The genuine virtues of the liberal market model need to be kept entirely separate from the mythical US 'new paradigm'

As seen from the European continent, the much-vaunted British "third way" is but a variant of a single Anglo-American liberal market economic model, which is ranged against the corporatist Franco-German or "Rhenish" model.

A fascinating lecture by Adair Turner, outgoing director-general of the Confederation of British Industry, at the London School of Economics throws light on more measurable aspects of the debate.

His first finding is that similarities of outlook between the US and Britain still hide big differences in performance. If you look at output per head of population, the US is well ahead of Europe, and Britain remains behind both France and Germany. There was such a thing as the Thatcher effect in the 1980s. But what it did was stabilise the previously growing gap between Britain and continental countries.

The most comprehensive estimates of output per head of population are for 1996 (made by Mary O'Mahony of the National Institute of Economic and Social Research) in which the UK was taken as 100. The US then came out at 137, Germany at 113, and France at 105. In other words, the US is still well ahead of the field, but the gap between Britain and Rhineland countries has narrowed to modest levels.

On the other hand, if you are a supporter of the Rhenish model you will point to gross domestic product per hour worked. After all, a higher level of output is not necessarily a sign of efficiency if it takes far more man-hours to produce. And from the point of view of human welfare, extra leisure is normally a gain. Here the picture looks very different. France and Germany had index numbers of 132 and 129 respectively. They had overtaken even the US, which was down to 121. The UK, at 100, was truly bottom.

At first sight, the Rhenish model wins, game, set and match. But then pause to reflect. The lower number of hours worked in France and Germany is not entirely voluntary. It reflects higher unemployment rates, more potential workers priced out of the labour market altogether, and compulsory shorter working weeks.

Another difference is in capital intensity - measured by capital for each hour worked. Germany and France have much higher intensities: 30-40 per cent more than in the UK and even 15-20 per cent more than the US.

Those who mistakenly think of investment as good in itself rather than a cost will cheer the Rhenish model. But these higher levels of investment were not necessarily rational. They have been partly extracted from the population by tax incentives. Moreover, much of the investment has been politically determined - for instance reflecting the French love affair with technology, shown by the TGV train system and the plethora of nuclear plants.

Mr Turner's very plausible conclusion is that the US is still ahead of all European countries in terms of absolute efficiency, while the UK has still some way to go to catch up with the continental countries. And he puts over this message more concisely and interestingly than the hundreds of pages in the British pre-Budget reports.

What has happened since 1996? Here we come to a parting of the ways between the US and the UK. The US, unlike the UK, is supposed to be experiencing a "new paradigm". The contention is that there has been a shift that has put the economy on to a much faster productivity growth track.

If you want to be safe you should look at productivity growth over at least a whole economic cycle. In the post-1992 US business cycle the average growth of business output per hour has been less than in earlier cycles. The American exponents of the new paradigm therefore concentrate on roughly half an economic cycle. Since the mid-1990s the growth of both total output and productivity has indeed far exceeded that of European countries.

This growth spurt is usually attributed to the revolution in electronic communications. Alan Greenspan, chairman of the US Federal Reserve, is characteristically hedging his bets. He believes that there is something in the productivity miracle, and he refuses to base monetary policy on any mechanistic extrapolation of past trends. His difference with the supply-side optimists on Wall Street is that he stresses the possibility that we have seen a once-for-all productivity jump, which may not translate itself into a lasting trend.

The new paradigm is supposed to justify stratospheric levels of Wall Street prices. Without going over old arguments, it is necessary to point to a macroeconomic time bomb ticking away. The rapid rise in US domestic spending far exceeds any conceivable productivity miracle. Since the mid-1990s US private spending has been rising by more than 5 per cent a year, while real growth has averaged 4 per cent. One percentage point of that growth represents increasing use of resources and cannot continue forever.

Private net saving is now running at minus 5 per cent of US GDP. The whole process is viable only because people believe that their wealth is increasing.

Wall Street prices do not need to slump. They merely need to continue to mark time, as they have been doing for the last few months, for retrenchment in private spending to occur. The Federal Reserve is clearly terrified of a Wall Street crash, which it says it would meet by slashing interest rates. This, in turn, would encourage a so-called recovery of the euro against the dollar.

The biggest danger to the British expansion thus comes from the backwash of a Wall Street setback. But there are more specifically domestic factors as well. There have been reports of the problems of individual corporations, especially in the retail sector. But Peter Warburton of Robert Fleming makes a good case that these are indicative of widespread squeezing of profit margins and also the lack of an adequate liquidity cushion to sustain corporations during a dry season. (One straw in the wind is the 20 per cent annual increase in corporate failures compared with a year ago.)

Mr Warburton attributes these difficulties to a rise in the corporate tax burden, an enhanced institutional appetite for dividends and a high exchange rate. Moreover, the cost of corporate borrowing, for say seven years, has risen by much more than the very short-term rates determined by the Bank of England.

Just as the virtues of the Anglo-US model are being oversold during a non-sustainable bubble, they are likely to suffer an unwarranted backlash in public opinion when the bubble bursts.

The safest ground on which to advocate a more liberalised and decentralised economy is the extension this gives to personal choice rather than one based on dubious league tables or ephemeral stock market bubbles.