The news that our recovery is now slower than after the Great Depression should sound the death knell of an economic model that simply isn’t working.

The figures are salutary. When Wall Street sneezed in 1929, the UK very quickly caught the cold. By 1932, the economy had shrunk by more than 5%. Unemployment spiralled to an extraordinary 17%, setting the stage for turbulent politics fuelled by the rise of both the British Communist party, which elected its first MP in 1935, and Oswald Mosley’s British Union of Fascists.

After almost a decade of low growth and despite almost full employment, output is refusing to bounce back to old norms

After the collapse of Lehman Brothers on 15 September 2008, the Wall Street infection once again spread like lightning. The UK’s recession followed a very similar path to the 1930s. But despite much lower unemployment, our economy has rebounded at a far slower pace than after the Great Depression.

Back in the 1930s, Britain abandoned the gold standard and free trade, replaced free trade with tariffs and imperial preference, and adopted a new policy of cheap money that created a housing boom. As new suburbs were built across the land, they fuelled the spread of new businesses, such as retailers John Lewis, that catered for the new middle class. By 1937, the economy had grown by more than 16%.

What a contrast to today. The Bank of England has offered cheap money once again, and with our super-flexible labour markets, we have kept unemployment low – largely through a surge in zero-hours contracts or self-employment. But the recovery has been far, far slower. Nine years on from the crash of Lehman Brothers, our economy has grown by less than 10% – a far weaker performance than during the 1930s.

The time has come to think more radically about the right medicine. Across the Atlantic, the debate is well under way. In a radical paper prepared for this year’s International Monetary Fund meetings, Larry Summers and Olivier Blanchard, observing similar underperformance in America, have challenged policymakers to think far more radically about new frameworks for monetary policy and a far bigger role for fiscal policy. We, too, should now be debating both the theory and practice of economics in Britain.

Despite the rise of new extremists, the real revolution in thinking during the 1930s was in the mainstream, as economists such as John Maynard Keynes sought new ways to mend, not end, the market. Today, economists have proved far slower to challenge the orthodox economic models that are simply failing to predict or explain what’s happening and which crucially, underlie the conduct of macro-economic policy.

Policy models assume that in the medium run, economic growth reverts to its long-run trend. The art of policymakers, therefore, is to effect the right mix of fiscal and monetary policy to nudge the economy back to an underlying pathway. But, after almost a decade of low growth and despite almost full employment, output is refusing to bounce back to old norms. So something is going wrong. Despite low interest rates as far as the eye can see, corporate bodies are preferring to hoard cash – some £635bn of it – rather than spend in an investment-starved economy which is struggling to become more productive.

The academic community is finally getting its act together. A bold new programme sponsored by the National Institute of Economic and Social Research is setting out to transform the state of economic thinking, seeking to bring together a range of disciplines to find new models that actually explain the world as it is. But the chancellor must play his part by tackling some self-evident truths.

As the Organisation for Economic Co-operation and Development laid bare last week, Britain’s problems are above all regional. London is an incredible 40% more productive than Wales. And in contrast to the shibboleths of traditional growth theory, our regions are failing to converge over very long periods of time. A bold new model would grant new fiscal freedoms to regions to borrow to invest in infrastructure and housing – as first proposed by the Keynes-inspired 1944 white paper on full employment. Devolution of the apprenticeship levy would rescue a failing policy and allow regions to coordinate technical education. And a radical boost to the Higher Education Innovation Fund would transform the power of regional universities to provide research and development to Britain’s underproductive small business base.

However elegant the strategy, said Winston Churchill, it’s good to occasionally look at the results. Today’s economic results are disappointing. It’s time to change the theory and practise of the strategy.

• Liam Byrne was chief secretary to the Treasury and chairs the all-party group on inclusive growth