Richard V Reeves argues that the Liberal Democrats should learn from one of their past leaders, Jo Grimond, and abandon the search for an alignment with Labour in favour of strong civic liberalism.

Jo Grimond was leader of the Liberal party from 1956 to 1967, and then again briefly as caretaker after Jeremy Thorpe's fall from grace in 1976. So who cares about a politician who peaked half a century ago, never held office, and led a party with a puny parliamentary presence?

Grimond demands our attention not for his political achievements but for his political philosophy. In a long series of books and pamphlets, he articulated a generous, pragmatic, civic liberalism that is at odds with Labour's post-war economic statism and with Thatcher's market fundamentalism - but feels fresh in 2012. Grimond's internationalism and early acceptance of the growing need to pool national sovereignty feels radical even now, although that almost certainly says more about our lack of progress on this front than his prescience.

From one point of view, Grimond was clearly a 'small state' liberal. And he was always a hawk on public spending: he criticised Thatcher for not being more aggressive in terms of cutting state expenditures. He savaged what he called the 'conservative state socialist wing' of British politics. For him, the economic role of the state was to control spending and inflation, and to wage continuous war against the monopolistic tendencies of business activity. He was pro-market, not pro-business. He strongly believed that market-led growth contributed more to human welfare than welfare states, once declaring that venerable department store Marks & Spencer did more to help the poor than most social workers. (This was a while ago.)

But the best way to define Grimond's liberalism is in terms of opposition not to the state but to all forms of concentrated power. His liberalism was anti-corporatist. He fiercely opposed the power of closed-shop trade unions, which he likened to 'medieval barons, ganging up against the common people'. He demanded a shrinking of the state, including a shift towards greater means-testing of benefits; he called for significant devolution of power to Scotland and Wales. But he was also sceptical of big business and worried about the power of commerce in a consumer society.

Grimond's hatred of nationalisation was matched by his enthusiasm for worker-owned firms. He wanted employees, not the state, to increase their share of ownership. Grimond wanted to protect workers 'against the tyranny of employers, trade unions or other associations' (the italics are his). And the best protection was ownership.

So he helped to found Job Ownership Limited (precursor of today's Employee Ownership Association), and described Mondragon-style shared ownership models as 'socialism without the state': in other words, the kinds of socialism liberals have argued for since John Stuart Mill. For Grimond, companies were part of society because workplaces are part of people's lives. So the firm could be one of the most important bulwarks of a more civic liberal society.

In terms of social policy, he combined support for more tolerant society (he was an active member of the Minority Rights Group) with a desire to focus welfare spending on the neediest and in a manner that promoted responsibility rather than dependency. 'We hear a good deal about Opportunity,' he wrote, 'but not so much about Responsibility, which is the other side of the coin.' He was a small-c conservative on the need to 'restore family life', although he said little more about this restoration was be achieved.

For Grimond, the great mistake of mid-century liberals had been to 'forget that man is a social animal' and to veer off towards a stark individualism that was out of step with the founders of British liberalism. But unlike his Labour colleagues, he did not believe that the state 'knows what is right and will pursue it and the individual will not ... If we must have high-sounding phrases I prefer liberty and fraternity to equality.'

Grimond did not look to the state to generate the conditions for a liberal society: 'Responsibility rests with the people - government is residual.' But nor did he think that individuals, acting entirely alone on selfish impulses, were likely to lead good lives. He was adamant that it was up to each of us to determine what to make of our lives. Alan Ryan's description of Mill applies equally to Grimond: 'He wanted volunteers for virtue, not conscripts.'

Grimond's liberalism was neither state liberalism nor laissez-faire liberalism. His was a civic liberalism, certain that individuals had to 'fix the ends of human existence', but attentive to the social and economic institutions - 'fraternity' - through which, in the thick of everyday life, each of us will make our way. He wrestled with an ancient liberal dilemma: how to support social and community institutions while protecting the right of individuals to determine their own ends. Institutions can oppress - as Isaiah Berlin never tired of reminding us. But they can also liberate.

Vitally, however, he did not think the state could step into the civic liberalism space. A 'good society' is one made up of good, free citizens - and the generation of goodness lies almost entirely beyond the reach of the state. The welfare state should be small and sharply targeted. Taxes should be low. Markets should be free. Even when he was tempted by state intervention - for example, to curb excessive advertising, for which he had patrician disdain - he recognised the need to resist. 'It would be an extremely delicate operation to cut out the bad and leave the good,' he wrote. 'I pin my faith on education and public example.' A Grimond liberal shares with a social democrat the temptation to order society into a better shape; the difference is that the liberal knows to resist it.

Civic liberalism is a political philosophy with a quieter voice than the shrill ideologies of left and right, and drowned out for much of the post-war period. But in a post-crash, politically fractured Britain, with politicians of all stripes looking for new approaches, Grimond's liberalism is worth resuscitating - not least by contemporary liberals. He lamented in 1959 that 'we were ahead of our time'. Of course, Liberals have been saying that for decades. Perhaps this time he was right.

This is an edited version of a full article which appears in the latest edition of Juncture, IPPR's journal for rethinking the centre-left.