The election approaches and Britain begins the long haul out of recession. What will the Conservatives do to the economy? David Cameron has claimed Margaret Thatcher's economic revolution as his own. She had, he said, engineered an enterprise economy that was the envy of the world. Today "our country does not face economic breakdown. We've won the economic argument." But, after three turbulent decades, it has ended in calamity.

The Conservative economic revolution of the 1980s casts a long shadow. It broke the power of organised labour, deregulated the economy and opened it up to global market forces. The 1980 Housing Act and the "right to buy" launched a neoliberal hegemony. Geoffrey Howe's 1981 austerity budget of public spending cuts and tax increases pitched Britain into mass unemployment and helped destroy the last vestiges of the postwar welfare consensus. His goal was to transfer wealth from the public to the private sector, and so unleash free enterprise.

It created a bling economy but little productive wealth. In 1978 there were 7.1 million employed in manufacturing, by 2008 that had fallen to 3 million. There has been no significant private investment in the deindustrialised regions. They have still not recovered their social fabric or productive economies and are now sustained by government spending.

The promise of a "property-owning democracy" created more home ownership, but no investment for future generations. Now there is a housing crisis. Financial deregulation turned the housing market into the centre of a casino economy that grew on asset bubbles and speculation. Dynastic levels of wealth grew alongside some of the highest levels of poverty and inequality in Europe.

Over the last 30 years the share of the nation's wealth owned by the bottom half of the population has fallen from 8% to 5%. The share of national wealth going to wages has dropped dramatically. The connection between productivity and wages was broken, and by 2000 productivity increases ran at twice the rate of wage increases. The Conservatives tore up the welfare safety net by undermining the value of benefits and the state pension. Low- and middle-earning households borrowed to sustain their standard of living, creating unprecedented levels of personal debt.

The Conservative economic legacy is a massive transfer of wealth and power away from the majority of the people to capital, away from the poor to the rich, and away from the country to London. The economy has been financialised at the expense of more equitable productive wealth creation. Cameron has no political economy to enact his pro-social politics and his rhetoric of social justice.

His compassionate Conservatism detoxified the Tory brand, but it is opposed by a free-market hinterland of hard right prospective parliamentary candidates amongst others. Now falling polls and faltering morale are galvanising them to rally against him.

George Osborne, the shadow chancellor, embodies this conflict. His policies face both ways at once. In last week's Mais Lecture he set out his new model of economic growth: "The only sustainable route to prosperity is raising the real rate of return on investment." His solution to restoring profitability is to unleash "the forces of enterprise". A nation of savers will generate the funds for investment and growth. Osborne's belief in the alchemy of fiscal rectitude, high savings and free markets will repeat the neoliberal policies of Howe's 1981 budget that set Britain on the road to financial disaster.

The recovery is being driven by public spending. Business is reacting to weak demand and cutting back on investment. Without investment to generate demand and rebuild the economy, we will fall back into recession. When the private sector won't invest, the government must. Labour needs to develop its political economy for a new era.

The future is Labour's to win. The challenge is to recover its campaigning role by building a new covenant with the people: a minimum income entitlement, for example, through the guarantee of a living wage and a citizen's pension; a referendum on constitutional reform; a crusade to build homes and reform the housing markets; a government industrial activism for the new green industrial revolution.

The longer-term goal is to reverse the transfer of wealth and power from the many to the few, and create a more reciprocal society of freedom and security.