It seems safe to say that Literature as an identifiable category of writing the characteristics of which can be specified and defended has never been under greater suspicion. Even those who still believe that the term has not been emptied of all of its meaning must finally concede that, yes, the concept of "literature" is to an extent a social construction, that what gets counted as literature is subject to historical shifts and is ultimately determined by contemporaneous social and cultural assumptions. Works of literature and the standards we use to judge them can never actually be timeless or universal in the casual sense in which he often use these words.
And yet judgments about what is good or bad, worthy of attention, "literary" or not aren't entirely socially determined. "Literature" is heavily freighted with the judgments of the past, and present notions of what makes a poem or a novel literary can't escape the influence of the poems and novels that have previously been considered such, even if their influence has resulted in the effort to counteract or negate it. More often, writers attempt to incorporate or creatively transform their influences, so that the work produced by current writers certainly is not free of already established conceptions of the literary as exemplified by the poets and novelists these writers have found important to them. Readers as well are inevitably shaped by the "great books" they have encountered (even if there is disagreement about what those great books are), and their experience of the writing of the present is surely in part conditioned by what these books have prepared them to expect a work of literature to be like.
Skepticism toward the exaltation of Literature, especially when embodied in an unofficial "canon," is expressed by those who feel the concept of literature as we have inherited it is inappropriately exclusive, as well as by those who believe it is still possible to credibly distinguish between works that are more and less significant, but that setting up inflexible criteria for determining what is literature and what is not actually gets in the way of being able to do so fairly. But of course the canon is in fact unofficial, developed mostly as a pedagogical tool in university curricula, and it has been expanded so thoroughly beyond the narrow conception of a canon that might have existed 50 years ago that to believe it still exerts an unduly restrictive influence on the reading choices of most readers is to live in the past at least as stubbornly as any hidebound traditionalist. And far from being unwelcome in most "serious" literary discussions, genre fiction and other forms of popular narrative have never been as influential on writers trying to blur distinctions between the popular and the literary as they are now, nor as accepted by readers prepared to accept that, say, science fiction or crime fiction can be as "serious" in intent as any work of "literary fiction."
Those who object to the preservation of Literature as a measure of the quality of imaginative writing are really objecting to the perceived influence of critical "gatekeepers," self-appointed arbiters of quality and guardians of the canon. After all, no literary work ever elected itself to the canon. This task has instead been taken up by literary scholars and critics, although of course no particular scholar or critic has ever actually been asked to cast a vote, except insofar as English professors choose certain books rather than others in the courses they teach. If for a while--keeping in mind that the academic study of literature as we know it now became widespread less than a hundred years ago, and thus the canon as we speak of it today is also a century or less old--the choices by and large reflected the demographics of the professors (that is, mostly white and male), this certainly had the effect of restricting canonical literature to an overly narrow range of writers and writing, but the gatekeeping done by this old guard of academic scholars was more likely to be of the sort that worked to distinguish between "major" and "minor" writers, the lattter themselves mostly white and male but not as worthy as the former. Certainly it would not have ocurred to these scholars to include what we now call genre fiction, and, sadly, women and minority writers were radically underrepresented because it also would not have occurred to this first generation of literary scholars that such writers existed in large enough numbers to warrant much attention.
It would be difficult to maintain that academic literary scholars now play any gatekeeping role at all. The university curriculum is loaded with courses on genre fiction, popular culture, previously neglected writers of all kinds, as well as courses on canonical texts designed not to foster appreciation but to "interrogate" underlying historical and cultural assumptions making these works anything but "timeless." Academic literary scholars do not currently patrol the gates protecting literary greatness but have taken down the gates, leaving an open field in which virtually no writing or reading practice is disallowed. If Literature remains an oppressive symbol of elitism and exclusion, it is certainly no longer being perpetuated by academe.
This would leave only non-academic literary critics as the guilty parties responsible for using the pretentious standards of Literature in judging writers' work. Presumably a figure such as James Wood, sometimes regarded as a harsh judge indeed, is the sort of critic who won't let Literature go. But while certainly Wood can be dismissive in his reviews of new work, the standards he applies don't come from Literature per se but reflect his own parochial conception of the proper goals of fiction, standards he habitually applies, finding some books that meet them and, unsurprisingly, many that don't. Perhaps all critics develop fundamental principles by which they exercise their judgment, but Wood takes this to a particularly doctrinaire extreme. Still, if you resist Wood's at times imperious pronouncements, you are not resisting an appeal to the haughty demands of Literature but the requirements of James Wood's tendentious notion of "how fiction works."
Capital-l Literature has been permanently reduced to the lower case, and claims that it still lords over lowly readers just can't be sustained. But to insist that critics and reviewers refrain from making any distinctions or rendering negative judgments amounts to declaring that no standards should be applied. Merely because we no longer believe it necessary to permanently enshrine books and writers worth reading into a canon, or judge all literary works by supposedly timeless standards that hold up all new work to comparison with the "existing monuments" of the past doesn't mean critical evaluation itself is obsolete. Critics can surely still provide compelling reasons why a given work is more or less successful. Further, those reasons might be informed by familiarity with a few of those literary monuments, not to mention less imposingly monumental works that were nevertheless good and served for the critic (or the reader) as exemplars of possibility in literary art. Perhaps some great works truly are great, and perhaps some books really are better than others.