That there was something wrong with the way the global economy worked in the 1990s first became obvious not to economists and politicians but to thinking capitalists like George Soros. For some time now he has pointed out that the uncontrolled global financial system, which he had exploited as a successful speculator, was an invitation to disaster, and that the idea that it is beyond control cannot be accepted. Others have also come to the conclusion that the institutions which have attempted toregulate it, and notably the IMF, have been barking up the wrong tree. It is now evident that the critics are right.

The crisis which began in South-East and East Asia and is now turning into a global capitalist crisis has suddenly reminded us just how badly capitalism can go wrong. This should long have been evident from the former USSR, the only country in the world to test the theory that all an economy needs is the introduction of the free market. Still, nobody paid much attention to the unparalleled social and human tragedy of the peoples of the former USSR until the Asian crisis threatened to destabilise the global financial system.

Under the impact of economic crisis not only governments but some of the most passionate champions of free-market globalisation, such as economists Paul Krugman and Jagdish Bhagwati, are now envisaging heterodox economic policies like exchange control, amid weepings and gnashings of teeth from the City of London. And this impact has demonstrated, in the case ofIndonesia, that a major breakdown of capitalism can overthrow powerful political regimes. The time has therefore come to rethink the assumptions on which the policies of too many governments, including Britain's New Labour, have been based since about 1980 and on which the opinions of most economists have been based for even longer. These are basically the assumption of the superiority of the free market economy over any other. Why this should have appealed to ideologically individualist governments committed to capitalism on principle is clear. Why governments like Tony Blair's could be described as Thatcherism in trousers needs more explanation. First, that by the end of the 1970s the classic policies of the `Golden Age' mixed economy had ceased to work well, and those of state-planned socialism were hardly working at all.

Second, there is what might be called the consensus of the neoclassical academic economists who dream of a nirvana of an optimally efficient and frictionless economy in a self-adjustingglobal market. That is to say an economy with minimal interference by states or other institutions. In practice, of course, this was an economics which fitted the economy of transnational corporations and other operators in a period of boom. This consensus is now at an end.

The third reason for Blair's attachment to the free market is what might be called the neo-liberal ideologists' equivalent to the old Marxists' belief in historical inevitability: the global economy is here. It makes any attempt at a national economy or a national policy impossible and therefore pointless. But `we don't want to do this' should not be disguised as `there is nothing we can do about it'. There is and it must be done. Faced with a Wall Street collapse, will economists discover the powers of state action? Let there be an end to excuses, self-delusion or sales-talk about the importance of government in economics. The global economy is indeed here to stay. But three things about it must be said.

First, its operation and itsfurther progress are not identical to the policy of extreme laissez-faire as is proved by what has happened to Russia since the free marketeers got hold of it. Second, the actors in the global market can no more function smoothly without non-market institutions than the national market. The global economy has not replaced the world of states, political power and policies. The two co-exist in mutual negotiation.And third, the power of states over their territories may have decreased since, after two centuries of growth, it reached its peak after the Second World War. Nevertheless their powers of control over the economy on their territory remain substantial.

There is, however, one way in which the rise of the global economy modifies the priorities of a Labour government. Ideologically the Blair government is today distinctly to the right of the other centre-left governments in the West certainly of the US, France, Italy, probably of the new German government. How far is it prepared to recognise that theeconomic theory, or the excuses, it inherited from its predecessor, are going down the tubes? Will New Labour in retrospect be judged to have failed for the same reasons that Very Old Labour failed in 1929-31, namely a refusal to break with current economic orthodoxy? How far will it recognise that there is not only a social, but an economic, case for returning to social-democratic policies? And `standing still and emoting fuzzily' about Third Ways, is not enough.Like Clinton, New Labour will be judged, both by history and by the people, by other criteria than its success in winning another election. In any case, if there is any way of losing the next election, it is by not recognising that the age of neo-liberalism is over.