Stuck between the flab and a hard place

There is no point picking an argument and then, once it starts, walking away. In Ruling Britannia, I suggested that the British state, like others, has lost power in the world as a result of globalisation, that power has gone to bond markets, to a more open information society, to international organisations, treaties and even companies. It seemed to me almost obvious, and the starting-point for discussing any reform of the British system.

But it clearly isn't obvious. A counter-attack has come from, inter alia, William Waldegrave, the Treasury Chief Secretary, the Economist and Martin Wolf of the Financial Times, all denying the state's loss of power. This is not a minor question, nor an abstract one; it affects how we judge our political class. It is about possibilities.

Being attacked is good for columnists' souls, because we see other people doing to our precious arguments what we regularly do to other people's - coarsening, over-simplifying and so on. It would be ridiculous to say that the nation-state is powerless. But it is less powerful than it used to be, and voters have already noticed. The critics accept without comment a large chunk of the case. They don't seem to disagree that global treaties, regional blocs, cultural and technological forces constrain national policy- makers. It would be odd if they did: global interdependence means nothing if it doesn't mean less national autonomy.

They have, rather, focused on the argument that the global economy limits the economic powers of governments. Wolf and Waldegrave say that all that has changed is the ''delusion of omnipotence'' as governments no longer try to pursue the damaging statist policies of the post-war era. All that is happening is that we are returning to the pre-delusion norm, the more economically virtuous pre-1914 world.

Up to a point, this is absolutely true. My home town of Dundee was a vibrant part of jute-importing, capital-exporting 19th-century globalism. Our democracy, though, emerged at the beginning of the statist era. That post-war world of nationalised industries, high income tax, pay-fixing, exchange controls and full employment is the world most of us grew up in and still use as our vague mental measure of the possible. Voters judge state power by their recollection of it, not by contrasting it with Edwardian, or indeed Victorian, times.

Nor was that a pre-statist idyll, when the British state had little economic power and used it timorously. For the century before 1914 there was the small matter of the British Empire, which used military and political power to advance the interests of British manufacturers and consumers - forcibly opening overseas markets, destroying Asian cotton-mills, keeping out the products of rival industrial nations such as Germany and America, who themselves were using tariff-walls against us.

And this was an era when the state was supposed to have been modestly uninvolved? Power is not neatly divided into economic power and other kinds. Economic policy can be expressed by battleships and governors-general as well as by deficit financing. What has happened is that the British state has lost both the pre-1914 and the post-1945 kind.

But did the post-war British state really have such powers? True, it was economically constrained by balance-of-payments crises rather than by bond markets. True, for much of the time it borrowed relatively cautiously. True, post-war statism, when millions of people worked for overstaffed nationalised industries, kept afloat by the taxpayer, ended badly.

Yet to argue from those truths that the state simply never had powers to control employment or output - that the dirigiste post-war governments were a collective mirage - is odd. They seemed, so far as many apparently balanced people recall, to exist at the time. To cite their eventual economic nemesis as evidence of their earlier powerlessness is no good. Just because we die doesn't mean we never lived.

In its recent editorial, the Economist, perfectly reasonably, argued that there was no Keynesian golden age when governments controlled everything and had all the answers. But then it went cheerfully over the top. On monetary and fiscal policy it confidently stated that ''global integration has left governments with about as many economic powers as they ever had''.

Bold stuff. But in the same edition, a detailed survey of the world economy by the magazine's economics editor concluded that ''nobody disagrees that elected governments now have less control over their economies than they used to''. Well, nobody barring her editor, anyway.

On fiscal policy, the survey explained that ''globalisation has restricted governments' ability to increase taxes, particularly on business. Multinationals with global investment strategies can quickly shift production to countries with more attractive tax regimes.'' On monetary policy, it says: "Central banks' grip on money, however measured, also appears to be weakening.'' Exchange and interest rates? ''As markets become ever more integrated, the global capital market will ... play an increasing role in setting exchange rates and interest rates.'' Right each time.

But the Economist had another argument - that because state spending as a proportion of national income varies widely, from Singapore's 20 per cent to Sweden's 68 per cent, governments are pursuing different policies; ergo, their economic powers are unaffected.

This is a stronger argument, though Singapore lacks the full appurtenances and duties of Western democratic states. It is more the Economist's Legoland Utopia. Better, surely, to ask why, despite removing themselves from so many industrial roles, the Western democracies still have high state spending.

The answer is the mass unemployment that followed the breakdown of the post-war boom and the Keynesian experiment - unemployment which, without high social spending, would be politically destabilising. This spending, in other words, is the historic residuum of the failure of state power, not evidence of its continuing strength. To use it as a measurement of the mightiness of the state is to confuse flab with muscle.

At the heart of this argument lies a logical dilemma about the nature of power. Globalisation has increased the severity and the speed with which any departure from the principles of orthodox economics is punished. Those punishments may be inevitable eventually, but for a long time governments, including Britain's, were able to evade them. Wars, booms, empires, high taxes all kept the politicians going, and their voters in some awe of the state's potency.

Now, was that power, or the illusion of power? It is almost a philosophical question, the answer depending on whether you are a historian or a polemicist.

Either way, that era is over. Governments have economic power only to do the orthodox things. In theory, they can create a siege economy, raise income tax to 90 per cent, increase their deficits vastly and give all the unemployed well-paid jobs as, say, government economists. But in practice, the punishments are too sharp and quick and no one believes they would, not least the people who insist that governments are still autonomous.

This certainly does not mean that nations are pointless nor that democracy is dead. It does mean that the rules of political discourse have changed. Voters, as well as politicians, need to reconsider what they can expect national governments to achieve. To revive our political culture we need, first of all, to get real.