When Francis Fukuyama celebrated what he believed to be the more or less permanent triumph of liberal democracy as "the end of history" in his famous 1989 essay of that name, he saw the "free market" and democracy as not only compatible but as mutually supportive.

The market, more or less unfettered, was in his view the natural equivalent in economic terms of political democracy, achieving the same dispersal of economic power throughout society as democracy achieved in political terms.

He saw no need for democracy to act as a restraint on the economic outcomes determined by the market and he saw no danger that the "free market" might in some ways prove inimical to effective democracy.

That confidence was helped greatly in the last two decades of the 20th century by what appeared to be a conclusive resolution of a contentious debate within Western countries about the form that a market economy should properly take.

In the immediate aftermath of the second world war, it had been taken for granted that full employment should be the prime goal of economic policy, that collective public provision was needed to guarantee basic standards of essential services and that market excesses would have to be restrained by careful regulation.

But by the 1970s, the received wisdom of the immediate postwar years was subject to a new challenge.

The individual, rather than society, was seen as the pivotal point of human endeavour and progress.

Writers like Friedrich Hayek and Robert Nozick questioned the need for or appropriateness of an extended role for government or the acceptability of meddling in "free" market solutions.

Redistributive taxation, the provision of taxpayer-funded benefits to the disadvantaged and the power of organised labour came to be seen as obstacles to economic growth rather than as guarantees of an equitable distribution of wealth.

Economists like Milton Friedman questioned the efficacy in peacetime of Keynesian intervention and promoted the idea that macro-economic policy was really just a simple matter of controlling the money supply in order to restrain inflation, while global developments such as the oil-price shock of the early 1970s meant that inflation rather than full employment was seen as the primary issue for economic policy.

The unravelling of the "postwar consensus" was helped, especially in Britain, by what seemed to be an increasingly difficult economic conundrum - how was the welfare state to be maintained in the face of the pressing need to improve competitiveness and productivity so as to meet the challenges of newly efficient rivals?

In the late 1970s "stagflation" - the failure to secure an acceptable rate of growth, combined with the threat that, even if a faster rate of growth could be achieved, it could be only at the cost of higher inflation - was seen to present, in the absence of any disposition to use the exchange rate to improve competitiveness, an impassable brick wall and dead end.

By the 1980s many of these issues had been resolved in favour of the "free-market" reformers.

Many of their ideas had been carried into government by Ronald Reagan in the United States and Margaret Thatcher in Britain.

The two leaders made common cause at the beginning of the 1980s in taking a step whose significance perhaps even they did not fully grasp at the time.

The portentous decision was taken in the US and in Britain to float their currencies and to remove exchange controls. The way was now clear not only for an explosion in international trade and foreign investment but for a determined assault by international capital on the political power of democratically elected governments across the globe.

The ability to move capital at will across national boundaries not only meant that international investors could bypass national governments but also enabled them to threaten such governments that they would lose essential investment if they did not comply with the investors' demands.

This shifted the balance of power dramatically back in the direction of capital and set the seal on the triumph of those "free-market" principles of economic policy that became known as the "Washington consensus."

We see the outcomes of this shift all too clearly.

Virtually the whole of the increased wealth of the last three decades has gone to the richest people in our society. Poverty, even in the "rich" countries, has risen while inequality, with its attendant social ills, has widened.

The rights of working people have been weakened.

Joblessness is endemic and the free market free-for-all achieved its culmination in the global financial crisis.

A "Europe" imposed by an elite and constructed in the image and to suit the interests of international capital has come unstuck and flounders in recession and unemployment.

The austerity demanded by Europe's leaders makes a bad situation worse. Popular support for the European Union has nosedived.

Major decisions continue to be made by big corporations and not by elected governments.

Faith in government and the democratic process is at a low ebb and attempts to consult the people on Europe's future continue to be resisted.

"History," in other words, has continued to unfold. Very few seem to realise how thoroughly our civilisation has been transformed by the triumph of the free market ideology.

They do not see that Western liberalism, which has informed, supported and extended human progress for perhaps 700 years, has now been supplanted by an aggressive self-interested doctrine of the individual which leaves no room for community and co-operation.

Even the victims of this comprehensive and fundamental change seem hardly aware of what has happened.

Fukuyama failed to recognise, in other words, that the threat to Western democracy came from within those democracies themselves.

It came from the greed and self-interest of the rich and powerful and their ability to manipulate the "free" market to their own advantage but also from the quiescence and apathy of that much greater number who fail to understand that democracy is necessarily sidelined if the market cannot be challenged.

The substance of democracy has been hollowed out so that only the shell, the forms, remain because we have not cherished and made a reality of what was our most valuable protection and greatest achievement.

Bryan Gould was a member of the Labour shadow cabinet from 1986 to 1994. His book Myths, Politicians and Money: The Truth Behind the Free Market (Palgrave Macmillan) is out this week.