Whether we are in the middle of a 'crisis of capitalism' is a moot point. What we are seeing in the fall of the global equity markets and in the rise of the sovereign wealth fund is a correction, a change in the type of capitalism that drives the world's economy.

Capitalism is, notoriously, creative destruction. Communities are constantly being forced to choose between the politics of social cohesion - whose maintenance often 'drags' on economic growth - and the economics of innovation which meets needs and wants but atomises society as it does so.

One philosophical answer to the tension between various forms of socialism and traditionalism on the one side and libertarian capitalism was the so-called 'third way', an odd mish-mash of faith-based communitarianism, liberalism and the language of rights and duties. 

A version of it fired the Clinton administration and inspired New Labour - from there it developed European legs and there is much in Sarkozy's and Merkel's programmes that might be regarded as derived from the 'mood of a time' when the defeated post-Soviet centre-left was looking for a 'capitalism with a human face'.

But, here in the UK, the 'third way' has run its course because it has failed to deliver either social cohesion or guarantee an economic system that is not prone to the violent leaps and starts and falterings of the pure free market model. 

When bankers make mistakes and the result is a credit crisis and possible foreclosures, no amount of communitarianism and happy-clappy faith-based initiatives are going to deal with a system that is broke.

If you are a Briton, you will be aware of two issues - crime and Northern Rock - that encapsulate this break-down of a model that was all theory and weak practice.

The increase in street violence and the collapse of local community is talked down by Government and up by the Tories but, on this one, the Tories are right.  It is happening, it is observable and it is getting worse. 

Social cohesion is breaking down and much of the reason lies in the free rein given to the market, whether it be in encouraging migration without adequate state planning of infrastructure or the very particular free rein given to industry to supply bad food, alcohol and drinking outlets because that is what the market wants.

At the other end of the scale, we have the Northern Rock debacle - a signal failure of appropriate regulation of the banking sector which has been settled in an unworthy political fix that adds an estimated $100bn to the national debt.

The Northern Rock settlement has the unique distinction of being bad for socialism (as a gross misuse of public funds to preserve a bankrupted system) and capitalism (as a quintessential example of how to build 'moral hazard' into what system survives).

The settlement, in short, epitomises the failure of the 'third way' as much as street violence and many other similar failures of implementation. 

Those with a free market approach to economic innovation but who require a socially cohesive society to do business and those who have a 'national' socialist mentality but see the necessity for freedom and the value of the market in meeting needs and wants are in severe danger of converging to want something different that recognises a world where sovereign wealth funds and insurgency are permanent factors.

That is the critical analysis but what of solutions? Western culture is liberal to its core and much of the solution will lie in intelligent tinkering. 

Instead of panic-driven authoritarian measures that achieve nothing but headlines and neurotic regulation that displaces rather than deals with risk, the new politics will eventually learn (after much pain and too slowly) to regulate anti-social behaviour in the markets and invest in the infrastructure of communities.

But the question arises - since Marx's insight, that the forms of culture derive from the economic relations that underpin society, does not require one to be a Marxist to accept - how do you create the economic underpinning for the reconstruction of local and regional identity and community without interfering either with the market or with personal liberty beyond tolerable levels?

One solution - a solution that might work as well in developing an intermediate economic base in the emerging world - is to look at adaptations of company structure that build in incentives for capital to 'slow down' growth (rather than with a view to rapid exit and capital return) in return for some form of community engagement that is still built on a basic market-orientated commitment to meet external demand with quality supply of goods and services.

Of course, this may mean a return of social engineering and government engagement of sorts. Even the Financial Times questioned on Tuesday whether the ridiculous (our word not theirs) subsidy to Northern Rock might not have required a large share of equity for the taxpayer instead of bonds that simply indicate that the Government has been too frightened to hand the Left in its own Party the implied victory of a nationalisation.

The way forward, apart from ridding ourselves of 'third way' thinking and its liberal internationalist handmaiden, is to consider State (in the form of Parliamentary legislation) and market as partners in managing risk, in providing national infrastructures and in enabling the market to operate in ways that can range from operations designed to sustain communities through to entrepreneurial operations designed to encourage innovation.

This does not mean regulating to stop things from being done (which is the pattern in our techno-bureaucratic society) but incentives to enable things to be done by drawing types of capital into more or less risky enterprise where the 'capitalist' still gets material benefit.

One of the absurdities of Northern Rock is that a regionally based entity, essential to the economic development of a relatively depressed region, with local employees and suppliers dependent on it, had a maniac business model more suitable to a global operation based in one of the world's financial centres.

We retain the sneaking suspicion that this Government, having failed to think through what happens when you let regional players try the international capitalist route, has used taxpayers' money (that is my money) to take resources required to solve the severe social cohesion and infrastructural problems of the South East and other regions in order to hold together one of its political heartlands.

There is room for London as a free market global financial centre, haven for hedge funds, big deals and risk-taking, but there should also be room for new types of economy and entity, feeding their successes into the global market, nurturing innovation and 'clusters' but partially protected from excessive risk (though not market pressure) within regions and localities.

This goes against thirty or more years of free market and single market ideology. It certainly questions the value of the European though not the globalising project. But it bears consideration whether tiering markets by geography - especially pertinent in protecting social cohesion within the third world before the pressures of modernisation cause breakdown into endemic insurgency - is now the way forward.

There are people thinking about this. Even prominent liberal intellectuals are asking suitable questions about our regulatory structures and whether their rigid Enlightenment rationalism is more problem than solution.

In Cambridge, a relatively unknown but longstanding think-tank, The Relationships Foundation has been engaged in a questioning of limited liability since 1999 and is working on a programme to see what a new type of company, alongside limited liability, for smaller nations, regions and localities and in developing countries, might look like.

This is work-in-progress but the team, largely legal rather than political and so perhaps a bit too inclined to detail than principle, is fairly formidable. Although I have been briefed on their ideas, it is for them not me to introduce them publicly when they feel that they are ready.

What can be said is that, though I am critical of some of the detail I have seen, this seems to be the only policy team working on a creative solution that matches social cohesion and market needs against the prevailing ideology. This, in itself, is an indictment of our intellectual elite.

The key factor in the Foundation's thinking is the forgotten primacy of the geographical, a primacy that is not in the least incompatible with the use of new globe-spanning informational and social technologies.

We often forget that the ideology of New Labour was created in the 1990s on a theory of communications. We now have access to the reality and to the practice. Much of the early theory of a globalised communications has proved flawed and this has undercut the intellectual platform of what passes for much of Government policy.

One example. Big IT projects do not work without massive expense, failures of delivery, inflexibility and systemic risk - yet this Government has invested vast amounts of time and resource into projects (like the NHS' IT spine and ID cards) that it imperfectly understands in either technmological or social terms.

Another example. Unless in business or part of the liberal elite, people still communicate for political or economic action, rather than opinion or therapy, in social networks that are still largely based on local geography. Towns, regions and nations matter to most people far more than some abstract global community.

The insertion of a proper working understanding of the practice of new technologies and of the importance of locality into policies on economic wealth creation and on the maintenance of social cohesion does not require a 'turn to the Right' - the conservatives are simply a more individualist and equally authoritarian version of the prevailing ideology.

It does require the effective displacement of a whole generation of honourable failures on the Left and their replacement with a younger and more libertarian political class that understands the need to balance global capitalist risk-taking and innovation on the one hand with the economics of social cohesion and of locality on the other. 

This is not the 'third way', it is true socialised capitalism or market socialism and both owners of capital and communities are going to prefer it to anything being delivered up by the current elite of whatever political party.

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