Now we know that UK economic growth has not been achieved in a genuinely sustainable and long-term way. On the contrary, it has been driven forward by four booms over the past decade: in government spending, in immigration, in house price inflation and in personal debt.

These booms have been episodic in character. They have washed through the British economy. And with relatively little positive effect on fundamental drivers of prosperity such as education and infrastructure, they have left us with no savings culture, a bloated public sector and a legacy of £1.5 trillion in personal debt, over and above the dire state of the public finances.

Far from abolishing the normal cycle of boom and bust, then, the government has presided over a huge expansion in demand which has only served to defer economic reality, and to worsen its effects. It has hopelessly failed.

However, the present crisis has hardly been kind to the Tories. They have seen the final parts of the Thatcher economic settlement swept away. If they win the next election, they will have an enormous job to put the country back on the right track.

In a way, this is strangely liberating. The truth is that all bets are off. The fiscal rules have been suspended. The supposedly independent Bank of England has been remorselessly bullied from all sides. There is no growth. The very numbers themselves have been made unreliable by the volatility of economic change.

What we need, above all, is fresh thinking. In a new book called Compassionate Economics, to be published this week, I argue that this is a time to reexamine the fundamental basis of economic policy itself.

At present, British government is in the grip of a 1970s textbook economics that is far removed from the cutting edge of the discipline. Keynes once famously remarked that “practical men . . . are usually the slaves of some defunct economist”. This has been applied with a vengeance: a whole standard economic model has enslaved us.

This dismal gospel treats human beings as purely self-interested, endlessly calculating costs and benefits, and highly sensitive to marginal gains and losses. It regards the human world as static, not dynamic, as a world of fixed social engineering, not one of creation, discovery and competition. It is extremely mathematical and normally expressed not in language but in the equations of calculus and statistics.

It has served to legitimise much of the bad policy-making, centralisation and state growth that have weakened the UK economy. It makes the present government’s obsession with top-down tinkering and micro-management seem not merely legitimate but positively required. And at the same time it has encouraged a politically useful but unwise belief in unfettered financial markets.

This textbook economics has also permeated the public mind. The public understanding of human behaviour has increasingly reflected a standard view of man as perfectly rational, greedy and fearful. This in turn has fed into fears about excessive materialism, about “clone town” Britain, about loss of place and loss of identity.

The standard view is self-reinforcing. How, then, can we break out of this intellectual straitjacket? Compassionate Economics sets out a new economic agenda for the centre-right. This is one small contribution, and we are at the beginning of a far wider debate. Nevertheless, I think there are two key points.

First, we need to remind ourselves of the scope and limits of human nature. Don’t forget that, according to the old textbooks, the financial crash of 2008 could never have occurred. Aware of the potential risks, people would not have borrowed so much, banks would not have lent so much, the regulatory system would have been barely tested and the interbank and money markets would have continued to function without government support.

Yet that colossal crash did take place, markets did seize up, famous banks did cease to exist, the powers of government to manage economic disorder were stretched to breaking point and the human consequences are likely to be dire. As one eminent commentator noted, every important safeguard failed. No greater proof is needed of the limits of man’s economic rationality.

Thus we need to rethink the fundamentals from the bottom up. In particular, we need a much richer public conception of what human beings are: not economic automata but fizzing bundles of human capability and potential.

Second, we need to rediscover the social foundations of economic prosperity: independent institutions, a more nuanced blend of competition and cooperation and a greater emphasis on entrepreneurship broadly considered. These have been the basis for British economic success since the 17th century, if not longer.

What difference would this perspective have made to the recent crash? Well, it would have made all involved – politicians, regulators and bank executives – far more aware of how hard humans find it to assess risk, and of the human predisposition to prefer a benefit now and to discount or ignore future costs.

It would not have allowed those politicians, regulators and executives automatically to assume that markets can efficiently assess the credit-worthiness either of individuals or of banks. It would have understood from the outset the importance of the Bank of England’s standing as lender of last resort, a role that is inexplicable on the standard economic model, in which prices are always efficient and liquidations do not affect markets.

Finally, it would have had a far more realistic conception of the value of competition within financial services: as a means to greater efficiency and better allocation of resources, and not simply as a good in itself. The result would have been a far more sceptical and realistic attitude within government to the various booms.

The present economic crisis is a severe one. The stakes are high and will become higher still if there is a backlash not merely against current governments and policy but against the very ideas of capitalism and the market economy.We can survive and thrive if we use the present time as an opportunity to rethink and to build a national consensus as to the kind of economy and the kind of society we really want.

Jesse Norman is Conservative parliamentary candidate for Hereford and South Herefordshire.

His new book Compassionate Economics is published tomorrow by Policy Exchange and the University of Buckingham Press

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