For those who care deeply about the future of journalism, the phone-hacking scandal could hardly have been less well timed. Professional journalism's survival is threatened by the economic impact of digital technologies. The plurality and diversity of voice upon which representative democracy depends is in jeopardy. Needed urgently is debate about how well-resourced, professional news gathering can be sustained. Instead, tired 20th-century concerns about the ethics and ownership of popular newspapers are diverting attention from critical 21st-century realities.

The alleged hacking of Milly Dowler's mobile telephone generated a moral panic that was seized upon instantly by a curious alliance of elite establishment and left-progressive opinion. At the same time, it diverted attention from a crucial debate that was beginning to gather momentum. That discussion, about whether professionally edited, fact-based journalism can continue to play the role of an estate, not just an industry, in the multimedia age will remain important after those responsible for phone hacking have been identified and punished.

There is a crisis in journalism that has nothing to do with hacking and relates directly to the conduct of public affairs. It started with recognition that the internet has weakened the authority of large-scale professional media organisations and progressed to predictions that the web will destroy it. Many thinkers in the field of journalism and media studies believe this and find the notion irresistible. They burble with delight at the possibility that the power of big media may be shattered by what laymen call blogging and they grace it with the oxymoronic title "citizen journalism".

The essential difference between the two deserves definition. It is that much blogging is an amateur activity carried out by people with no understanding of journalism's social purpose who operate with scant regard for facts. Like the activists who, in the late 18th and early 19th centuries, published illegal newspapers seething with radical ideology and revolutionary zeal, they prefer opinion to evidence. Liberated by broadband from a free market in which their ideas have no traction because too few find them interesting, they bleat - and tweet - wild rumours, half-truths and conspiracies.

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That such freedom of expression is welcomed by people no editor would pay to provide copy is neither surprising nor objectionable. That it might or should replace professional journalism is troubling. As the news cycle accelerates, propelled by superb digital technology, the need for expert journalism that can distinguish fact from fiction and privilege objectivity over ideology grows too. Partnership with audiences is essential: they now possess the digital, mobile technology to send words, images and opinions to newsrooms at lightning speed. But they need professional journalists to sift and curate that information, and they know it.

Citizens intrigued by events in Syria or Libya or interested in the death of Amy Winehouse do, certainly, pay attention to what is trending on Twitter. They take note also of peer-to-peer recommendations on Facebook and other social networking sites. But they do not rely on these horizontal communications to discover truth. Once alerted by their friends, many of them follow links to reliable news sites such as BBC News Online, Sky News and newspaper sites such as those hosted by The Guardian, The Independent and the Daily Mail.

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Audiences have learned to follow this path from amateur information-sharing to professional news reporting. They understand that professionally edited mass media have the authority and power to inform and enlighten. They appreciate that there can be a symbiotic relationship between social recommendation and fact-based, professional journalism. Regrettably, they do not yet understand that the expansion of online and social media is undermining the economic foundations upon which professional news gathering rests.

News has never been more accessible or less well funded. A large chunk of blame lies with newspaper proprietors. When the internet was new, they chose to offer free access online to editorial content for which they had always charged in their printed editions. They were persuaded that online advertising revenue would flow in return. It did not. So, in one gesture of collective madness, newspapers throughout the liberal, capitalist world undermined the dual income stream from advertising and circulation that had long sustained awkward, trouble-making journalism and reinforced representative democracy.

Readers saw no compelling reason to pay for content they could read free on their computer screens. Circulations began to decline and they have not stopped falling. Audit Bureau of Circulations figures show that in July 2011 the 248,775 daily purchasers of The Guardian (down from 424,132 in October 2001 and from 7,426 in July 2010) were subsidising the reading habits of 2,613,405 daily unique users of Guardian Unlimited, that newspaper's free website. The Guardian demonstrated its editorial vigour by pursuing and breaking the telephone hacking story, but it may not survive to produce more such journalism. Last year its parent company posted an operating loss of ?58.6 million. Andrew Miller, chief executive of Guardian News and Media, warned in June that The Guardian may run out of cash in as little as three years.

