The polemics for and against the legacy of Keynes obscure rather than reveal his main message for our times

During the 1970s and 1980s there developed a counter-revolution against, not necessarily the core doctrines of Keynes, but against the "Keynesianism" which governed official policy in so many countries, especially in the US and UK. It could better be described as a reaction against overambitious economic management.

The counter-revolutionary ideas were partially put into effect by the Reagan and Thatcher governments - which for some people was enough to condemn them. In fact the UK and US counter-revolutions started in the closing years of the Callaghan and Carter administrations - Callaghan's famous 1976 denial that governments could spend their way into full employment was a landmark.

The counter-revolution has indeed been carried forward by the present Labour government and has no keener exponent than the chancellor, Gordon Brown. Evidence is provided by his grant of operational independence to the Bank of England, his remit to the Bank to follow a strict inflation target, his devotion to a medium term financial framework limiting government borrowing, and his insistence on "supply side" cures for unemployment.

None of this prevents many leftwing economic intellectuals from disliking this counter-revolution intensely - a dislike which is shared by some on the right who are still attached to the postwar consensus. Hence the series of claims that Keynes is back and that free market and monetarist economists are discredited. How are these claims reconciled with the fact that in so many of the world economies there are independent central banks pursuing targets for inflation rather than for real growth?

Much of the battle reflects a Kulturkampf among the economic chattering classes, which is a good deal fiercer than the ordinary party political battle. The most important rule of this game is to draw the dividing line between the Keynesian and the counter-revolutionary school in a way favourable to your own side.

If you want to exclaim that Keynes is alive and kicking you attribute to the counter-revolutionaries the most extreme doctrines possible: for instance that the economy automatically balances at full employment and is self-stabilising. They are also supposed to believe that the only instrument of economic policy is money supply rules, which have to be followed rigidly. As soon as it is clear that the money supply can neither be defined nor controlled so easily, and that in any case it cannot be the sole guide to policy, the other side exclaims with glee: "Keynes is alive: classical economists fall down dead." If on the other hand, you want to pull down the Keynesian flag you pretend that any concern with inflation, other than by pay and price controls, is antipathetic to the Great Man's memory.

Those who want to claim victory for the anti-Keynesian side can point to the widespread agreement on what is called a "nominal framework". This means that even authorities such as the US Federal Reserve, which openly admit to a concern with the level of demand, think of it as demand in money terms. Those of us who would like the European Central Bank or the Bank of England to adopt similar objectives are really saying that at very low rates of inflation central banks should not be afraid of promoting output and employment; but this must be subject to an overriding concern with preventing an inflationary take-off.

A closer inspection shows that much of the argument is shadow boxing. The counter-revolutionaries have demonstrated that there is no long-run trade-off between unemployment and inflation and that there may even be a trade-off the other way at high and fluctuating inflation rates. That is their Big Idea. There is an underlying or structural rate of unemployment which cannot easily be treated by monetary, fiscal or exchange rate policy. This is sometimes called the natural rate, or more politely the NAIRU - non accelerating inflation rate of unemployment.

Yet on reflection there is no incompatibility between the "natural rate" and at least one reasonable interpretation of Keynes's doctrines in his 1936 General Theory of Employment, Interest and Money. The inclusion of "employment" in the title was no accident. Before then economists believed that increases in savings could be nothing but beneficial. Interest rates would fall, investment rise and the growth rate increase. The heresy of Keynes was to demonstrate that these moralising tales might not always be true.

The traditional analysis, by focusing only on interest rates, overlooked other variables that could respond: namely output and employment. An attempted increase in savings might reduce national income and raise unemployment. This could happen because interest rates fail to fall enough or because investment is not sufficiently sensitive to them. It is this oversavings doctrine that was Keynes's Big Idea, for which he would have deserved a Nobel prize - had it existed in his lifetime for economics - several times over. In contemporary terms this means that you might not get unemployment even as low as the "natural rate" if attempted savings are too high and demand is therefore inadequate.

There can be honest disagreement about how fast to try to restore price stability or squeeze inflation out of the system once it has taken hold. Similarly, when there is some depressive force, there can be disagreement on how aggressively governments should try to restore demand. But the interesting thing is that these arguments do not centre around any of the slogans used by the flagwavers of the two sides. Those economists who still call themselves monetarists, including Milton Friedman himself, are often in the forefront of saying what Japan or the emerging countries should have done to restore activity.

There are almost no practising economic advisers who believe that the economy can be left on its own to approach an underlying equilibrium. It can be knocked off course by events ranging from oil price explosions to German reunification. Not to speak of capital flights away from emerging countries or into western economies whose exchange rates then overshoot.

On the other side many practising Keynesians are now "reconstructed". This means that they do not believe that governments can promote full employment regardless of what is happening to inflation: and in practice they support the inflation targets now in force.

There is also a good deal of acceptance of the primary role of monetary policy in fighting both inflation and depression, although in some cases this is based on perceived political possibilities rather than genuine conviction. There are plenty of disagreements left on what remains for fiscal policy to do.

The most famous quotation from Keynes runs: "The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler from a few years back." This remains true.