What is the modern Conservative party? How coherent is its ideology? Is it united? Not in the sense of the day-to-day policy skirmishes around David Cameron, but rather at the party's deeper levels, the real potential source of prime ministerial instability.

The central paradox facing the modern Tory party is obvious. On the one hand, Cameron carries it all pretty lightly; he enjoys, and is pretty good at, the job. He purports to lead a modern, liberal, cosmopolitan government – all mainstream politicians now tend to call themselves "progressive". He presides over a radical, reforming administration – think deficit reduction, health reform and the overhaul of welfare – and faces an opposition recovering from arguably its worst ever election defeat. Not a bad place to be. All other things being equal, the party should be united behind the leader.

Yet the hallmark of the modern Tory party is fragility. It is a dangerously brittle thing. After 13 long years of opposition, and barely two years into government, it appears to be sinking, devoid of pragmatism. The recent reshuffle exposed its inner wiring – a medium-term modernisation strategy surrendered before the concerns of day-to-day party management. Cameron is captive and weak. Boris is mean and hungry. New right-wing factions are launched almost weekly. Hostility to the Liberal Democrats is simple transference; real venom is directed in private at the Tory leader. Is there any better example of a new government stalling so dramatically after initial suggestions of energy and vitality?

The leadership response from Westminster is to paper over the cracks – to remind us these are the usual mid-term travails ramped up by sacked or passed-over MPs and the pathologically oppositional. Meanwhile, from the grassroots, the admirable Tim Montgomerie of the influential website Conservative Home calls for renewed vigour on the part of Osborne, Hague and IDS in drilling into Ed Miliband's leadership, and a focus on immigration and welfare. Both sides look to the impressive 2010 intake to square the circle; to import grit, ideas and rigour into the Tories, and to deal with the pesky Lib Dems.

All roads lead to Britannia Unchained, the short tract written by a group of young, right-wing Tory MPs that is considered a route map to political renewal. Forget the small beer, shallow-end stuff of the news cycle: real unity is to be secured through rallying to the ideas in this book, and its generation of Tory "stars" putting a spark into their party and securing outright victory in 2015. That is quite a task for the MP authors Kwasi Kwarteng, Priti Patel, Dominic Raab, Chris Skidmore and Elizabeth Truss, yet they appear up for it. The book received some unfavourable attention before it was published – newspapers picked up on the suggestion that the British people are "among the worst idlers in the world", too many of whom "prefer a lie-in to hard work". But first things first: there is still much here that we can agree on.

The task at hand is to rebuild this country. We start with an extraordinary economic history, but one we cannot simply rest on. The reality is that Britain does, as these authors suggest, face a fundamental choice – whether to manage decline or confront today's global challenges. How can we do this and build a successful 2020 Britain? Many of the remedies put forward here are pretty self evident: good quality childcare, applauding hard work, high quality education and skill formation, embracing risk and innovation, regional balance, cutting unnecessary red tape. The comparisons the authors make are also of interest – praise is given not just to the usual Singapore and South Korea, but also to Brazil and even parts of Europe. The authors demonstrate their socially liberal credentials on race, sexuality, gender and identity, and they make other interesting arguments: for example, they question the cult of celebrity, and emphasise the importance of virtuous parenting and the nurturing of appropriate attitudes in our children.

Yet at its core this book is not about social liberalism. Scratch off the veneer and all is revealed: a destructive economic liberalism that threatens the foundations of modern conservatism. The state is assumed always to be malign, and it's taken for granted that the labour market is not flexible enough (is it ever?). For reform read marketisation and intensified commodification. In this world, safety nets stifle a "can-do" culture, weakening our work ethic and muscular individuality. Banking crises are simply part of the natural order of things; Britons are working fewer hours because they can't be bothered or are wilfully avoiding work. The role of politics and public policy and the impact of structural problems in markets and institutions are absent from the analysis.

For these authors – all members of the party's right-leaning Free Enterprise Group – it is a binary world, where everything is forward or back, progress or decline, sink or swim, good or bad. They do not appear to see the world as a complex place. The choice is between regulation and dynamism: their ideal worker is one prepared to work long hours, commute long distances and expect no employment protection and low pay. Their solution to the problem of childcare is unregulated, "informal and cheap childminders". We need dramatic cuts in public expenditure, they argue, to be matched by equivalent tax cuts. The demonisation of the welfare recipient continues apace; a broad dystopian worldview dominates the future. The bottom line for these Tory radicals is that the notion of community, society or indeed country is always trumped by textbook economic liberalism.

A few years ago I asked a high-flying commentator about the notion of "compassionate conservatism". This young columnist is hardwired into the project set out in Britannia Unchained and gives his readers a weekly report from the frontline. His contempt for the compassionate version of Tory ideology was total. Why, I asked. Because "we" are "liberals organising within the Conservative party," he replied. It is this economic liberalism that has sought, albeit in vain, to sell off our forests. It seeks a planning free-for-all; it celebrates chaos. It would dismantle valued national institutions – in broadcasting, policing, transport and health. Such libertarianism is unpatriotic – the nation's best interests wouldn't be pursued in industrial strategy, defence or indeed Britain's place within Europe. It threatens the "national-popular" foundations of the Thatcher revolution; it is a brutal and destructive creed at odds with national interest as she understood it.

Put simply, Margaret Thatcher knew she had to meld together the economic liberalism of the new right and the traditional, patriotic sentiment of both her party and the country. This was never framed as "either-or". Her pragmatic brilliance built a coalition that contested the centre ground and bolted in parts of the working class.

In contrast, although claiming to be the true descendants of Mrs T, the authors of Britannia Unchained represent a project that is extreme and destructive, and which threatens the essential character of our nation. It is because this faction is in the ascendancy that Cameron is actually failing; he remains captive to an economic reductionism that could well destroy conservatism – in the proper sense of valuing and conserving the nature and assorted institutions of the country.

Cameron is not one of this crew. Tactically, in the short term he might survive; but in the medium term he is toast. The economic liberals' march through the Conservative party will continue; every day there is less and less opposition, and they will eventually win. The coalition with the Orange Book Liberals in Clegg's party might well stumble on. But the cost, over time, will be two lost traditions: a recognisable conservatism and a recognisable social liberalism.

• Jon Cruddas MP is a member of the shadow cabinet and leads Labour's policy review.