When I see that I am wrong, I change my mind

The State to Come by Will Hutton, Vintage, pounds 5.99; Diane Coyle is encouraged by a dashing editor's speedy about-turn

How appropriate that one of the most devoted followers of the economist John Maynard Keynes, the dashing Observer editor Will Hutton, should take to heart one of his hero's most famous remarks: "When I see that I am wrong I change my mind. What do you do?"

Contrary to popular Islington opinion, this new Hutton manifesto is a much better book than his bestseller The State We're In. Although it is shorter and was written in a few weeks ahead of the election, the new book is as passionate in its diagnosis but more realistic in its prescriptions. Perhaps the proximity of the Labour Party to power helped concentrate Hutton's mind.

One sentence in The State to Come sums up the new realism. "We have to start ... from where we are, with the institutions we have and in a highly open economy operating in a globalising market." The absence of this sense of history and context was its predecessor's glaring flaw. The evolution of the Huttonesque analysis of the Bank of England illustrates the distance he has travelled since 1995. In the first book, the Old Lady of Threadneedle Street was the malign emblem of the City of London, the evil succubus sucking the vitality out of the British economy by keeping it in thrall to the extremes of financial orthodoxy.

I exaggerate - but only a little. "The way the Bank of England manipulates and guarantees the vast short-term money markets is the first of many incentives that forces the banks into keeping their lending as short-term as they can," he charged.

At that point, he was against independence for the Bank of England: "To pass the control of interest rates to a semi-private organisation run as an extension of one wing of the Conservative Party would be a disaster."

Now, however, he is rather in favour: "The growing power and possible independence of the Bank of England - as long as it is properly constituted - would be an important potential counterweight to the Treasury's institutional dominance." The Treasury, he argues, embodies the defects of the British constitution, with its narrow focus on financial orthodoxy, its centralised power and its lack of accountability.

Well, the economic bogeyman has only moved from EC4 to SW1, but at least Hutton has accepted that there is a respectable case for central bank independence. Indeed, he was positively glowing in his comments on Gordon Brown's recent surprise announcement of that independence, greeting it as "part of a process of modernising the British state".

This intellectual voyage parallels the journey from Old to New Labour. For all the ferment aroused by Hutton's notion of "stakeholding" 18 months ago, it never developed political clout. Here, Hutton gives stakeholding - the somewhat vague idea that economic fairness requires institutions that give all interested groups a voice - a token four pages. His prescription is more focused this time.

For example, he argues, globalisation has narrowed governments' options over interest rates and levels of borrowing because of the power of the financial markets. But they have another spectrum of more detailed policy choices, such as the regulation of landing slots at Heathrow, the structure of corporate taxation and the quality of public transport.

The Hutton critique of free-market capitalism has also grown far more coherent. He draws on Anthony Giddens's use of the concept of reflexivity to argue that demand and supply are too shifting and unstable for market prices to give efficient signals, as classical theory supposes them to. And he exploits Robert Putnam's "social capital" metaphor for effective institutions to make the case that markets are too short-term to build the economic relationships necessary for lasting prosperity. Both are more useful than the tired, old-left rants about overpaid dealers in the City of London.

Hutton is right to sense that these building blocks for an alternative approach to economic policy could inform the new government's programme. But, although spot-on with the questions, this slim volume does not have the answers. I counted less than a handful of policy prescriptions. It is, in fact, a disappointingly unspecific analysis, prone to long lapses into vague language about seizing opportunities and overturning intellectual hegemonies.

In the end, The State to Come boils down to a cheer-leading exercise for New Labour. This is not to belittle it: there are real reasons to cheer. Readers depressed by The State We're In will end up in better spirits after learning that "the country stands on the threshold of a new course which could lead it to become the most dynamic economy and healthy society in Europe". I, for one, am encouraged that Will Hutton has changed his mind.

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