In 1949, all light entertainment broadcasts on the BBC were made subject to a set of decency rules known, by the colour of the volume in which they were inscribed, as the 'Green Book'. It stipulated: 'an absolute ban on ... jokes about lavatories, effeminacy in men, immorality of any kind; suggestive references to honeymoon couples, chambermaids, fig leaves, ladies' underwear e.g. winter draws on; animal habits e.g. rabbits, lodgers, commercial travellers.'

The ban was lifted 14 years later, in the year that Philip Larkin would later identify as the one of collectively lost virginity: 'Sexual intercourse began/ In nineteen-sixty-three/ (which was rather late for me)/ Between the end of the Chatterley ban/ and the Beatles' first LP'

Sex is the syllable that hooks you into Larkin's over-quoted verse. But the really vital word - the subversive word - is 'intercourse'. It is a collision between the idea of social communication and private intimacy; it means conversation and penetration.

Somewhere between postwar austerity and Woodstock, copulation went public. That process is usually feted with a jail-break metaphor: sexual liberation.

Since then sex has become progressively freer. Images that would have been considered obscene two generations ago, are now sprawled 10ft high on billboards. Everything from chocolate to shower gel is sold with the implication that it gives quasi-orgasmic pleasure to the consumer.

Surely this is the end of a road. Every phrase, act, body part whose representation was taboo in media even a decade ago, has now been broadcast on the BBC. What limits remain in the mainstream are blurred in the multi-channel world of cable and satellite TV; they do not even exist online. A broadband connection is all that are required to explore every permutation of sexual activity, free to view, free from shame.

For decades now that process has seemed unstoppable and irreversible. And who would want it stopped or reversed? It is certainly hard to imagine a majority of British people today allowing politicians and clerics to police the boundaries of public morality as they once did. But it isn't just zealots and prudes who question whether or not things might have gone too far. With any currency or commodity, over-production leads to inflation and devaluation. If that happens to sex, aren't our public life and our culture somehow impoverished?

There is still some limit to supply; some censorship. You will never see an erect penis on primetime television. The pretence that children under 18 are forbidden from watching certain movies is still quaintly upheld. (As if they don't swap the most graphic highlights phone-to-phone in the playground).

But obscenity law and censorship before the Sixties were meant to reinforce a more pervasive social opprobrium. Subversion and titillation in plays, films and books worked by testing the boundaries of that cultural austerity. Now we live in an age of sexual profligacy. The function of law is judged not to be the protection of collective morals, but of individuals. Occasionally that means regulators upholding complaints about sexual material being used 'gratuitously'; but that generally means it was displayed or broadcast in a way that deprived the public of a reasonable choice to avoid it. It was on the side of a building or shown before the watershed.

Mostly the law is used to stop (or try to stop) sexual representations that break other laws - chiefly the abuse and exploitation of children. By and large, everything that takes place between consenting adults is allowed.

That is a good thing.

The original impetus behind the sexual revolution was both moral and political. Puritan sexual squeamishness was considered by Sixties liberals to be hypocritical and repressive. They argued that the culture of shame in relation to all things sexual was promoted by a class-based establishment that feared openness in any area of public life as a threat to its authority. Sex and obscenity were, in the eyes of that establishment, inseparable from the idea of vulgarity - the moral corrosion of the nation perpetrated by the lower orders.

So getting sex into media and the arts was the cultural front in a wider progressive battle, the same one that fought for decriminalising homosexuality; legalising abortion; ending censorship.

The publisher's defence in the Lady Chatterley trial, in fact the only defence allowed under the 1959 Obscene Publications Act, was that the book was a work of demonstrable 'literary merit'. Material that could not be proved as art was assumed to be 'liable to deprave and corrupt.'

But the argument was not so much won by the defence as lost by the chief prosecutor when he asked the court if Lady Chatterley's Lover was 'the kind of book you would want your wife or servants to read.'

Members of the jury, not being in a position to employ staff, decided that the only way to judge its potential to accelerate social decay would be to read it themselves - and to allow everyone else the same privilege.

Once established in the world of books, the 'art not porn' principle was soon applied to the West End. The 1968 Theatres Act removed the power of the Lord Chamberlain, a royal appointee, to shut down blasphemous and obscene plays, prompting a rush of nudity onto the national stage.

But for all that the liberal intelligentsia might have congratulated itself for prodding the establishment into incremental reform, the revolution was actually driven - even in the Sixties - by market forces. The twin agents of change were then and still largely are music and television.

In 1955, ITV was launched. Before then, broadcasting was the monopoly of the BBC and it was run long the founding principles of the corporation's first director-general John Reith, a strict Presbyterian.

While ITV also had a public service mandate, it was less uptight and not embarrassed by populism. Crucially, ITV was quicker than the BBC to grasp the commercial power of rock'n'roll. Both channels tried to do music broadcasting but it was ITV's Ready Steady Go! (1963-66) that became essential viewing for the generation that was about to be truly, sexually liberated.

And it was rock'n'roll that did it. It was the penetration of subversive pop music into people's homes, via the TV, that did more than anything else to challenge taboo, aggravate moral conservatives and push the boundaries of public decency, from Elvis's gyrations and Mick Jagger's leer, via Jimi Hendrix humping a guitar, through the Sex Pistols' profanity and Frankie Goes to Hollywood - banned by the BBC for singing 'Relax, don't do it, when you want to come'. That was 1984.

The music industry has been so important for pushing back sexual boundaries because it has been so adept at commercialising offensive manners. Whenever a youth cult has appeared that might challenge received norms of reputable behaviour, record company executives have co-opted the revolution, packaged it as a lifestyle brand and sold it back to the punks on the barricade.

