Is the only guaranteed alternative to English domination Scottish independence? This is certainly a card the SNP likes to play, evoking the Scottish heroes of the late 13th and early 14th century wars of independence, William Wallace and Robert the Bruce. But historically there was another alternative to English empire, and that was the idea of Anglo-Scottish union. Unionism is in fact a Scottish invention - the original 'third way' - and not, as might be imagined, an English idea.

Union – as an alternative means of controlling English imperial ambitions – was the brainchild of the Scottish philosopher and historian John Mair, whose Maioris Britanniae Historia (History of Greater Britain) was published in 1521. An Anglo-Scottish union, he argued, would achieve the same political benefits for Scotland as independence, as well as a range of social and economic goods which embattled independence on a small island shared with a much greater power had conspicuously not delivered.

The SNP is not keen to be reminded that dream of a British union long predated not only the full political union of 1707, but also the loose union of the crowns of 1603. In other words, union was not simply an ex post facto justification of political reality, but a visionary project designed not to subordinate Scotland to England but as a means of taming England's overbearing imperial pretensions. Indeed, unionism is as Scottish as nationalism, part of the warp and woof of Scottish history for half a millennium.

So when Union came into being it was not an English takeover – in some ways it was quite the reverse. In return for amalgamating with the English parliament, the Scots were allowed a large measure of institutional autonomy, including their established Presbyterian kirk and distinctive system of Roman law. Furthermore, the Scots gained membership of a large free-trading area and access to England's overseas colonies under the protection of the royal navy.

Scotland flourished within the union of 1707. Eighteenth-century Scotland – the fastest-urbanising society in Europe – was an economic success story, building a dynamic economy with strengths in textiles, ironworking and chemicals. The very rapidity of economic change encouraged the analysis of social transformation and gave rise to one of the most distinguished bodies of sociological literature in the modern world - what is now referred to as the Scottish enlightenment. The novelist Tobias Smollett talked of 18th-century Edinburgh's 'hotbed of genius', and the appropriate cultural comparison seemed to be with the philosophical glories of ancient Greece. Indeed, by the early 19th century Edinburgh was known as the 'Athens of the north'. It had its own acropolis on Calton Hill, and various monuments and temples dedicated to the glory of Scotland's cultural contribution within the union.

Such was the magnitude of Scotland's success story that from the defeat of Jacobitism at the battle of Culloden in 1746 there was very little need to make the case for union. It was such an unalloyed boon both in material and cultural terms that it needed little or no justification. Instead, it was the union of Britain with Ireland in 1800 – brought about on the assumption that it would do for Ireland what the union of 1707 had done for Scotland – which required defence. From the 19th century, unionism meant making the case for the British-Irish connection; the earlier Anglo-Scottish union was not simply unquestioned but so fundamental an axiom of British political life that it began to inhibit any clear exposition of what it might bring to Scotland or indeed England. All eyes were on the Irish question.

The smearing of union

But the very successes of the 19th-century Scottish economy stored up problems for the future. Scotland had achieved dominance in the field of heavy industry not only through technical skills but also by way of a relatively underpaid workforce. A vicious circle of overdependence began. The manufacturing elite preferred investment abroad to the limited opportunities available in the domestic economy, where there was insufficient domestic demand, while, in turn, light industries and the service sector were underdeveloped. The world wars served only to reinforce these imbalances and to delay the inevitable collapse of an under-diversified economy.

The rise of the SNP from the 1930s was merely one minor symptom of the malaise, less significant at the time than either communism or anti-Catholic prejudice. After all, there was insufficient faith in the long-term prospects of the Scottish economy to sustain a dream of home rule. As the Scottish Labour politician Tom Johnston was to warn in the early 1950s: 'What purpose would there be in getting a Scottish Parliament in Edinburgh if it has to administer an emigration system, a glorified poor law and a graveyard?'

