What has shocked many rank-and-file party members, as well as a number of local leaders, has been the enthusiasm with which Nick Clegg and his allies have endorsed the Tory agenda of laying waste to vast areas of public services and public spending. The coalition is using the public deficit as a heaven-sent opportunity to attack and even demolish key sections of the welfare state, and while Clegg and his friends seem happy enough about this, his party is uneasy and unhappy. Speaking to the Liverpool Echo, the leader of the Lib Dem group on the city council, Warren Bradley, spoke of feeling ‘physically sick’ on hearing of the coalition’s cuts to the school building programme.

‘I simply do not believe that there is no money for schools. The funding of Trident and the war in Afghanistan costs billions of pounds, so if we cannot find £1 billion a year to improve children’s education then it’s a sad indictment of the state of the government and the country,’ Bradley said.

‘I will not be toeing the national party line just because we’re in a weak coalition. That will deliver nothing to the Lib Dems except total electoral decimation. I give you that absolute guarantee: we will be wiped out by Labour in the north and the Tories in the south.’ Rather than rushing into government jobs, Nick Clegg and colleagues ‘should … emphasise that social justice is the golden thread which runs through our party’, Bradley argues.

He is surely not alone in believing that cuts on this scale were neither what Liberal Democrats were campaigning for in the election, nor what Lib Dem voters were voting for.

This tension may or may not bring down the coalition. Either way, as Bradley suggests, it will do terrible damage to the Lib Dems at the local level. The support they have slowly built up over many years in major cities such as Birmingham, Liverpool, Newcastle, Sheffield and Hull is already melting away. The erosion may become an avalanche in next May’s local elections. No wonder local Lib Dem leaders and activists are worried.

Unresolved conflict

What has gone wrong? The standard response is to point to the left-right divide among the Lib Dems, and that is correct as far as it goes. But what this division really reflects is an unresolved conflict within the liberal tradition that first developed in the late 19th century, and helped to bring about the dramatic collapse of the British Liberal Party in the first 30 years of the 20th century.

This conflict was about the role of the state, and in particular the relation of state intervention to personal and individual liberty, or freedom. The traditional liberal view of freedom is simple: we are free to the extent that we are not controlled, regulated, taxed, interfered with, or subject to laws, rules and commands. From this point of view, the state, law and government are necessarily the enemy, always threatening to order us about, and often, alas, succeeding. This kind of liberalism is close to anarchism, or what is often nowadays called libertarianism.

In the 19th century it was anti-interventionist. Most liberals opposed factory legislation, designed to regulate the hours and conditions in which people were expected to work. Such legislation was instead championed by radical Tories. When the great Whig/Liberal leader Lord Palmerston was asked in 1864 what were his plans for domestic legislation, he replied with evident exasperation: ‘There is really nothing to be done. We cannot go on adding to the statute book ad infinitum … we cannot go on legislating forever.’

The legislation went on regardless. And many Liberals began to re-think their attitude to state intervention. Urged on by philosophers such as T H Green and D G Ritchie, they began to argue that the state could be used to increase personal liberty, not diminish it. ‘State assistance, rightly directed, may extend the bounds of liberty,’ said leading Liberal politician Herbert Samuel. And the Liberal thinker L T Hobhouse argued: ‘There are many enemies of liberty besides the state, and it is in fact by the state that we have fought them.’

Their conception of liberty was positive, not negative. It stressed the importance of ability and real opportunity. Freedom of the press means little or nothing to those who cannot read. How meaningful was it to say that anyone was free to stay at the Savoy hotel if 90 per cent of people could not afford to do so? The New Liberals wanted to empower ordinary people so that they could make use of these largely nominal freedoms.

As the Liberal leader and prime minister Herbert Asquith put it, ‘To be really free, [people] must be able to make the best use of faculty, opportunity, energy, life.’ Hence his party defended the introduction of compulsory education, old-age pensions, and other state-provided services, as ways in which the real, substantive freedom of the mass of the people was increased, not diminished.

Facile rhetoric

Now contrast these statements from Liberals of a century and more ago with what Nick Clegg and David Cameron have been saying about the values they apparently have in common. ‘We share a conviction that the days of big government are over; that centralisation and top-down control have proved a failure.’

Mainstream conservatism, especially in the wake of Thatcher, is, with its commitment to free-market capitalism, naturally hostile to ‘big government’ and ‘the state’. And proclamations that ‘big’, ‘top-down’ government is a thing of the past, are two-a-penny. They are seen as an easy way to win popularity. But to find the Lib Dems going along with this facile rhetoric of liberalism marks a rejection of the tradition represented by New Liberalism and a reversion instead to the crude, hard-faced anti-statism and anti-interventionism of the mid-19th century.