The music business was the first to decide that standards of decency could be set by the market instead of political or religious doctrine. But in the Eighties, the whole of British society was reconfigured by the same ethos. The entire economy was reoriented towards finding the most efficient way to satisfy consumer appetites. Because sex sells, a dramatic liberalisation of carnality was inevitable.

That was not what Margaret Thatcher intended. She was an old-fashioned moralist who extolled 'Victorian values'. But Thatcher never reconciled an intellectual conflict at the heart of the doctrine that took her name. Economic liberalism and social conservatism clash because freeing business from state control and subjecting it to competition creates incentives to promote the sort of things that guardians of traditional 'family values' find distasteful. The market encourages instant gratification while the essence of sexual conservatism is deferring satisfaction - or denying it.

Because Thatcher's Conservatism was socially illiberal, the artistic and cultural elite in Britain continued to see attacking taboo as part of the political struggle of the Sixties.

Those cudgels were taken up by Labour after it took power in 1997. While Tony Blair's government disappointed the liberal left on many issues, it did remove some of the vestiges of statutory sexual prejudice: It repealed Section 28 (the bar on teachers 'promoting homosexuality'), it introduced civil partnerships and it lowered the age of consent for gay sex. New Labour gave Britain its first openly gay cabinet minister.

Prejudice continued during the Blair years, of course. But the old moral conservatives were shunted out of the cultural mainstream. They formed a reactionary rump, commonly derided for being 'out of touch', bewildered or embittered by the new, modern, licentious Britain.

So in the late Nineties social and economic liberalism joined forces. Sexual images floated on the market unregulated by politics. Whenever there were objections raised to the sexualisation of public space, there was a ready ideological rebuttal that combined the moral philosophy of JS Mill and the economics of MH Thatcher: individuals have the right to do as they please so long as no harm is done to others; media and business have the equivalent right to trade in whatever they fancy.

The old argument that sex in popular entertainment corrodes public morals has been turned on its head. TV broadcasts that are attacked as degenerate - Big Brother being the favourite target - are defended on the grounds that they reflect contemporary mores, and so serve a useful function. Far from corrupting the masses, sex on TV now apparently edifies the elite.

So is that the way things will be from now on? Crude economic logic would suggest that as long as there is a correlation between sex and revenue, the volume of explicit material will increase. Moreover, to maximize the financial return from sex, it is necessary to shock, and that means perpetually pushing back the boundaries.

While that has been the trend since the second half of the 20th century, there is historical precedent for cultural shifts in the opposite direction. Georgian England was much more licentious than Victorian England. Scurrilous journals routinely published satirical cartoons lampooning public figures in coitus. Popular illustrations and engravings displayed heaving bosoms, exposed nipples and bulging trousers. Those were all covered up - as, notoriously, were the legs of pianos - by the new, bourgeois, churchy elite created by the Industrial Revolution.

From Cromwellian Puritanism to Restoration bawdiness, from Victorian and Edwardian respectability, via wartime austerity to Sixties free love, sex has been alternately glorified and decried. The pendulum could swing again.

There is some evidence of a backlash already. Religious groups are become more effective in mobilisation against material they consider offensive. Evangelical Christian lobbying succeeded earlier this year, for example, in forcing Heinz to cancel a TV advertisement that showed two men kissing.

It is no surprise that people who think God hates homosexuality get upset by a lot of what is on TV these days. To liberal minds, the religious homophobes are simply on the wrong side of a moral argument, so their views should not be accommodated in public policy.But that is just a continuation of the old argument between permissives and prudes, only with the balance of power reversed. Now it is the religious reactionaries who think their views are suppressed and despised by a secular establishment.

There is, however, a more persuasive case against the ubiquity of sex in the public realm. It starts by remembering that market forces are amoral. Consumerism happened to serve the cause of sexual liberation from Sixties onwards, but that doesn't mean it is always an engine for progress. It erodes boundaries that even the most relaxed liberals consider sacrosanct. It pushes back the line, for example, where children become adults, and therefore targets for sexualised marketing.

Perhaps it is only on becoming a parent that the extent to which a sexual aesthetic has spread through society becomes alarming: clothes for eight-year-olds that are shrunken versions of outfits designed for 18-year-olds to wear clubbing; Playboy Bunny pencil cases; home pole-dancing kits sold as toys.

That last item was the subject of a campaign last year by consumer groups and children's charities against Tesco. The supermarket denied it was encouraging children to learn erotic dancing, but it did remove the kit from its toy department. Likewise, in 2002, Asda withdrew a range of lace underwear for pre-teen girls after complaints that the product imitated designs for adult lingerie.

But even aside from sexy products aimed at kids, the normalisation of erotic imagery makes it hard for parents to keep some cordon of innocence around childhood. A walk down the street provides a glut of messages that tell us what women's bodies should look like, and what they are for. The top shelf may be reserved for the hard stuff, but Nuts magazine is practically at toddler height.

This is a new culture war over the boundaries of public sex. Sexual intercourse in Britain may have begun in 1963, but it has long since been overtaken by sexual commerce. Liberalism won the battle against the tyranny of the anti-sex fogeys, the church and the 'Green Book'. It hasn't yet found a way to take on the tyranny of the ultra-sexual market.

Before that can happen there is a whole vocabulary to be reclaimed from conservatism. Liberals do not feel comfortable with words like 'modesty', 'decency' and 'discretion' when used in the context of sex. They reek of closed-minded piety. But, if not used as a cover for repression, they might describe real virtues. At least there has to be some way for a liberal society to value sex instead of simply hanging a price tag on it.

• Rafael Behr is the chief leader writer of The Observer