Mr Blair, the Shadow Home Secretary, said that the 'socialism of Marx, of centralised state control of industry and production is dead because it misunderstood the nature and development of a modern market economy'.
The speech, to a Fabian Society conference in London, struck a sharply different tone to recent comments made by one of the other leadership candidates, Margaret Beckett.
Mr Blair argued that socialism did not need to be bound to 'the narrow, time-bound class or sectional interests or particular economic prescriptions'. Mrs Beckett has alarmed some modernisers with her pledge that 'there could well be a need to sweep the board clear' of Conservative industrial relations legislation and start again. Although her supporters insisted that her comments were consistent with party policy her opponents argued that she might be marking herself out as a clear candidate of the left.
Suggestions that Gordon Brown, the Shadow Chancellor, who nominated Mrs Beckett for the deputy leadership, was embarrassed by her comments were denied. There has been no contact between the two since Mrs Beckett spoke.
In common with Mrs Beckett and John Prescott, Mr Blair rejected pacts with the Liberal Democrats, arguing that the future would rest not on deals but 'the power and energy of our ideas and our vision.'
Mrs Beckett's supporters warned that if the party elected Mr Blair leader and Mr Prescott deputy, then Labour's most senior woman politician would be left without a leadership role or automatic membership of the National Executive Committee and the Shadow Cabinet.
The following is an edited extract from Mr Blair's speech:
The Socialism of Marx, of centralised state control of industry and production, is dead. It misunderstood the nature of a modern market economy; it failed to recognise that the state and public sector can become a vested interest capable of oppression as well as the vested interests of wealth and capital and it was based on a false view of class that became too rigid.
By contrast, socialism as defined by certain key values and beliefs is not merely alive, it has a historic opportunity now to give leadership. The basis of such socialism lies in its view that individuals are social, interdependent human beings, that individuals cannot be divorced from the society to which they belong. It is, if you will, social -ism.
It contains a judgment that individuals owe a duty to one another and to a broader society - the left view of citizenship. And it believes that it is only through recognising that interdependence and by society as a whole acting upon it that the individual's interests can be advanced. It does not set apart individual interests and the interests of society as the Tories do.
Once socialism is defined in this way - a set of principles and beliefs based around the notion of a strong society as necessary to advance the individual - then it can liberate itself. It then no longer confuses means, such as wholesale nationalisation, with ends, such as a fairer society and more productive economy. It can move beyond the battle between public and private sector and see the two in partnership.
There are at least three obvious economic changes in the post-war world. First, the economy is global; economic isolation is neither desirable nor feasible. Second, there has been an explosion in service industries coupled with the development of a consumer culture. Third, the world of work has been revolutionised. Almost half the workforce are women; many choose to work part-time. The pattern of working hours has changed. People change jobs several times in their lives.
Above all, as a modern economy develops, the premium on knowledge and education becomes ever greater. It is the amount of value they (the workforce) can add to what they produce that is the key to overcoming competition from low- wage or low-skill competitors.
Yet we have failed to answer this challenge. Large numbers of people are undereducated. There are still frightening proportions of young adults that are both illiterate and innumerate. We are in danger of dividing into two groups in the working population: those with careers and those with jobs.
The old extreme left has no real answer to these problems - believing that addressing them is collusion with the market system. The right ignores them or, in the case of bad management practice, endorses it.
This is the chance for the Labour Party and the left to capture the entire ground and language of opportunity for itself - by policies that are entirely consistent with its traditional principles - namely intervening to equip and advance the individual's ability to prosper within this new economy - but applying them in a different way for the modern world. How it does so should be where the new thinking and ideas are developed, released from false ideological constraints.Reuse content