However, the discovery of oil changed all that. By the time the Scottish National party (SNP) made its major breakthrough in the two general elections of February and October 1974, it was able to make a positive economic case for independence, while unionism was associated with Conservatives and, worse, with the atavistic prejudices of the UK's most prominent Unionist politicians, figures such as Enoch Powell, who had just become an Ulster Unionist MP for South Down, and the Reverend Ian Paisley, founder of the Democratic Unionists. Unionism barely existed as a distinctive discourse in Scottish political life, and the only argument for union to enjoy some currency was the notion – now at best arguable, at worst discredited – that the Scottish economy would wither without English support.

Labour, SNP and the union

Oddly, the continued rise of the SNP under Salmond has not prompted any significant reappraisal of the case for union, which has remained tongue-tied and unimaginative. Unionist arguments – except insofar as they related to Ireland – have been in prolonged hibernation since the first half of the 18th century. The case for union needs to be updated and refurbished to meet the needs of each new generation.

The onus now is on Labour to make this case. The Scottish Conservatives have long been in electoral decline. They currently hold only one Westminster seat, and since the era of Thatcherism have enjoyed little or no rapport with the wider electorate in Scotland. Scottish unionism will amount to nothing without serious support from the Labour party. Yet this requires Labour politicians and thinkers to move away from an instrumentalist view of the state, which concentrates on the redistribution of wealth, the alleviation of poverty, and the nationalisation of vital but precarious industries. Of course, Labour has not ignored the territorial dimension of politics in the United Kingdom, but its primary concern in this area – naturally enough – has been on addressing regional imbalances in the economy. An understandable obsession with class has also inhibited Labour attempts to engage with the politics of a multi-national union-state. But without addressing how to retain Scotland in the union, Labour will be out of government in England and unable to meet its primary social democratic purposes.

Labour faces a further problem. Although unionists seem to find it difficult to articulate a positive argument for union, Scottish nationalists are not afflicted by the same inhibitions. The SNP is already making the case for a much looser 'social union' which would flourish in the context of Scottish independence. Ironically, it is Salmond himself who has made the most compelling in his Hugo Young lecture:

'When you consider our shared economic interests, our cultural ties, our many friendships and family relationships, one thing becomes clear. After Scotland becomes independent, we will share more than a monarchy and a currency. We will share a social union.'

The envisaged 'social union' is craftily opaque – all things to all men. It reassures monarchists that the union of the crowns of 1603 will continue notwithstanding the ending of the union of 1707. The use of the term 'social' also hints – no more than that, perhaps – at common standards of social services and welfare provision north and south of a political border, which will somehow not be a 'social' border. Salmond also wants to make an independent Scotland 'a beacon for progressive opinion' in these islands. Politically astute, he has pre-empted the social democratic case for union: that social democracy across Britain relies upon the support of a left-of-centre Scottish electorate working through the Labour party to deliver social democratic governments for the United Kingdom.

Salmond has also presented himself as a more reliable custodian of Anglo-Scottish membership of the European Union than the Little Englanders of the Conservative party. Indeed, 'independence in Europe' is the SNP's flagship policy, a way of winning support for Scottish autonomy within the protections of another union, a larger and so arguably more resilient one than the United Kingdom itself.

Making the case for the union

Nevertheless, a true social union in Britain – one grounded in 'social insurance unionism' – is incompatible with the SNP's vision of independence. For a social union to be meaningful, it would need as its foundation more than a common head of state and currency. The SNP presents the social union as a zone where friends and family from both sides of the border might observe allegiance to a beloved monarch and share the pound sterling. But Labour can make a much more compelling case for a social union which rests on a common fiscal platform (which need not prevent a further devolution of powers, at least within certain limits). This is – it should be stressed – not a matter of England subsidising Scotland, but about wealthy individuals and companies on both sides of the border contributing to a common safety net.

There are also economies of scale to be considered. A genuine social union would spread risk across the complex and diversified economies of the whole United Kingdom. Without a fiscal and political union, a social union – in the long run – is destined to be little more than an optimistic soundbite. For the likeliest prospect – under the loose SNP model of social union – is a beggar-my-neighbour spiral of cuts in corporation tax, leading in time to the erosion of welfare and pensions. The union-state is the unacknowledged bulwark of the welfare state.

