The credit crunch is a salutory reminder of two things: the weakness of governments and the power of governments. Governments failed to predict, prevent or prepare for this crisis; but they have also shown that they can, after all, make massive interventions in the globalised economy when they want to. Will this lead to great democratic and social reforms as the depression of the 1930s did? At the moment, it seems unlikely.
The key difference between today's situation and the aftermath of the 1929 crash is the absence of countervailing forces to finance capital. Contrast this with the middle decades of the last century, when the threat of communism, the power of organised labour, and the strength and autonomy of municipal governments all posed serious challenges to the power of banks and corporations, making it possible for governments to implement the very high levels of regulation and socialisation typical of welfare capitalism. Today, globalisation and the difficulty of effective labour organisation leave governments of the left in a much-weakened position.
Despite this, the great Fabian fantasy – the dream of benign and omniscient government re-ordering social relationships from the centre of administrative power – maintains a grip on the imagination of both left and centre-left which is crippling in its consequences. On the one hand, New Labour tries and fails to solve social problems from the centre. On the other hand, its radical critics have consistently and correctly pointed to New Labour's enthusiastic embrace of most of the neoliberal programme, but they also rarely address the broader question of the global political context and the constraints that it imposes. For example: can anyone really doubt that if New Labour had attempted to resist the international imperative towards privatisation of public services, as many wish they had, then the press and the City would have turned on them savagely, turfing them out of office after a single term?
The point is this: if we want a democratic future, then "what policies should government enact?" is almost always the wrong question to ask. The question for anyone interested in a progressive route out of the crisis is: "what alternative sources of power should government be trying to build up, to fill the vacuum left by the financial institutions which have ruled the world for the past 30 years?"
The right has often understood better how to think this way. The most brilliant strategic move by any government in living memory was Thatcher's sell-off of council houses. The effect was to turn a generation of former Labour voters into small-time property speculators, creating a massive source of pressure on future governments to continue acting in a Thatcherite way. So even while real wages were shrinking, debt was spiralling and working-hours climbed ever-upwards, governments have been forced to pursue policy objectives (easy credit, high asset prices) which in the long-term only benefit the real capitalists.
New Labour has never had an equivalent strategy. It could have helped the unions to reinvent and renew themselves for the 21st century, instead of pushing hard to remove protections from workers across Europe: by now a revived labour movement would be a powerful ally in the face of recession and Tory revival. It could have thought strategically about how to encourage the development of a democratic media sector in the world of web 2.0: instead it has never ceased to cower before Murdoch.
Instead of allowing the PFI industry to erode the democratic accountability of public-service provision, it could have helped to rebuild local government as an ally in the effort to regulate capitalism. After New Labour, this is the path which any potential progressive government worth the name will have to follow.
"After New Labour", the second debate in the "Who owns the progressive future?" series, organised by Comment is free & Soundings journal, will take place in London at Kings Place on November 3 at 7pm. Guardian readers can obtain tickets at a special rate of £5.75 by phoning Kings Place box office on 0844 264 0321 and quoting "Guardian reader offer". For full details click here.