State Sen. Tom Harnisch says he's found the perfect symbol of the battered Democratic Party for the 1980s. It's an Indian peace pipe -- with an ax at one end.

"The peace pipe means we have to get together and make peace," he told delegates to the state convention this weekend. "The ax is what we have to do to the Republicans."

The Democrats gathered here are fired up. For a party that got clobbered nationally last November and suffered several important losses in state races, including the defeat of liberal Sen. Gaylord Nelson, the delegates seemed remarkably cheerful, confident and unbending -- some here believe too much so -- in their liberal priniciples.

Republican Gov. Lee S. Dreyfus, nicknamed "Red Vest" or "LSD," is up for reelection in 1982. Two Democrats are running against him and several others are thinking about it. The party has its sights set on regaining the House seat it lost last November, and it hopes to maintain its current majorities in the state legislature.

On Friday night, the local Democratic Party put on a hilarious variety show in which it roasted both the Republican administration in Madison and the Reagan administration in Washington.

One skit had Sen. Jesse A. Helms (R-N.C.) explaining Reagan's trickle-down economics pouring honey over a waffle and a stack of buckwheat cakes. The waffle represented the "super rich" and the bottom wheatcake the truly needy. "See how the waffle traps the honey," Helms said gleefully, noting that it would seep down to the truly needy "sometime in the next century."

The other hit of the weekend was a board game called "Bankrupt the State," the brainchild of Senate Democratic Leader Bill Bablitch. It is a spoof on Dreyfus, who came into office with a $1 billion surplus in the state treasury and now faces a $600 million deficit.

But Dreyfus, who shocked the Democrats with his 1978 victory, may not be as vulnerable in 1982 as many delegates want to believe according to one party official, and the large turnout for workshops on campaign methods represented not only enthusiasm but anxiety.

The party is in debt and has been losing members, and it is trying to decide how prudent its historically liberal stance is in the face of a conservative tide sweeping the country.

One indicator of this mood came during Friday night's session over a proposal to eliminate the work "liberal" from the party constitution. It was offered by Jeff Reuter of Milwaukee's south side, where Reagan scored heavily among ethnic and blue-collar voters.

"This is an attempt to open up this party to people who have been leaving the party," Reuter said. "We need to bring back moderate Democrats."

The proposal was too much for a party that prides itself on being among the most liberal in the country, and the other delegates rallied to crush the amendment by voice vote.

It is perhaps not surprising that the Democrats were unwilling to abandon their trusted formula. But the main message was that they need to find a better way to sell their product. As Elizabeth King, a member of the Democratic National Committee, said of the Reuter amendment:

"If we had adopted it, the press would have had a field day. But that doesn't mean we have to go around talking about liberals all the time."