market on the grounds of efficiency - most notably on the railways - the Blairites see it as an embarrassment, not as a chance to champion a new organising principle for centre-left government.

Blairites, in other words, suffer from agoraphobia. They fear open spaces in the original Greek meaning of the word, the agora being the place where citizens went to debate and decide on their collective futures. Theirs is a political agoraphobia - a fear of open, public spaces in which non-market values might just prevail, where collective power might take precedence over individualised purchasing power.

Markets do one thing brilliantly well: they encourage innovation in pursuit of profit. Social democrats do not deny that markets empower us; they try to harness that energy for the benefit of society as a whole. But they also recognise that capitalism is not a moral or humane force - it takes no prisoners. Tradition, community, establishment and vested interest are all swept away in the search for profit. Nothing is beyond monetary value. All that is solid does indeed melt into air. Anything that has been decommodified will, if left unprotected, be remorselessly recommodified. For markets, the public domain represents a vacuum of untapped profitable potential.

The danger is that we end up with a monoculture. More market means less society; more consumerism, less citizenship; more commercialisation, less public domain; and more privatisation, less democracy. If the ambition of the right was to unleash without fetter the forces of the market, and the forlorn hope of socialists was to replace capitalism completely with common ownership, the historic task of social democrats was to find the right balance between market creativity and the protection of the public domain. The pendulum inevitably swings between the two. Social democrats have to be vigilant about the encroachment and contamination of the public domain by the market. Yet, under Blairism, they have actively paved the way for further marketisation. We are told that if public sector services are to be good enough to win popular support, they need competition as a spur. So Blairism ends up following the GI policy for dealing with the Vietcong: "Burn the village to save the village."

The struggle between markets and the public domain is ultimately a struggle for our souls, for our vision of what constitutes the "good life". As Zuboff and Maxmin argue in their influential book The Support Economy (2003): "In an advanced industrial society, consumption is a necessity, not a luxury. It is what people must do to survive . . . Through the consumption of experience - travel, culture, college - people both achieve and express individual self-determination." To dominate society and maximise profitability the market must become the sole preserve of our dreams for a "better" life, the only horizon, the only common sense.

So the soil in which active citizenship can flourish is thin and getting thinner. It is because of this onslaught of the market, not just into the public domain but also into our aspirations for the good life, that social democrats should act in a determined and strategic way. Just as Thatcherism created ideas and institutions that encouraged individualistic and commercialised behaviour, so the democratic left should respond with equal ambition in the cause of citizenship. If Thatcherism was about the creation of markets, the left should be equally ruthless in the creation of citizens.

Citizenship cannot be taught, only learned. Just as we learn the art of consumption in the shopping centre, by trial and error, so we have to learn citizenship within institutions that allow non-market values to flourish. And citizenship cannot prosper in the shadow of an overbearing and centralised state. Centralism and deference worked for a while - but times have changed. In a more diverse and self-assertive world, social democracy must build itself anew. Aspects of Blairism have recently been converted to the language of localism, but the creation of a more powerful and intrusive central state carries on. The politics of pluralism dictates the recognition of multiple and legitimate centres of power. Active citizens take decisions and wield power on a regular basis to shape their world - they are not just consulted when decision-makers feel weak or want to confirm decisions already made.

The ingredients of an active citizenship lie all around us: in proposals for proportional representation, for truly empowered localism, for new mutualism, for workplace and pension-fund democracy, for new partnerships in providing public services, for a citizen's income (where everybody is entitled to a minimum "wage" from the state). What is required is some defiance of untrammelled global capitalism and the will to meld these ingredients together.

This an edited extract from an article in the latest issue of the Labour quarterly journal Renewal (www.renewal.org.uk), which Neal Lawson and Daniel Leighton help edit