Winning the war, losing the peace; THE WORLD AFTER COMMUNISM by Robert Skidelsky, Macmillan pounds 16.99

IN 1919, after the end of the First World War, John Maynard Keynes published a short polemic about the implications of the peace settlement the Allies imposed on Germany. The Economic Consequences Of The Peace warned that the crippling level of reparations would so strain the German economy that the whole of Europe would suffer as a consequence. He was proved right.

Three-quarters of a century later, the Cold War is over. Robert Skidelsky, Keynes's biographer and champion, is too modest to call his own "polemic for our times" The Economic Consequences of The Peace as well, but his purpose is similar: to sound a warning amid the muted triumphalism. His warning is not for the "defeated" former communists, however, but for the liberal democracies.

The history of this century, insists Skidelsky, has only on the surface been one of resistance to Communism, or even to totalitarianism in general. The struggle has been about the degree of collectivism in society, the degree to which private choice is replaced by government choice, private provision by government provision. This battle has not been resolved by the fall of Communism. Communist society was totally collectivist, but even in Western Europe, the state spends 40 to 50 per cent of the domestic product of the economy. Skidelsky makes the modest-sounding proposal that this should be scaled back to about 30 per cent.

His argument is that the social agenda of the state has grown beyond its original role as a safety net "into a system of universal entitlement to services which most of the population could afford for themselves if they were not so heavily taxed". (A lot hangs on that blithe "most".) There comes a point when society simply resists new taxes, and governments either resort to totalitarian measures to enforce their collection, or covertly finance their programmes by printing more money: taxation through inflation.

The most interesting part of the sharp and coherent economic tour d'horizon that bolsters Skidelsky's main thesis is the section on the economic shock therapies (wholesale privatisation; the abolition of state subsidies; immediate open market competition) in vogue in the former communist states. He discusses how well they have worked in the Czech Republic and Poland, and how they have been hamstrung in Russia. To work, he argues, shock therapy must move to a market-based system as quickly and as cleanly as possible. Any attempts to smooth the transition merely prolong the misery.

Oddly, he ignores the most shocking therapy of all: the bolting of the country-sized Potemkin village of East Germany onto West Germany. Overnight, the two economies were formally integrated, in a way which, for the short- term political advantage of Chancellor Kohl, passed the bill to the citizens of West Germany and, in due course, of the whole European Union.

"The arguments will continue," concludes Skidelsky, "about where to draw the borders of the state, and about how much equality is compatible with liberty. But a democratic state in which civil and political rights are entrenched ... and which spends no more than 30 per cent of GDP is one that could enable a great deal of good and do comparatively little harm."

Skidelsky's 30 per cent was about the level of the 1950s and 1960s, which makes it sound a comparatively minor turning back of the clock. But some simple calculation, not provided by the author, shows what he is really proposing. Government spending in Britain is at the lower end of the Western European range, at about 40 per cent. To scale it back to 30 per cent would still mean lopping about pounds 70 billion off the budget. Were the benefits of government spending distributed evenly, that would mean each citizen of Britain losing services and transfer payments to the value of rather more than a thousand pounds.

But spending is not evenly distributed; the beneficiaries tend to be the poorer members of society. So Skidelsky's recommendation is, in effect, that pounds 70 billion should be taken from the poor and given away in tax cuts.

He would argue that the resulting stimulus to growth and the economy would benefit everyone, the poorest included. He might well be right, although the 1980s suggest otherwise, and no one should underestimate the electoral appetite for tax cuts, at whatever price. But the political will to take a gamble of this magnitude is, simply, absent. Peter Lilley reportedly baulked at removing even pounds 5 billion from the social security budget of about pounds 80 billion. Even John Redwood's disappointingly pusillanimous manifesto suggested finding savings in efficiencies rather than in the state abandoning a quarter of its activities. Skidelsky himself is opaque about the hard choice of precisely which areas the state should abandon; health care, unemployment benefit, pensions, education?

Keynes bet heavily on his view of post-war Germany by speculating against the mark. In the event, his timing (rather than his logic) was off and he nearly bankrupted himself. If Professor Skidelsky is right, we will all bankrupt the state, and it us. But his alternative, most politicians will conclude, does not bear thinking about. Societies have to be punch drunk before shock therapy seems more attractive than muddling through. In the short term, the losers would lose much more heavily and visibly than the gainers would gain. And in the long run, as Keynes knew, we are all dead.