For the shrinking band of true believers, the ­anniversary of Margaret Thatcher's 1979 election couldn't have come at a worse time. After years in which the political and media establishment could be relied on to parrot the tale that the former Tory leader did what had to be done – however painful – to put Britain back on track, her reputation is now in ruins. It's barely 18 months since Gordon Brown felt it necessary to have his picture taken with the one-time scourge of Labour Britain and praise her as someone who "saw the need for change".

Not a mistake, even in his most self-destructive moments, the prime minister would make today. In the wake of the implosion of the financial free-for-all and corporate engorgement she unleashed, the Thatcherite diehards are struggling to rescue her name from a legacy of greed, entrenched inequality and economic failure. Her "principles of capitalism are under question," wails Maurice Saatchi, the man who gave us the "Labour isn't working" slogan in 1979 – before his heroine tripled unemployment. A Billy Elliot version of history has made Thatcher a "boo-word in British politics", London's mayor Boris Johnson bleats.

If only young people knew, insist the irreconcilables, what a basket-case Britain was in the 1970s – an "offshore banana republic", a land of perpetual power cuts, strikes and unburied bodies – they would understand why ­millions had to lose their jobs, industries and communities had to be destroyed and billions had to be handed over to the wealthy. Britain in the 70s, the high Tory Simon Heffer wrote last week, felt like the Soviet bloc, where men with "bad teeth and ill-fitting suits" (union leaders) called the shots in public life.

You'd never guess from all this fevered snobbery and retrospective catastrophism that average economic growth in Britain in the dismal 1970s, at 2.4% a year, was almost exactly the same as in the sunny Thatcherite 1980s – though a good deal more fairly distributed – and significantly higher than in the free-market boom years of the last two decades. Nor would you imagine that there was far greater equality and social mobility than after Thatcher got to work. Or that, while industrial conflict was often sharp in the 1970s, there was nothing to match the violence of the riots and industrial confrontations of Thatcher's Britain.

What is true, of course, is that the ­seventies saw a crisis of economic power, in which the labour movement was strong enough to block attacks on workers' interests but not politicised enough to push through an alternative to the failing corporatist model of the postwar years. That's why the assault on trade unionism was much harsher and the lurch to neoliberalism came earlier in Britain than elsewhere in the advanced capitalist world.

Labour paved the way for Thatcherism with the then prime minister Jim Callaghan's public conversion to ­monetarism in 1976 and the most savage public spending and real wage cuts since the war. That in turn triggered the much mythologised Winter of Discontent – an entirely avoidable revolt of low-paid public service workers against a self-defeating determination to beat an ­inflationary crisis at their expense.

Bolstered by the consequent schism in the Labour party and a timely war in the south Atlantic, Thatcher proceeded to crush the resistance of the unions and solve the "who rules" question that had done for her Tory predecessor, Ted Heath. The result was dramatic, not only in the huge boost to inequality and the income of the well-off, but also in the US-style decline in the share of GDP going to wages and salaries – which fell from a peak of 65% in 1975 to 53% last year – as corporate profits swelled.

That helps explain why Thatcher's cheerleaders and the country's wider elite are convinced her years in power and her legacy of deregulation and privatisation have been a feast of general prosperity, even when that's not remotely borne out by the facts. For while the issue of social power was settled for at least a generation and industry restructured in the corporate interest, the great leap forward promised for the economy never materialised.

It's not just that conventional growth has been sluggish over the last two decades. So have investment, ­productivity and manufacturing, while the quintessentially Thatcherite ­housing and finance boom fostered by her New Labour successors has driven the ­economy into a slump, discrediting the ideology that underpinned it in the process.

Who now believes it "had to happen" like this? Certainly not the British people, to judge by recent opinion polls. But despite the crash, the Tory-New Labour neoliberal consensus that has been Thatcher's greatest political legacy staggers on. As the former chancellor Geoffrey Howe said on her 80th birthday: "The real triumph was to have transformed not just one party, but two."

In his first couple of years as Tory leader, David Cameron distanced himself from Thatcherism, and the shadow chancellor George Osborne continues to nod in the direction of "compassionate Conservatism" with his announcement in the Guardian today that he is linking up with the once left-leaning "progressive thinktank" Demos.

But the traffic has increasingly been in the opposite direction since the crisis went critical, as the Tory leadership has demanded ever deeper cuts in public spending and championed far greater market-driven privatisation of schools – while surveys of Conservative candidates show Cameron's new Commons army will be unreconstructedly Thatcherite if the Tories win the election. Meanwhile, even as the slump has driven the Brown government towards more social democratic policies, from state intervention to progressive taxation, it remains hobbled by its Thatcher inheritance, most strikingly in its obsessive bid to part-privatise Royal Mail.

The fact is the historical era that began in 1979 followed a prolonged period of crisis and the gradual emergence of a powerful intellectual current around the New Right. The current crisis, by contrast, erupted into a comparative political vacuum – which is why Thatcher's former private secretary Charles Powell still feels able to insist that the "Thatcher settlement remains largely intact". But that settlement has demonstrably failed. A "sea-change in politics", of the kind that Callaghan ­privately identified in the last days of the 1979 general election campaign, is once again taking place. Whoever grasps that must eventually shape the politics of the years to come.