Two of the most important architects of the post-1945 social democratic settlement were leading figures in the Liberal Party: Keynes and Beveridge. But when did you hear Clegg or Huhne, or even Cable, invoke them? If they were genuinely ‘progressive’ Liberals, they would be proud of the role their forebears played in alleviating poverty, creating the welfare state and establishing the principle of full employment. But they say nothing about it.

Probably they are ashamed of it. From the enthusiasm with which they have identified themselves with the Tory attack on welfare and the programme of public spending cuts, we should probably conclude that either they have never read Keynes, or they think he was wrong. The current Liberal Democrat leadership, in other words, has gone back to its 19th-century roots, and rejected the advances in understanding made by the New Liberals, and by Keynes and Beveridge. Is it any wonder the party’s rank-and-file are so restive?

Whether Labour, under new leadership, can effectively exploit the Liberal retreat remains to be seen. Labour has conceded so much to the rampant market philosophy that it may not be able to regain the social democratic initiative. But the opportunity is there: to re-assert the positive and beneficial role of the state and public authorities, not only in reducing poverty and inequality, but also in increasing the real, substantive freedom of the great majority of the population, who, without state support and welfare provision, would lead wretchedly constricted lives.

The Liberal Democrats have lost sight of their own tradition and will pay the price. The left never should.

Labour’s way of preventing a Conservative government over the past decade has been to turn itself into one. The concessions the Lib Dems have made to David Cameron over the budget reduction strategy pale beside the concessions Labour made to the Tories – ceding the whole economic ground – years ago. If Labour is going to continue to obsess about ‘betrayal’ and ‘selling out’, it needs to start looking in a mirror.

Labour lost its soul in office. One of the sticking points in the Lib-Lab talks on which Labour was unwilling to concede concerned locking up the children of illegal immigrants. This pretty much says it all. There are a great many things that worry me about the Conservative-Lib Dem coalition but I am confident that we will end up a freer, more humane society as a result. And that is about as damning an indictment of Labour as it is possible to make.

Nonetheless, in terms of a future for the progressive left, we have grounds to be optimistic. There are four things we need to do to ensure that this coalition does not become a triumph for the right.

First, we must maintain lines of communication and co-operation. At Westminster, select committees will be a useful place to build alliances. With most of the more right-wing Lib Dems now holding office, the Lib Dems who hold the balance of power in these committees will tend to be of the left.

Second, it is vital that the new Labour leader is someone the Liberal Democrats can do business with. Returning to pendulum politics is neither desirable nor likely in the longer term. The UK has now embraced multi-party politics and can expect to follow countries like Canada and India, whose first-past-the-post voting systems no longer prevent balanced parliaments. If there is a balanced parliament again in May 2015 and the Lib Dems face the same obstinacy from Labour that they experienced this time, the Tories’ position will only be stronger.

For the Liberal Democrats, their new ministers need to use their time and resources in office wisely. They may not have won every policy battle in the coalition agreement, but they can now commission civil servants under their control to fully research policy options.

One example worthy of urgent attention is a full study of the practicalities of land value taxation. A policy aspiration that goes all the way back to Lloyd George’s People’s Budget a century ago, there has been no serious attempt to implement it since the first world war.

Finally, the Lib Dems need to widen and deepen internal debate about policy and strategy. Party members need to be able to define themselves as Liberal Democrats while not signing up to everything the party says. The party needs a ‘partnership in power’ arrangement, building on the existing democratic decision-making processes.

In Scotland and Wales, the experience of coalition government led the Lib Dems to become more concerned about the practicalities of administration than strategic direction. We must not repeat that mistake. The risk is that Lib Dem ministers – and the media – will view any disagreement with government policy as an attack. Nick Clegg and his team need to be far-sighted enough to appreciate the virtue of dissent.

There is only so much constructive criticism the parties’ internal processes will be able to handle, however, and for that reason the Social Liberal Forum needs to up its game as both an advocate of authentic social liberalism and as a genuine forum.

This is an exciting, scary time to be involved in politics. Now is not the time to wrap yourself in cosy slogans and old comforts. The Liberal Democrats in office are guaranteed to not get everything right, but as soon as the left begins to recognise that they can do a great deal of good, we will start to make progress.

James Graham is on the Lib Dem federal executive and an executive member of the Social Liberal Forum (www.socialliberal.net). Come to Red Pepper’s fringe meeting at Compass conference, ‘Class, Power and Ownership: Liberalism and its Limits’. Saturday 12 June, 1.30pm