Ed Miliband tore into Labour's style of government under Tony Blair and Gordon Brown today as he promised to rebuild a grassroots movement that would go beyond "the bureaucratic state" and look to local people for answers.

Seeking to sustain momentum after the party's success in last week's Oldham East and Saddleworth byelection, the Labour leader insisted the party would only move forward if it understood how and why it "lost touch with people's daily struggle" during 13 years in power.

Miliband told the Fabian Society that he was proud of much that Labour did in office, but that its failure to regulate the markets and, latterly, its belief that the state knew best, left it remote from the people it existed to serve.

"We became too technocratic and managerial," he said. "But more than that: we sometimes lost sight of people as individuals and of the importance of communities. In our use of state power, too often we didn't take people with us. That is why over time people railed against the target culture, the managerialism of public service reform and overbearing government.

"At the same time, we seemed in thrall to a vision of the market that seemed to place too little importance on the values, institutions and relationships that people cherish the most."

The Labour leader is gradually putting together his own alternative to David Cameron's "big society" with the help of a team of new advisers that now include the recently ennobled academic Maurice Glasman, who pioneered the acclaimed work of community group London Citizens.

Rather than dismantling local institutions and relying on volunteers – the Tory vision of localism – Miliband said he wanted to reinvigorate local communities by preserving and strengthening local institutions such as post offices and libraries, seeing them as the hubs of community life. "The only way we rebuild the case for politics is from the ground up. The campaign for the local library, the local zebra crossing, the improvement of a school, must be our campaign."

Miliband told the conference that Labour had to reclaim the "big society" as it was an idea in tune with its values, not the Conservatives'. "Only Labour can build the good society. Society can only function if based on progressive Labour values," he said.

He renewed his appeal to disaffected Liberal Democrats to work with Labour against the coalition's cuts agenda, arguing that Nick Clegg had made a "tragic mistake" by teaming up with the Tories. He declared himself ready to co-operate with Lib Dems "in parliament and outside it" to oppose the direction in which the government is taking Britain.

His overtures appeared to yield immediate dividends: Simon Hughes, the Lib Dems' deputy leader, said at the Fabian Society event that he had been working closely with Labour in a row over coalition plans to scrap the education maintenance allowance (EMA). The scheme encourages poorer pupils to stay on in education through a grant of £30 a week, but it is to be stopped from September.

Hughes said he had been talking to Labour's education spokesman, Andy Burnham, about supporting a Labour motion in parliament this week, during an opposition-day debate on EMA. He hoped the motion would commit the government to finding a suitable alternative to the allowance.

In a further swipe at Brown, Miliband said the former prime minister's determination, before the election, to avoid using the language of cuts was one of many mistakes made by Labour in government.

"Parties don't suffer defeats like the one we suffered last May because of an accumulation of small errors," he said.

"They do so by making serious mistakes, and that's why I have said what I have said on issues like Iraq, failing to properly regulate the banks, ignoring concerns about economic security and not doing enough to deliver on the promise of a new politics.

"We have to show that we have learned lessons if the British people are to trust us again."

Philip Hammond, the transport secretary, said: "The only mistake he was willing to admit to was not being leftwing enough. What the British people deserve is an apology from Labour for maxing out the nation's credit card during the good years and burdening our grandchildren with debt, but Ed Miliband is still in denial."