Tony Blair is right. Labour has made some big and avoidable mistakes since it came to power nearly two years ago. Keir Starmer had a strategy for winning the election but lacked a coherent plan for what his government would do next. Fair cop.

Blair is also correct when he says that unless Britain tackles some long-term structural issues, it is in danger of being relegated from the “premier league of nations”. Achieving higher levels of sustainable growth is one challenge. Welfare reform is another. And as the former prime minister notes, reversing Brexit is not a solution to those problems.

But, all that said, Blair’s 5,700-word essay published by his Institute for Global Change is a flawed analysis of what the country needs. It is one part nostalgia for a golden Blairite era that never was, one part belief that AI is the answer and one part failure to accept that the current crop of Labour politicians might be on to something.

AI is a case in point. The UK government is trying to steer a middle way – a very Blairite concept – in its approach. It wants to encourage AI startups while providing the proper regulatory safeguards to protect the public. It doesn’t want regulation to stifle innovation, as it does in the EU, but nor does it want a free-for-all. This seems a sensible approach. Blair, from what he says, seems to have drunk far too much of the Silicon Valley Kool-Aid.

He has also been too quick to jump on the anti-net zero bandwagon, a curious stance for a politician whose government commissioned the groundbreaking Stern review into the economics of climate change two decades ago. The choking off of crude oil shipments through the strait of Hormuz is one reason why Ed Miliband is right to be going big on renewable energy. The UK’s record-breaking temperatures this week are another.

But it is Blair’s failure to accept that the world has changed since he left Downing Street in 2007 that really jars. That change was swift and brutal. Within a month of him stepping down as prime minister, the cracks started to appear in the global financial system that led a year later to the near-collapse of banks around the world.

This was a complete system failure of the free-market liberal model championed by Margaret Thatcher. Attempts to resuscitate that model have been in vain for one simple reason: the model was a complete dud. It didn’t make the economy grow faster, it didn’t lead to higher levels of investment, it didn’t allow wealth to trickle down from rich to poor.

Instead, it led to deindustrialisation on an epic scale and – by reducing the power of trade unions – created a labour market in which employers were able to call all the shots. Labour’s changes to employment rights will shift the pendulum modestly back in favour of workers.

Blair sees this as an attempt to turn the clock back to the 1970s, rather than an acknowledgment that the result of Thatcher’s flexible labour market has been casualisation and exploitation. It has also led to weaker productivity since employers have used cheap labour as an alternative to investing in new equipment.

Andy Burnham is not wrong to say that Scotland, Wales and the regions of northern England have been treated badly by successive governments. Britain needs a plan for reindustrialisation that will raise manufacturing’s share of the economy. That will require investment – including public investment – in a range of sectors. It is not just a matter of relying on AI.

Deindustrialisation didn’t end when the Conservatives lost power in 1997 but continued under Blair. His governments broadly accepted the Thatcherite settlement that they had inherited: a trust in free markets, a concentration on financial services, retaining the legal curbs on trade unions.

And for a while it seemed to work. Cheap goods from China kept inflation and interest rates low, creating the perfect conditions for a property boom. Light-touch regulation spawned an anything-goes mentality in the City, with ministers turning a blind eye to the buildup of debt because tax revenues from excessive speculation could be recycled into higher public spending. It worked until it didn’t. Thatcher’s dream of a liberalised economy died when Lehman Brothers went bust in September 2008. Blairism died with it.

That was the moment the left should have been ready not just with a critique of what had gone wrong, but a plan for what to do next. Sadly that opportunity was not taken and the economy has been allowed to drift for the past 18 years. Growth has been weak, living standards have barely risen, the public mood has become angrier and angrier.

Blair’s advice to Labour is that it should occupy the centre ground of politics, snuggle up to big business, get people off welfare, fully embrace AI – and that it should have chosen to raise VAT rather than national insurance. This is fantasy-island stuff. Apart from anything else, there is a failure to accept that the centre ground of politics has shifted to the left as voters have become ever-more dissatisfied by a model that only seems to deliver for the better off.

If Starmer is furious with Blair he has every right to be. When you are fighting for your political life it is unhelpful – to say the least – to have one of your predecessors lobbing bricks at you. As Clement Attlee once said to one of his critics: “A period of silence on your part [would] be welcome.” In truth, Starmer’s inability to connect with voters means he is doomed anyway.

Yet it is not serious politics to suggest that the present government could rip up its manifesto pledges, take the axe to the welfare bill, ignore the egregious behaviour of the privatised utility companies, pretend the climate crisis isn’t happening and move closer to Donald Trump.

Labour, Blair says in his essay, has an “almost infinite capacity for self-delusion”. That may well be true. But if the former prime minister thinks he here has the solution to Britain’s problems, no one is more deluded than he is.

• Larry Elliott is a Guardian columnist