Poverty has always been with us; so has war. Military expenditure has been the principal cause of fiscal innovation for most of history.

In The Cash Nexus, Niall Ferguson sets out to examine the link between economics and politics after the failure of socialism and the triumph of capitalism.

There is a powerful argument that economic growth spurs liberal democracy, but, Ferguson argues, there is plenty of historical evidence that democracy can generate perverse economic policies and that economic crises caused by war can be conducive to democratisation.

Institutions such as a central bank, a tax-gathering bureaucracy and a representative parliament can give democratic regimes more power than dictatorships, but democratic states have tended to lack the political will to use their strength. And this idea is particularly interesting now given the relative strength of the United States after the implosion of the Soviet Union.

Unless there is an urgent external threat, Ferguson says, democracies prefer to shift resources from military spending to domestic redistribution - the welfare state benefits at the expense of the warfare state. Despite its dominance, the US refuses to play the role of world policeman, unlike the British empire a century ago. Wars are now fought using precision bombers - no more body bags to upset the folks back home.

According to Ferguson, it was not the excessive cost of the empire that led to Britain's global downfall but its failure to prepare for its defence. The two states that really challenged the empire "on which the sun never set" - Germany and Japan - were not equal in institutional terms.

Niall Ferguson is no Oxbridge counterpart to the Reaganite blusterer PJ O'Rourke ("give war a chance"). The Cash Nexus is an erudite and scholarly, if overlong, economic history. In seeking to understand the mechanics of power Ferguson is attempting to provide not a sufficient explanation of the modern world, but a necessary one.

jmulqueen@irish-times.ie