Book review: A shift from red to black

The cheering thing about reading economic history, if you are an optimist, is that it reveals that politicians do learn, slowly, from predecessors' policy mistakes. The depressing thing, for a pessimist, is that each generation falls victim to some fashion or other. This agreeable canter through postwar history demonstrates both points.

For instance, a copy of the Beveridge report was found in Hitler's bunker, indicating that Germany would have had a welfare state whatever the outcome of the war. The Fuhrer, like other leaders, was determined to prevent any repetition of the mass unemployment of the 1930s. Fifty years later, the Soviet Union was abandoning the rubble of central planning for the free market in a jump so painful that the Ministry of Finance's security officers had degrees in counselling.

This country has been at the forefront of each wave. From Beveridge to Thatcher, the British economy has been the laboratory for radical shifts in intellectual climate. Blair gets the credit here as the true heir of Thatcherism.

What The Commanding Heights - Lenin's phrase for the parts of the economy that really mattered - gains in grand sweep it lacks in originality. The thesis is the well-known one that globalisation has eroded the power of governments to manage the economy. The nation state is not defunct, but the domain of the public sector has shrunk. The authors end with limp conclusions about what governments ought to be trying to do: ensure fairness, guard the environment, uphold national identity. They went to press late enough for the present Asian crisis, a dramatisation of the conflict between markets and states, to have started. But some of the most interesting light this upheaval sheds on the role of government has been too recent for them.

For example, they state that "financial integration means that contagion can pass rapidly among markets". Seven months on, the striking thing about the Asian cataclysm is just how Asian it is. The markets in Europe and the US have gone from strength to strength.

This raises the possibility that the markets are simply the fastest channel for the invisible hand to pass a verdict on bad governments. Rather than demonstrating the failures of laissez-faire capitalism - a popular view on the old left - recent events in Asia are the modern manifestation of the problems of intervention. Where Britain had its balance of payments crisis and IMF rescue in 1976, making Thatcher's subsequent victory a sure thing, Malaysia has had a capital-market meltdown.

The book takes it as given that government is shrinking. In fact, the share of government spending is level or rising in almost every country. But the type of spending is changing: it is decreasingly financed by borrowing, rather than by raising taxes. There is certainly a fever of deregulation. But the state has not shrunk noticeably. Increasingly, its role is social, with a growing share of spending going on education, health and welfare.

The real orthodoxy of our time is not small government but solvent government. This generation of politicians has learned from the mistake of their predecessors, which was loading up economies with debt in a vulgar pastiche of Keynes's view that governments should spend their way out of recession. While Keynes thought they should prudently do the reverse in a boom, by the early 1970s the social ambitions of Western politicians led them to spend more on tick year after year.

The price turned out to be high inflation and low growth. The driving force behind today's policies is avoiding stagflation. No doubt it will become tomorrow's fashion mistake.