Twenty years ago, in the dining clubs and think-tanks of the new right, there was a saying: Labour will never rule again. Most of those who repeated this dictum were simply drunk on power. Having achieved a victory they hardly expected, they could not imagine that it could be other than permanent. But for others on the new right, the certainty that Labour was finished as a party of government had a different, if no less vulgar, inspiration. It came from a deterministic ideology, cruder than any ever entertained on the left, according to which Margaret Thatcher's victory in 1979 was the result of irresistible economic forces.
History, as they say, has not been kind to these ideologues. Not only did Thatcher prove to be vulnerable to opposition from within her own party, but also the worldwide victory of free markets that the new right believed she heralded has proved to be less than complete. In Russia, the transition to the free market has failed. In eastern Europe, the political beneficiaries of the collapse of central planning have been reform communists, not free- marketeers. The faith that free markets are the wave of the future lives on only in the United States, where - ironically - it may well be killed off once and for all by the protectionist leanings of the Bush administration. Yet the idea that politics is a mirror image of economic development lingers on - notably on the centre left, where Bill Clinton's "It's the economy, stupid" is still seen by some as a piece of perennial wisdom.
Niall Ferguson is a historian whose prolific writings on war and finance have earned him a worldwide reputation. For some years, he was also a journalistic commentator who analysed the political scene from an astringently right-wing perspective. In The Cash Nexus, Ferguson presents a critique of the economic determinism that seduced many, not only on the new right, into believing that Thatcherism embodied an irreversible historical trend.
Writing with a terse grace one wishes other academics would emulate, Ferguson argues that human beings are not moved chiefly by economic motives - least of all in politics. Not only are our economic calculations frequently subordinated to our biological urges; our behaviour often displays the morbid and erotic impulses analysed by Freud, which - Ferguson believes - cannot be adequately explained by evolutionary biology. Even the profit motive has irrational roots in religious asceticism. "Man is a social animal," he writes, "whose motivations are inseparable from his cultural milieu." The idea of Homo economicus, which underlies both the Marxist and the free-market interpretation of history, is not so much a useful abstraction as a dangerously misleading fiction.
Ferguson reaches this conclusion not by abstract reasoning of the sort favoured by many political theorists, but by a rigorous historical analysis of the interaction of money and power over the past 300 years. In a com- pendious survey of the history of the past three centuries, he subjects to a withering demystification the fashionable belief that prosperity and democracy are interdependent and mutu-ally reinforcing. This now conventional view actually encompasses two, quite different claims: that economic growth leads to democratisation, and that democratisation promotes economic growth. Endlessly repeated though they are by the likes of Thomas Friedman and Francis Fukuyama, neither of these claims stands up to careful scrutiny. Fifteen years ago, Yugoslavia seemed to be an economic success story, but its transition to democracy has been more difficult than that of practically any other post-communist country. On the other hand, China has achieved consistently high rates of economic growth with no commitment to democratic government, as has Singapore.
The upshot of Ferguson's detailed and probing analysis is that, although some economic developments, such as hyperinflation, are undoubtedly bad for representative institutions, the late 20th-century creed according to which democracy and prosperity are inextricably intertwined is just so much claptrap. The eulogies to "democratic capitalism" we have had to endure over the past decade are likely to prove as ill-judged as they were at the beginning of the past century, when a similar mood of shallow triumphalism soon ran up against the intractabilities of history. I am sure that, when harsher times arrive, they will be equally soon forgotten.
Ferguson's critique of the conventional wisdom that sees democracy and prosperity as two sides of the same coin is devastating. But it does leave him without a political home. The detached, illusionless view of history that informs The Cash Nexus embodies an old-fashioned Tory world-view that has all but disappeared from the political scene. These days, Conservatives are no longer singing so stridently from the free-market hymn sheet. They have moved on to become a party of opportunistic reactionaries, lacking even the primitive intellectual coherence that the gospel of free markets once gave them. The political collapse of free-market ideology has not led to the revival of the older, more sceptical Toryism of which Ferguson's book is redolent. That perished with Thatcherism. Instead, under William Hague's leadership, market fundamentalism has been replaced by cultural fundamentalism. The callow certainties of the free market have been succeeded by a squinting, resentful, anti-liberal populism.
The message of this book is that, in any longer perspective, politics always trumps economics. Ferguson sums up this cool, almost patrician view of history when he writes, in the introduction, that "even in such dry-as-dust entities as bond yields, Carlyle's 'ever-working Chaos of Being' may be discerned". But this poetic statement of a once-familiar Tory theme only shows how far removed it is from today's political scene. In their quite different ways, both Disraeli and Salisbury knew that politics is not so much a result of economic change as the art of coping with it. As a result of the right's infatuation with the ideology of economic determinism that Ferguson so comprehensively demolishes, however, the party that Salisbury and Disraeli led no longer exists - and Labour is back in power. It is hard to think of a more elegant demonstration of the central thesis of this splendid book.
John Gray's most recent book is Two Faces of Liberalism (Polity Press, £12.99)