As the new Labour project comes to a shuddering halt, attempts by the Blairites to revive it throw into stark relief two contrasting possible directions for the the Labour Party. Most recently and notably, those who want to salvage the wreckage of new Labour have called on the party to "liberalise or die". But what type of liberty do they mean? The answer the party gives will determine whether it has a progressive future or not.
There are two types of liberals. The first are those, like the Blairites, who are essentially still in the neo-liberal box. We can call them "neo-Labour". The others are those who want a more "social" liberalism. Both types start from the same question: how are people to take control of their lives in the 21st century? But their responses are very different.
Labour's neo-liberals have emerged out of the decade-long process of triangulation that has taken much of the party's programme into centre-right territory. Their target is the centralised and bureaucratised state, which they want to see broken up and power passed down to individuals. Smashing the state is, for them, what defines new from old Labour. But the essential point is that they are liberal on economics. Free markets and globalisation are to them an inevitable force that must be accommodated. Not only must markets be largely left alone, they must also be encouraged into the public services to make them more efficient.
The guiding force of neo-Labourism is the former health secretary Alan Milburn who, in a speech 18 months ago, and repeated more recently, argued for power to shift from the state to the individual. "We can't let the right be the voice of the me generation," he has written. So ideological and electoral strategy come together: the Tories are defeated by taking their terrain before they have a chance to get there.
So far there is very little detail about what all this might mean. Individual budgets are the one big idea, but their range is limited to long-term conditions, and they bring with them all sorts of problems, especially in terms of equity. Those that can top up and game the system will do better. Inequalities will be exacerbated. Individual budgets just follow the inexorable logic of the market. If individuals are best placed to spend their money, then why not go for Tory-style vouchers or, better still, drop tax altogether and cut back the state? Sound familiar? It should do - this is not just the sentiment of Thatcherism but of former Labour minister Denis MacShane MP writing in the Telegraph just a few weeks ago.
The problem with this neo-Labour form of liberalism is that it does nothing to calm the anxiety and insecurity of modern life. The shift from collective security to the daily individual struggle to survive is the root cause of the social recession the country is experiencing. We are better off but less happy, able to buy more of what we want but unable to control the big things that affect our lives.
There is another way. Liberalism starts with the individual, but true autonomy and freedom comes only from collective action. This is social liberalism, or if you like liberal socialism. It is a creed temporarily crushed by Fordism and the mass production and mass politics of the 20th century. Now all that is unravelling, there is an opportunity for it to reassert itself.
Social liberals recognise the complexity of modern life. They want diversity, experimentation and localism so that people are more engaged in key decisions. But they want fairness, and as much equality and universalism as possible, which can only come from a strong centre. This creates the central paradox of modern politics, as diversity and equality conflict.
A paradox can't be solved, only managed - and the tool to manage it is democracy. Instead of the bureaucratic or market state, social liberals want a democratic state, so that at every level, people are given not just more individual control to pick and choose providers but a collective say in the big decisions and institutions that currently dominate their lives.
Let's take an example. If a patient is unhappy with their GP, the neo-Labourites would advocate exit, based on a competitive alternative. But the problem is that it's usually only the more affluent and confident middle classes who have the means and the car to find a different GP. Even then it's hard to know if the new GP is any better. And how does exit encourage the old one to improve? What if instead all the patients held an AGM and had the power to vote on whether the GP retains their post based on proper deliberation and debate? The reality of a collective "you're fired" would be a huge incentive to perform. In the process, a demoralised service is remoralised through the engagement and ownership of users and producers. Already people with individual budgets are clubbing together to form co-operatives to buy services collectively rather than individually. They are pooling risk to get a better quality of service.
Neo-Labourism fails to meet the complexities of living in the 21st century, but is not even working at the level of electoral strategy as the Conservatives, no longer stupid or nasty, are refusing to play the triangulation game. Blairism has left so much space to the left that David Cameron has found it impossible not to leapfrog into it.
There is an important dividing line between liberals and authoritarians, but an even bigger one between the left that wants equality and democracy and the right that wants free markets and more individualism. It's the battle for the heart and soul of what's left of the Labour Party.
Neal Lawson is chair of Compass. The New Statesman is sponsoring its national conference, "Born Free and Equal", in London on Saturday 14 June. Details at www.compassonline.org.uk