The curious phenomenon of the SNP's pseudo-unionism also points to an elemental – and still unharnessed – power in the unionist cause: that even Scottish nationalists, notwithstanding their commitment to independence, can perceive how reassuring unions are in a world of anxiety and insecurity.

Scotland's financial sector thrived within the union. The Bank of Scotland, founded in 1695, and the Royal Bank of Scotland, established in 1727, contributed significantly to the development of Scotland's economic infrastructure. In particular, 18th-century Scottish banks pioneered the system of cash-credits - a kind of overdraft facility - which guaranteed a measure of liquidity to the emerging industries. The recent financial crash, and particularly the fall of Scotland's banking giants, showed that a powerful union-state provides a necessary safety net beneath the richly-rewarded trapeze-artistry of high finance. Indeed, in this respect the United Kingdom seems to be a more credible union-state than a European Union riven by national divisions, between Germans reluctant to mollycoddle Greeks and Greeks fearful of German imperiousness.

Whereas the European Union exists - somewhat superficially - as a contractual union, the British union is a union of belonging. In the United Kingdom, centuries of shared experience and a common set of values meant that English voters never questioned why English taxpayers' money was being used to prop up - notionally - Scottish banks. Would an independent Scotland - smaller and with a less diversified economy than the UK as a whole - not be highly susceptible to global fluctuations in the markets, say for oil, and thus find it difficult to guarantee a minimum standard of living for its people? Would 'independence in Europe' really make a difference in this regard? Has it shielded Greece from social trauma? Without the financial security offered by the British state, Edinburgh as capital of an independent Scotland, could become once again - in much less auspicious circumstances and with a different set of resonances entirely - 'the Athens of the north'.

On the other hand, there is a positive case to make for multi-national diversity - within limits, of course. Genuine political community is best sustained by a common language and a reservoir of shared ideals, notwithstanding inevitable differences in any community about how these might be realised. But in small countries too much ethnic solidarity can become claustrophobic, especially for immigrants - and small-nation homogeneity might also be stifling for natives too should they be, for example, homosexual, sceptical of conventional pieties, or even just mildly eccentric.

Moreover, in Scotland, sectarianism between working-class Protestants and Catholics is far from moribund, and debates over issues of sexual morality and freedom - especially when no longer conducted in a wider British context - might well ignite such tensions, or, scarcely better, provoke an aggressive combination of Protestant and Catholic traditionalisms on behalf of a repressively Christian social policy.

By contrast, a positive case can be made for the 'liberal' dimension of a social union. Britishness offers a non-ethnic badge of identification for citizens on both sides of the border. It doesn't frustrate full expression of a Scottish identity: Scots have, after all, lived with dual identities since the union of 1707. Concentric loyalties have flourished during the past three centuries: a kernel of loyalties to native glen, kirk and song at one's core of belonging, complemented by an outer husk of official allegiance - though perhaps at times no less emotional - to the British state.

At the micro level, there is also much that Scots currently take for granted and that might be threatened by independence. Will an independent Scottish state have to replicate the entire panoply of government ministries and public agencies, many of which benefit from economies of scale and are run - relatively speaking - cheaply and smoothly as British-wide institutions? How much would it cost Scotland, for instance, to set up its own equivalent of the DVLA at Swansea or, alternatively, to contract in to the DVLA from outside the United Kingdom? In other areas of public administration, the costings will be more elusive. By contrast with the humdrum and unspectacular efficiency of the DVLA, the BBC provides a compelling example of a widely loved service, whose broadcasting role in Scotland would be precarious in the event of independence.

Moreover, notwithstanding coded talk of a 'social union', welfare and pensions are, of course, likely to be even touchier subjects for Scots. Unionists need to capture for themselves the rhetoric of social union. Obviously, matters of public administration and the distribution of benefits do not capture the imagination of the wider public in the same way as centuries of grievances - or imagined grievances - concerning the overbearing behaviour of a richer and more powerful neighbour. Nevertheless, such is the complexity of modern society that an interlocking set of effective UK-wide bureaucracies - however dull and uninspiring a subject for campaign slogans - is not to be lightly jettisoned without overwhelming good cause.