BOOK REVIEW / Unthinkable thoughts make history: 'Thinking the Unthinkable' - Richard Cockett: HarperCollins, 25 pounds

IN THE summer of 1974, Sir Keith Joseph persuaded Ted Heath to hold a post-mortem on the economic policies that led to the defeat of his government. Discussion concentrated on the U-turn of 1972, when Heath ended his flirtation with market economics and reverted to interventionism.

According to John Ranelagh, a Conservative official who attended, and is quoted in this monumental study: 'Heath concluded as he had started. . . . 'I think I can sum up the proceedings adequately. The main conclusion I think is that our policies were right but that we didn't persist in them long enough.' ' Margaret Thatcher sat without expression, her back to the wall. 'The division was forming between those who could not accept that the post-war consensus had got things wrong in a fundamental way, and those who were more convinced than ever that monetary policies should be pursued,' Ranelagh noted. Six months later that division was a gulf, Heath was a backbencher and Thatcher Leader of the Opposition.

According to Cockett, this meeting was the occasion at which Sir Keith decided that he would establish a think- tank in addition to the increasingly influential Institute for Economic Affairs. The new body would be dedicated to the advocacy of liberal (in the sense of freemarket) economics within the Conservative Party.

The supposed aim of what was to be the Centre for Policy Studies was to see what lessons could be learnt from the successful European economies, and in particular to examine the success of the German social market economy. Instead, Cockett describes how the centre became the intellectual motor driving Thatcherism. It provided a safe haven for Labour defectors, many of them ex-Marxists of substantial intellectual reputation.

Cockett traces the long march of the free marketeers from 1931. Western economies were in chaos and Keynes was formulating his interventionist ideas - which were to be so influential in all three parties for the next half century. Among the tiny band of intellectual freedom fighters who rejected Keynesianism, the

author gives pride of place to Friedrich von Hayek, who fought a lonely battle from the London School of Economics. Hayek's The Road to Serfdom, published in 1944, and dedicated 'To the socialists in all parties' argued the case against collectivism, and stressed that the new fault line in politics - between individualists and collectivists - crossed traditional party lines. He believed that the attempt to create a managed economy was inherently inflationary, inefficient and anti-democratic.

In spite of the best efforts of a dedicated yet sometimes cranky band of economic liberals, the form of Keynesianism which came to be known in the Fifties as Butskellism (after Rab Butler and Hugh Gaitskell) dominated economic policy from 1939 for the best part of 40 years. Only in the Seventies did the corporatist system bring about a crisis of governability and the collapse of the Callaghan administration - thus allowing Margaret Thatcher and her think- tankers into Downing Street.

Today the Tory government is tired and bereft of ideas. There is a more 'caring' mood abroad, and Labour is its beneficiary. Superficially, it is hard to conclude that the ideological hegemony of economic liberalism is secure. But it is impossible to imagine Tony Blair or any other Labour leader going to the country on a platform including wholesale re-nationalisation, the return to municipal ownership of former council houses and the restoration of union monopoly powers. That is the nature of the think-tankers' victory.