Esther Rantzen: none of Labour’s war room strategists saw her coming. The government is, it hardly needs saying, in very deep trouble. The expenses row will hit Labour hardest, as an anti-incumbency mood spreads. The anger at the City bankers has been redirected three miles west, towards the Palace of Westminster. There is a strong whiff of populism in the air. The political objective for Labour should be to channel that anger into a republican liberal movement to shift power from institutions to people.

The travails of the financial services sector and of parliament demonstrate the dangers of concentrated, unaccountable power. Labour’s only hope is to abandon the goal of seizing control of powerful institutions, and replace it with a radical agenda to release power to individuals. It is not society that is ‘broken’, it is our institutions. A republican liberal politics takes Liam Byrne’s desire for a ‘nation of powerful people’ seriously. It answers James Purnell’s call for an ‘egalitarianism of power’. And it echoes Hazel Blears’s demand that the economic downturn ‘should be the catalyst for more decentralisation of power to citizens and communities’.

The ideal animating the idea of a liberal republic is that individuals have the power to determine and create their own version of a good life. The ‘good society’ is one composed of independent, capable people charting their own course, rather than a perfect shape to be carved by the elite. It is messy and unpredictable. There are six vital features of a liberal republic.

First, power lies with people, not institutions or groups. Conservatives on left and right prefer power to be exercised by institutions, rather than people. They want order. And they fear that, in the end, people do not know what is good for them. But as the liberal philosopher Amartya Sen argues: ‘Responsible adults must be in charge of their own wellbeing; it is for them to decide how to use their capabilities.’

Of course, institutions have value – they embody the desire of people to engage in collective, social activity. Nobody yearns for a world sandblasted clean of civic, social and state organisations. But institutions exist to serve individuals, not the other way round. The power to exit from, ignore or abolish institutions ultimately rests with individual people. Conservatives believe, by contrast, that power ought to lie in the institutions themselves. Economic conservatives invest private sector corporations with power, even when they are acting arbitrarily and monopolistically. Social conservatives emphasise the family, church or community. Social democrat conservatives gather power to the state. Communitarian conservatives imbue the social group with power over the individual.

The point is that institutions and communities can be valuable and liberating – or cloying and dangerous. Bertrand Russell warned against ‘attributing ethical qualities to communities as such’, and insisted that ‘what is good or bad is embodied in individuals, not primarily in communities’.

Second, markets are usually liberating – but not always. So the republican liberal approach to markets is instrumental. Markets serve liberal ends by dispersing power to individuals. But when economic power becomes concentrated in monopolies or cartels, the liberating potential of markets is undermined. This is why liberal economics is not neoliberal economics.

But there is a risk that recent economic events will blind us to the overwhelmingly positive contribution of free markets to prosperity and liberty. The test to be applied to any social or economic structure is the same as the one TH Green posed for any action by government: ‘Does it liberate individuals by increasing their self-reliance or their ability to add to human progress?’ Markets provide an important means through which people can exercise what Isaiah Berlin called ‘the painful privilege of choosing’, but clearly not the only one.

Third, dissent and diversity are to be encouraged and embraced. Freedom of speech matters because we need to be able to argue for different ways of living. Dissent and diversity are not only inevitable, but welcome indicators that people are leading radically different versions of the good life. This is not to say that everyone will be successful. Some will fail. Our lives may be wracked with tragedy and failure – but they are our own tragedies and failures.

Fourth, people determine for themselves what a ‘good life’ is. Other moral philosophies are based on the presumption that some individual, institution or ideology should supply a definition of a good life for us. The medieval popes thought someone leading a good life would be pious and poor; modern social democrats think they will be secular, but freed from poverty; conservatives that they will be married and economically productive. The goal of conservative politics then becomes to ensure that as many people as possible conform to this standard. Liberals pay people the compliment that they might know their own mind, and their own good.

Fifth, freedom requires resources. Unlike their libertarian distant cousins, republican liberals do not, however, assume that the conditions for a self-directed life emerge out of thin air. Independence requires a set of what Sen labels capabilities – especially financial resources, education and skills and health. Without them the goal of independence is a pipe dream. Egalitarians ought to focus on the capabilities people have, rather than on narrow measures such as income or poverty. Liberals care deeply about equality, but in terms of life chances, rather than income. ‘The problem of inequality,’ Sen argues, ‘in fact gets magnified as the attention is shifted from income inequality to the inequality in the distribution of substantive freedoms and capabilities.’

Sixth, for independent, capable people to build their own lives they also need power. The long tradition of civic republican thought insists that people are only free when they are not, in Rousseau’s phrase, ‘at the mercy of others’. This ‘neo-Roman’ view of freedom – expressed by David Marquand as a ‘democratic republicanism’ – departs from the classic liberal view of freedom as non-interference. A dictator may govern liberally, but his people are not free. Unlike classical liberals like Berlin, republican liberals insist that citizens are only free when they have an equal voice in a properly democratic political system.

Liberal republicans insist that power is held at the lowest level possible. Discussions in political circles about ‘devolving’ power approach the question from the wrong direction. The default assumption should be that individuals have power, unless there is a good reason for consolidating power upwards to communities, local agencies, national government or international bodies. Individuals should control their own health or social care, for example, through the possession of an individual budget: an approach to policy being pursued in the UK, but at a glacial pace. Similarly, parents should have the power to choose a school for their children, and this will only happen if they control the purse strings.

These six demands amount to a charter for a liberal republic. Labour remains too wedded to an institutional conception of power, rather than a liberal one. The party has too often acted like the ‘impatient reformers’ John Stuart Mill warned against, those who ‘thought it easier and shorter to get possession of the government than of the intellects and dispositions of the public’. But the dangers of institutional power have rarely been more evident in recent months that at any time in recent decades. Power and freedom for all: these are the republican liberal goals. They should be Labour’s, too.