As liberalism and Marxism competed against one another for hearts and minds during the 20th century, they both had something in common -- a disdain for the political route. Original liberalism relied more on economic means than political means and believed government shouldn't intervene in the economy. Marxists believed that economic forces and the harmonious result of class struggle would eventually kill off the State, making it unnecessary when no classes need be suppressed anymore.
The reaction to classical liberalism and Marxism was, what was called in Europe, social democracy, the third way which embraced political means as a way of managing the economy and preventing the unjust consequences of unfettered capitalism. I suppose in America this political force has been called Progressivism or Modern Liberalism, but calling this political force liberal is no longer justifiable. Modern Liberals in America must distinguish themselves from social democracy by supporting real limits on government power and supporting economic means over political means, or else they don't deserve to be called or considered liberal.
Social democrats didn't necessarily want to transition from capitalism to socialism, when it became evident that socialism proper couldn't generate real wealth, and they saw no ineviitability in the transition, thus, their split from Marxism was based on a third way in which capitalism could be used to create wealth, but government would control and distribute the wealth for the greater good through political means. This is how social democrats became allied with nationalist socialists and fascists during WWII -- they joined in reaction to the anti-statist tendencies of both liberalism and orthodox Marxism.
This reactionary movement manifested itself in the US in the Democratic Party, and the two party system, shared with statist Republicans on the Right, has worked much like the social democratic and fascist system in Europe in the 20th century in opposition to liberalism/modernization and Marxism.
The battle has been a timeless battle seen throughout history when the forces of liberty are attacked and subjugated by the forces of domination. The forces of domination have many justifications for control and management -- the social democratic justification was to do what's best for the collective, and not simply what's best for individuals. We can see where this force of domination has led us -- to great State power, over-regulation, violations of the Constitution, a mountain of debt, high unemployment, failed education system, an out of control Fed, a crony-infested military/industrial complex, a protected power eilte, mideast entanglements in which men and women on both sides are dying and suffering needlessly, small businesses squashed by government-favored Big Corporations, an impotent congress and an imperial presidency.
I say it's time for another round, a permanent condition, of anti-statist liberalism -- real liberalism. Liberals of America wake up and be counted or admit that social democracy is a more appropriate label than liberalism.