The Guardian's losses have reached peaks of ?100,000 a day, but although its plight is desperate it is not unique. The Independent produces journalism consumed by 13,513,040 monthly unique users online from revenues generated mainly by 182,881 daily sales of its printed edition. It relies for its survival on the generosity of Alexander Lebedev, its proprietor, much as The Times (441,205 daily sales in July 2011, 678,498 in October 2001) is kept alive by Rupert Murdoch's deep pockets and his emotional commitment to news printed with ink on paper.

The link from newspapers teetering on the brink of insolvency to hacking is real. Tabloid circulations have been hammered, too. The News of the World sold an average of 2,667,428 copies every Sunday in June 2011, the last month for which figures exist. In October 2001 it sold 4,104,2 a week. The competition that reduced its readership did not come exclusively from online newspapers. That has not happened at quality titles, either. Social networking, the explosion of television channels available via satellite and Freeview and video games have all taken time once allocated to newspaper consumption. But declining circulation made competition ruthless. And when circulation wars are intense, journalists often break rules to please their proprietor and win market share.

That is the context in which hacking occurred. Comparable pressures helped to generate atrocious journalism in the era of Lord Northcliffe and Lord Rothermere, Britain's original press barons. Even in the glory days of Fleet Street's red-top tabloids, when Freddie Starr ate hamsters and profits flowed, the urge to beat rivals with attention-grabbing scoops produced excesses. As mobile telephones became ubiquitous in the early 1990s, it did not take unscrupulous journalists long to recognise their potential.

By 1997, when I became a broadsheet newspaper executive, few editors did not know that it was possible to hack a mobile telephone's message box. When it first became controversial, I had the process explained to me by a colleague who had never worked for Murdoch's News Corporation. We did not need or use such tricks at The Scotsman, but we knew they could be performed. I shall be flabbergasted if the News of the World was the only newspaper to commission hacking. That is among the reasons that I supported at launch the Hacked Off campaign's demand for an inquiry into the extent of the use of illegal information-gathering by journalists.

It is ideologically appealing to elite progressives to imagine that such criminality occurred only at newspapers owned by Murdoch, but it is not true. We know that The Guardian's own David Leigh once hacked a mobile phone. In late 2006, after Clive Goodman, the News of the World's royal reporter, had been arrested and then admitted to phone hacking, Leigh wrote: "I, too, once listened to the mobile phone messages of a corrupt arms company executive - the crime similar to that for which Goodman now faces the prospect of jail. The trick was a simple one: the businessman in question had inadvertently left his PIN code on a print-out and all that was needed was to dial straight into his voicemail."

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Speculative hacking is deplorable, but only marginally more so than the glee with which the hacking scandal has been seized upon by politicians in all parties, elite liberal newspapers and several broadcasters. Their attitude is informed by ideology and self-interest and, sometimes, intensified by jealousy. Some members of both houses of Parliament despise journalists for revealing the details of their expense accounts. Editors of near-bankrupt quality newspapers, of which The Guardian is probably closest to economic extinction, hate the raucous, right-of-centre tabloids for their mass circulations, populism and profitability.

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Into their toxic embrace walked the News of the World, plaything of Rupert Murdoch, the man the Left loves to loathe. I think The Simpsons ridicules him best. The episode in which Fox is a drag-race sponsor, along with Amalgamated Pornography, Kingpin Malt Liquor, Laramie Cigarettes and Cop Stopper Exploding Bullets is fun. So is the one in which a Fox telethon spokesperson says: "Sure, Fox makes a fortune from advertising but it's still not enough", and "So, if you don't want to see crude, low-brow programming disappear from the airwaves please call now".

But, for some in Parliament and beyond, satire can never beat sanctimony. So, while the allegation that News Corporation hirelings tapped Milly Dowler's telephone appalled ethical journalists, MPs and ideologically hostile journalists barely tried to conceal their joy. Celebrities with grudges to bear did not try. For Hugh Grant, celebrity frontman for the Hacked Off campaign, the disgrace of the "Screws" was manna. He is liberated from any obligation to distinguish between illegal conduct and reporting liable to embarrass him. So are Max Mosley and other C-listers who imagine the discomfort they have suffered at the hands of the red-tops is a constitutional issue.

Robust discussion about whether hacking might ever be in the public interest would be interesting. To me the answer is plain: Leigh was right, there are circumstances in which a reporter gaining access to private telephone messages can be morally and ethically justified. If it exposes crime or serious impropriety; if it protects public health and safety; if it prevents the public from being misled by an action or statement made by a powerful individual or organisation, then editors should be allowed to sanction it. I believe the Regulation of Investigatory Powers Act 2000 - which first made phone hacking a criminal offence - should be amended to permit such action in the public interest.

