Economic crises generate political upheavals. In Britain, the recession could terminate Labour's years in office, inaugurating an era of Conservative hegemony, and invigorating the radical right in the form of the BNP.

That would be a paradox since the credit crunch is moving opinion in a social democratic direction. Since the 1980s a central motif of British politics has been the failure of the State; now it is the failure of the market. Victims of the recession remain, no doubt, sceptical of the State, but they want what only it can deliver - protection against unemployment and against failure in housing and banking. Far from repudiating the State, they seek to huddle under its umbrella.

Yet, on present trends, Labour, a social democratic party, is heading for defeat. Perhaps the best that Gordon Brown can hope for is a hung Parliament. That would probably lead to a minority Conservative Government and a rapid second election; although, if Labour came near to a majority, it might seek an arrangement with the Liberal Democrats.

An obvious question arises - if Labour would be prepared to talk to the Liberal Democrats after the election, why not before? Why should Gordon Brown not seek a coalition government, a government of national recovery, to bring all social democrats under one roof? That would revive the new Labour project of realignment that collapsed only because it won by a landslide in 1997; and it would transform the economic psychology of an electorate coming to believe that Britain's economic problems are too serious to be resolved by any one party alone.

Mr Brown understands that modern governments must transcend the rituals of tribal politics. On forming his government in 2007 he offered the Liberal Democrats Cabinet posts, and made a number of appointments to junior and advisory posts from outside the Labour Party.

There is an obvious Labour incentive to seek a coalition. But why should the Liberal Democrats agree to sustain a beleaguered government? Would Nick Clegg be able to lead a united party into a coalition? Jo Grimond, the Liberal leader in the 1950s and 1960s, used to complain that as soon as you try to do something with the Liberal Party, it breaks in your hands.

Yet the Liberal Democrats believe in proportional representation. It is inconsistent to support PR and be hostile to coalition, since the party is unlikely to achieve, unless by some miracle of parthenogenesis, an overall majority without an intervening period of power sharing. The strategy of the long march, perfected by their election strategist, Lord Rennard, would, under present trends, yield a Liberal Democrat majority in 2050, too late for Mr Clegg, young as he is, to enjoy it.

Moreover, coalition gives the Liberal Democrats the chance to insist that Labour fulfil its pledge of a referendum on electoral reform, perhaps a year after the next election. The Conservatives are adamant against electoral reform, even though disadvantaged by firstpast the post; when the Welsh Conservatives sought, after the 2007 Welsh Assembly elections, a rainbow coalition with the Liberal Democrats and Plaid Cymru, based on PR for local government, the Shadow Cabinet would not hear of it.

There are, of course, deep differences between Labour and the Liberal Democrats. Yet a government of national recovery would not be a mere coalition of convenience. The two parties have been able to work together perfectly well in the devolved parliaments in Scotland and Wales, to the benefit of progressive government. They could surely agree measures to stimulate the economy, combat the collapse of the housing market, achieve greater control over the banks and reform the regulatory system.

The differences between Labour and the Liberal Democrats are minuscule in comparison with what divides them from the Conservatives. The Conservative approach of “sound finance” and a balanced budget is contrary to that being followed in other advanced societies, and would only deepen the recession, while the policy of tax cuts has been shown in the US to be ineffective. Moreover, it was the economic philosophy of Margaret Thatcher that created the ideological conditions that made financial meltdown possible. As recently as last spring, George Osborne, the Shadow Chancellor, was calling for more financial deregulation and a smaller role for the State.

The Left has been here three times before, and each time, because it was unable to co-operate, it opened the door to Conservative hegemony. In 1924 Ramsay MacDonald's first Labour Government rejected co-operation with the Liberals. The Conservatives, he said, “were gentlemen, but the Liberals were cads”. Nine months of Labour government were followed by five years of Conservative rule.

MacDonald again rejected co-operation in 1929. But, by the end of 1930, he had changed his mind, and sought a coalition with David Lloyd George, the Liberal leader, to combat the slump. It was too late. An electoral reform Bill, providing for the alternative vote, was passed by the Commons, but wrecked by the Lords. Before it could be put to the Commons again, Labour was blown out of office by the financial crisis of 1931, to be succeeded by nine ruinous years of “National” - in effect Conservative - government.

In 1978 James Callaghan failed to call an election partly because he did not want a hung Parliament and another Lib-Lab pact. The outcome was 18 years of Tory government.

Three times, a divided Left helped the Conservatives to regain power for long periods. By contrast, the Conservatives succeeded in drawing to themselves figures from outside their party, such as MacDonald, and secured landslide majorities.

It was because the forces of progress were so often divided that the 20th century was a Conservative century. If the Left can unite on an agreed programme of economic reform and electoral reform, the Conservative century could be succeeded by the progressive century.

Vernon Bogdanor is Professor of Government at Oxford University

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