Keynes famously remarked that in the long run we are all dead. But before we die we seem to have been put on the economic equivalent of a life-support system. Is it possible to provide a radical alternative to the do-nothing, Treasury orthodoxy he so effectively demolished during the 1930s, and to contemporary Keynesianism that, in a new and uncertain era of resource depletion, may be even more damaging?

After the near financial meltdown and subsequent international recession of the last two years, the question may appear an academic one. Western governments faced their most serious economic crisis in the post-war era and were left with little choice, other than rapid and massive state intervention.

A consensus has now established itself that, although far from an ideal solution, this direct investment in, and loans to, major financial institutions; quantitative easing of the money supply; support to private sector corporations; and a range of other demand stimuli, including the car scrappage schemes, averted a global depression. Perhaps, even more significantly, this consensus provides an ideological prop to the argument that the conditions for growth have been re-established, despite the need for a period of painful restructuring to rein in, and eventually repay, the large public debts that have been accumulated.

But what if we are entering a new era where the relationship between growth and macro-economic stabilisation is breaking down? What if resource depletion and ecological limits to production are already beginning to impact on the real economy in ways that undermine the prospects for future growth on which the Keynesian recovery is based?

A neglected element of the story behind the financial collapse of 2008 was the unprecedented rise in oil prices during the previous twelve months, caused by concerns over security of supplies and increased demand from the rapidly expanding economies of China and India. Over a twelve month period from July 2007 to July 2008, oil prices rose by 80% in real terms, to reach a record high of $147 dollars a barrel. Key sectors such as the motor industry experienced falling demand that had a knock-on effect on consumer confidence, helping to accelerate a withdrawal of capital that exposed the black hole in the sub-prime mortgage accounts of leading United States and European financial institutions.

Subsequently, the price of oil fell as a result of the international recession, leading some commentators to argue that the problem had simply been one of market speculation rather than any real, underlying concern about future market conditions of reduced security of supply and increased demand. But the more recent trend is a return to higher price levels, despite the patchy nature of the recovery.

Here, we need to be clear about the meaning of peak oil, as the term seems to cause some confusion. This is not a complete or sudden drying up of supplies but rather, lower and lower returns to exploration efforts, increasing concentration in the larger, established sites, a peak of production based on those main sites and then inexorable decline - a pattern that can be generally expected with many non-renewable resources in the 21st Century.

In a global, capitalist economy whose essential dynamic is to maintain trend growth but which also faces the new reality of resource depletion, the international markets will anticipate higher energy prices, even during a recession. Oil is the first non-renewable resource to be treated more as a store of future value, like gold, rather than as a traditional commodity. Although there may well be massive speculation and fluctuations in prices, given the herd mentality of investors, the underlying trend will be upwards. A similar pattern will develop for other finite resources such as nickel and copper driven by expectations of increased demand and declining supply. It is not unrealistic to assume that oil could reach up to $300 a barrel and for the price of other scarce commodities to show a similar trajectory.

No economic recovery based on growth is possible in this new era. There may be a series of small and short-lived increases in activity as the various demand stimuli work through the economy, but ones that simply cannot be sustained. The unprecedented levels of energy and other material costs will reduce disposable income, demand and investment. Without trend growth, the tax base available for repayment of government debt will be insufficient, leading to further negative impacts including higher interest rates for government bonds and deeper cuts in public expenditure.

Modern Keynesianism offers no solution to these dilemmas. Optimists may look to new oil supplies such as offshore discoveries, resource substitution, and energy efficiency improvements, to maintain the post-war growth trajectory. But all future extraction will require higher levels of energy and material inputs as the older and biggest oil fields decline over the next ten years. The recovery, such as it is, will leave Western economies totally exposed to the impact of resource depletion, compounded by international financial speculation on future prices.

This is the ultimate fate of Keynesianism in the 21st Century - to create a far worse economic crisis than the Great Depression of the 1930s by propping up a dysfunctional capitalist system that is turning the nation state into a form of punishment against its citizens.

There are, of course, radical economic and environmental critiques of growth . The pioneering work of Herman Daly on the steady-state economy and Tim Jackson's recent book on a no-growth economy are just two examples of a new movement that is beginning to mount a serious challenges to the prevailing order. Also significant has been the work of Transition Towns offering alternatives, including local food and renewable energy production, to reduce dependency on external supplies.

What these point to is nothing less than a revolutionary change in both our conception of economics and its practical applications in order to create a new, localised economy that provides the material needs of life but with a massively reduced throughput in both energy and other non-renewable resources.

As with any radical alternative to the status quo there will be skepticism, bordering on incomprehension. But what is the alternative if the future of global capitalism is so grim? The fate of Detroit provides a salutory lesson in the scale of the disaster facing us and yet, some signposts to possible solutions. Having built its prosperity on the automobile industry it experienced rapid de-industrialisation, characterised by mass poverty; the loss of over a million people from its inner-city districts; house price collapse and vast areas left to dereliction.

Gradually, local people are fighting back by repossessing the land for farming and through other small-scale economic initiatives such as social housing. In effect, this could be described as a nascent, parallel economic system (sometimes described as the solidarity economy) that has little connection with globalised capitalism on which our prosperity is supposedly based. But the process has been a slow and intensely painful one.

Instead of creating yet more Detroits, yet more de-industrialised wastelands as we wait for the return of growth, we should be planning now for a successful transition to a no-growth, localised economy. Rather than accept that the process will be painful and destructive in the traditional form of capitalist restructuring, we should be creating a new economic framework, including a network of local financial, technological and manufacturing institutions, to help build a dynamic alternative to globalised capitalism. The clear objective should be to resolve the underlying crises of resource depletion and environmental degradation, while, at the same time, providing interesting and stimulating work that meets the basic, material needs of life in food, energy, housing and transport.

Keynes was right that the argument for long-term equilibrium was also a convenient excuse for inaction. But there is another saying that better reflects our present dilemma - fanaticism is the redoubling of your efforts when you have lost sight of your goals. Worship at the altar of growth has become a form of fanaticism and it really is time to take a long, hard look at what we mean by economics.