But such reform of the law would not reverse closures of newspapers or redundancies among journalists. It could not secure the future health of the vibrant, commercial press that held Anthony Eden to account over Suez, revealed the truth about Thalidomide and brought down John Profumo. It could not keep The Guardian fit and free to expose "the scandal of tax-dodgers with private jets pretending to live in Monaco, but still working four days a week in a London office", or "the corrupting influence of the defence ministry's arms sales department", as the excellent Leigh has done. It would not fund the meticulous and tenacious investigation through which The Guardian exposed hacking.

It is hard to persuade the British electorate to think about the processes whereby the news that informs their democracy is gathered, edited and distributed. Privacy law, libel tourism and an increasingly stretched law of contempt have barely raised a murmur, despite the efforts of editors to publicise their woes. The closest the general public usually gets to thinking about the cost of journalism is when they pay the BBC licence fee. Even so, there are many Britons who will complain about a paywall at The Times but still believe that BBC journalism is free despite the annual disappearance from their bank accounts of Auntie's ?145.50 levy. It is worth every penny, but free it is not. Nor is any journalism of quality.

I welcome Lord Leveson's inquiry into press ethics and practices in relation to the public, politicians and police. It is an appropriate response to a profoundly troubling episode in public life. It is essential that operations Weeting and Elveden (the Metropolitan Police investigations of telephone hacking and alleged payments to police by journalists) be pursued thoroughly, energetically and promptly. But when each of these appropriate reactions to egregious conduct is complete, journalism's core crisis will remain unresolved. The pressing question that truly, madly, deeply deserves more thought than hacking is how to fund expensive investigative, foreign and public-interest reporting in the age of Twitter and Facebook.

Matt Drudge's decade-old predictions that, in the internet age, "Every citizen can be a reporter, can take on the powers that be", and that the net "gives as much voice to a 13-year-old computer geek...as to a CEO or Speaker of the House", is daily exposed as naive. Most loners with computers lack the skills and ethics to gather and report news. A minority who do not, including some who provide a valuable critique of mainstream news values, face the same difficulties that their predecessors in the era of print struggled to overcome: they lack the resources to achieve scale, resist legal pressure and speak truth to power at a volume power cannot ignore.

My colleague Richard Keeble, of the University of Lincoln's School of Journalism, points out the crucial role played by the non-corporate media in the development of alternative journalism. He is right. But the radical-amateur ethic also spawned journalists of the calibre of Robespierre, who regarded his ideological opponents as criminals and insisted that, "We must rule by iron those who cannot be ruled by justice". Similarly brutal populism is common online, not because it represents majority opinion but because the net permits free expression of prejudice. The Arab Spring offers hope, but unaccompanied by a large-scale, professional news industry informed by liberal, Fourth Estate values, the chaotic anarchy of the internet may disappoint us by nurturing a new generation of zealots.

Before hacking diverted our attention, a consensus was beginning to emerge among professional journalists and analysts of journalism that networked individuals and traditional media would learn to work together in the public interest. Citizens with information would help professional reporters to do a better job of keeping the powerful honest and accountable to the people they serve. Professional journalists, working within robust ethical guidelines, would fulfil their duties and offer the engaged citizens of the 21st century what Eric Hobsbawm called "an explanatory narrative adequate to its complexities".

Since the emergence of representative democracy in economically liberal nation states, good liberal journalism has served the public sphere well. It has helped citizens to engage in critical debate about the practices of government and state. It has exposed wrongdoing, helped to keep power honest and advanced the case of reform. It has defended democracy and civil rights. When every celebrity has changed the default settings on their mobile phone, the challenge of ensuring that good journalism can continue to perform these duties will remain urgent.

The internet can make this possible. It allows reporters to work collaboratively with their audiences and gives them access to an unprecedented range of data and sources. But the multimedia skills required to nurture, fertilise and reap such collaborative journalism do not come cheap. They demand the backing of profitable newsrooms sufficiently wealthy to maintain independence from government and informed by ethical values: newsrooms such as the ones maintained by several great British newspapers that are alarmingly close to collapse.

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