Strolling into the British Library, I was brought up short by a gigantic white-bearded man, pointing sternly in my direction. The iconic image of Uncle Sam, taken from a 1917 US army recruitment poster, was advertising its exhibition Propaganda: Power and Persuasion. In one corner, the picture fragmented into pixels: the exhibition will include not only retro memorabilia such as posters, stamps and flags, but also Facebook and Twitter. How rare, I thought, for any aspect of western culture to be identified as propaganda, let alone social media, that beacon of transparency and individual empowerment. I resolved immediately to attend. The image had done its work.

It's easy to ogle North Korea and claim that its weirdly uniform society is nothing like our own. But last year, as millions of westerners found themselves transfixed by South Korean pop video Gangnam Style, a film entitled Propaganda was uploaded to YouTube. Purporting to have been made by North Korean apparatchiks, but subsequently revealed to be a New Zealand-produced mockumentary, it makes the compelling case that in the west today there is no distinction between propaganda, advertising and mass consumerism. A political system that protects elites and provides a mere illusion of democratic choice relies on a population enthralled by the latest iPhone.

The assumption that we are free and self-determining makes our advertising culture seem less blatant and ubiquitous than it really is. Children throw it into relief. Catching sight of a huge Big Mac billboard ad, my three-year-old son remarked with straightforward appreciation, "That's a nice sandwich."

But does it really wash to assert that we are just like North Korea? The problem with propaganda is that it's not at all clear what the word actually means. To some, it's pejorative disinformation. But to the wartime ministry of information, the Catholic church, and Edward Bernays, nephew of Sigmund Freud and author of the 1928 public relations bible Propaganda, it is necessary and even beneficial persuasion.

Propaganda is obvious, crude and naive, but it's also subliminal, underhand and insidious. Its paradoxical definition is more than just a semantic curiosity. It represents our inability to get to grips with how we are influenced, and by whom.

We disown overt propaganda by associating it with other places and other times, by thinking not of those proliferating outdoor advertising screens but of five-year plans and Your Country Needs You!. And we dismiss covert propaganda by proclaiming that we are sophisticated consumer-citizens, immune to manipulation and mind-games. This latter blind spot is enabling the rise of two new forms of hidden persuasion: behaviour change and social media.

Now that ideology is disavowed as passé and "divisive", governments are adopting subliminal forms of policy and persuasion. Behaviour change – the "new science of irrationality", "neuro-economics" or "nudge" – claims that since people often fail to act rationally and in their best interests, their decisions and behaviour should be guided subconsciously by (rational) experts. David Cameron's "nudge unit" is run by David Halpern, a former social psychology lecturer, whose cabinet office paper Mindspace: influencing behaviour through public policy advocates an approach that relies on citizens "not fully" realising "that their behaviour is being changed".

It may be good for us to eat more cabbage and prioritise our pensions. But this modish wonkery is all about eroding vital distinctions between government, psychology and marketing. The government's public health responsibility deal works jointly with the nudge unit and fast food giants. The nudge unit is itself to become a profit-making business. According to Rory Sutherland of Ogilvy Change, a "behavioural sciences practice" that builds "connections, in all directions, between the social sciences, business and policy making", this enterprise is "bigger than the internet".

We are no longer appealed to as thinking citizens. We are simply flawed units to be prompted into spending more and costing the state less. The propaganda lies not only in the political-corporate manipulation of the public but also – most insidiously – in the way this is cloaked in the language of ideology-free empiricism and the semblance of autonomy: the idea that people are being nudged "to make better decisions for themselves".

Let's take the second revolution – in social media. To read the trade literature of the PR and online advertising industries is to be hit by a tidal wave of guff about authenticity, engagement and two-way conversations. In the "era of participatory public relations", the story goes, "the people have defeated the corporation". The objective now is to "make your customers a partner in the selling process". This is pseudo-egalitarian code for the voluntary circulation of Facebook ads. The notion that propaganda is always a state-run, top-down affair provides a cloak for our complicity. Social media's veneer of openness and people-power exemplifies western propaganda's habit of masquerading as its opposite.

The apparently spontaneous Harlem Shake meme, a carnivalesque subversion of conformist work culture, was in fact orchestrated by new media companies that monetise virals. The "Mr Cake" resignation viral, while apparently genuine, was gleefully converted by the media into great PR for no-jobs-for-life entrepreneurialism and the pernicious myth of easy internet-driven success. Our most palatable propaganda appears to be homemade.

How Neville Chamberlain's heart would sink were he alive to enter a Whitstable homewares boutique. Originally the subject of a morale-boosting poster produced on the eve of the second world war, the slogan Keep Calm and Carry On has been co-opted by a brand of capitalism that disguises itself as humane, ironic and artisanal, and it serves austerity Britain by lending it an aesthetic of jolly stoicism. Post-Thatcher propaganda operates in the places it's least expected: not, as everyone complained, in the eulogies, but in the admissions that the woman was "flawed".