Even for battle-hardened observers of the British economy, the landscape portrayed by last week's autumn statement was shocking. Now there is official acknowledgment that a country burdened by bank assets five times its GDP and chronically poor productivity is being dragged into the deepest and longest economic setback in modern times – with awesome implications.

Thus the continuing weakness in tax receipts that forces another £30bn of spending cuts if the government is to meet its self-imposed targets for budget balance, but two years later than planned. Thus the promise of decade-long austerity. Thus median incomes in real terms will be lower in 2015 than in 2002, the longest period of falling real incomes ever recorded. Thus more than 700,000 job losses in the public sector.

It could scarcely represent a bleaker picture. In the 1930s, Britain had an empire to fall back on as a protected market to help support recovery; in the 1970s, North Sea oil was to come to our rescue; in the 1990s, the great credit boom seemed to solve the economic question. Nothing like that is going to happen now. Britain has to answer the riddle about how to make its living in the world with no soft options – with a grossly unbalanced and underperforming economy.

It is hardly a surprise that the talk is of a lost decade and a lost generation, but still there are some who try to comfort themselves with the hope that, while Britain is going to be a drearier and more austere country than it was, we will muddle through with the rules of the game more or less unchanged.

The postwar settlement will hold, if in a more flyblown and tattered shape. Organised labour will continue to decline. British companies will carry on as they have, along with explosive growth of pay at the top. The City of London, albeit subject to more regulation, will continue as it has. England will remain the fiefdom of the Conservative party. Britain, the argument goes, remains such a great power with such distinctive resources that it can afford not to make common cause with other European countries. The EU will either split up or go its own way; Britain can at last live its euro-sceptic vocation.

It is an assessment supported neither by history nor by any honest assessment of our plight. For example, the last time Britain endured such an extended period of depression and falling living standards – the 1870s and 1880s – saw the mushrooming of the co-operative movement and the emergence of the Labour party as the more moderate expressions of anger that wanted to challenge the very basis of capitalism. Be sure that British civil society will not accept its grim fate as if nothing is happening. There will be organised and angry responses – and rightly. We are about to experience economic, social and political tectonic plates on the move.

What is going to make the years ahead doubly fraught is that the ideologies that used to provide the basis for our democratic discourse have been as torched as the economy. This is a first-order crisis to which socialism, certainly as conceived and practised over the past 100 years, is no plausible answer.

But equally, nobody can dare argue that the solution is to press ahead with yet more of the free-market capitalism that has laid Britain and the west so low. The simple-minded nostrums that have poured from the great American neocon thinktanks have been tried and found wanting. An ideological vacuum coincides with the most testing economic times for decades.

We need vision and visionaries – but what we have is journeymen espousing bankrupt world views. Perhaps the most dispiriting aspect of George Osborne's autumn statement was its lack of an organising or inspirational idea about what he wants the economy to be. Enveloped by the collapse of anything he has believed in, all he could do was reach for the grim economics of the corner shop with incantations about the menace of public debt. But governments are not corner shops. Osborne is operating within a framework that permits no vision for how the British economy can be re-energised and reimagined.

Any prospectus for the future must have as its alpha and omega the answers to two coherent and related questions. The first is how risk is to be managed and shared – whether risk for companies and entrepreneurs that the business models on which their finances rest might collapse as a consequence of lack of demand, new technologies or new competition; or the risk for ordinary men and women of unemployment, ill health and financial hardship. The second is how opportunity is to be generated and capitalised on – whether to build new industries, how to ensure genuine social mobility. The paradox of capitalism is that unless it is buttressed by collective and social institutions that share and distribute risk fairly, provide a social contract for its people and generate opportunity, it degenerates into what we are living through – business leaders preoccupied with their own remuneration, consumers frightened to spend, sectors such as banking bloated by vast, hidden subsidies and a poverty of innovation and investment.

What is needed now is for these truths to be understood and then addressed. This is a crisis of bad capitalism, a capitalism distorted by the ideological prattle that claims it is moral and efficient that all risk be borne individually. This is a world in which the rich get richer, the poor get poorer and everyone else can go hang.

But everyone else will not just go hang. They will ask ever harder questions about how reward and risk are distributed in our society. What are the 2,800 bankers in London estimated to be earning more than £1m a year doing to deserve such rewards? As the pension age is extended to 67, the education system Balkanised, unemployment institutionalised and workplace rights removed, what is the quid pro quo, the social deal? Are we happy to see the postwar social settlement whittled away with no coherent replacement? Why does the British private sector provide so few jobs, so little growth and so little innovation, but so much reward for those at the top? Is the sole purpose of government only to reduce its debt?

The only way forward is a good capitalism that solves these hard questions, commits to investment and innovation and builds new institutions that share the risks of entrepreneurship and of life, led by an enterprising government with a bigger conception of its role than debt reduction. Nor can Britain allow itself to become disconnected from the continent to which we are bound by geography and history.

The autumn statement exposed the raw truth of our national predicament and with it the promise of inevitable discontent and anger. It is a watershed moment. With sufficiently visionary leadership, it could mark a turning point; without it, decline could turn to rout.