Once again, as the western world seems to teeter on the edge of catastrophe, mankind begins fearfully to wonder, "What on earth is to be done?" Practically speaking, the disasters in Japan and the revolutions in the Middle East demand an answer to an urgent, even desperate, question. Global warming may be high on the international agenda, but global capitalism still takes nuclear power and fossil fuels for granted.

One draft of an answer lies buried in the crumbling, saffron pages of the Observer's back numbers from the 1940s, 50s and 60s. As 2011 unfolds, their author, the economist EF Schumacher, looks set for rediscovery as a man with a plan whose hour has come. Here, for instance, is Schumacher on "the so-called peaceful use of atomic energy" – "There could be no clearer example of the prevailing dictatorship of economics… That nuclear fission represents an incredible, incomparable, and unique hazard for human life does not enter any calculation and is never mentioned."

To submit to the nuclear lobby, he continues, "is a transgression against life itself, a transgression infinitely more serious than any crime ever perpetrated by man. The idea that a civilisation could sustain itself on the basis of such a trangression is an ethical, spiritual, and metaphysical monstrosity." These brave, burning words could have been written last night. But who, exactly, was EF Schumacher?

To his family, he was "Pop". To friends he was "Fritz" and, occasionally, "James". To David Astor, editor of the Observer, he was "Professor". When he died in 1977, EF Schumacher was not only a secular guru to countless admirers, but also the author of Small Is Beautiful, a global bestseller subtitled "a study of economics as if people mattered".

Schumacher expressed the ideas of Small Is Beautiful in pithy soundbites: "Technology must be the servant of man, not its master"; "there is more to life than GDP"; "the world cannot rely on diminishing supplies of non-renewables"; and, most famous of all, his belief in "lots and lots of small autonomous units". For a moment, in the 1970s, these caught the wind of the zeitgeist.

"To very few people", declared the Times, "is it given to begin to change the direction of human thought. Dr Schumacher belongs to this intensely creative minority." Long before our current crisis, Schumacher and his ideas were attracting attention here in the UK. Several of the better themes of David Cameron's widely disputed "big society" are indistinguishable in their ambition from parts of Small is Beautiful. The prime minister, indeed, has long been interested in Schumacher's ideas. Almost immediately after becoming leader of the Conservative party, Cameron addressed the Soil Association, engaging with key aspects of the Small Is Beautiful message.

Schumacher always said that his arm would wither if he voted Conservative, but he turns out to be a natural godfather for the coalition. A very English German, and lifelong anti-Nazi, Schumacher once wrote "Be prepared to joke at every pain". Much of his life was devoted to reconciling the planet to intractable global issues through the application of a dissenting intelligence, good humour and lateral thought. "We always need both freedom and order," he once wrote, a sentiment dear to English hearts and minds.

Ernst Friedrich (Fritz) Schumacher was born on 16 August 1911, the son of a distinguished academic and professional family from Berlin. His sister Edith, who later married the atomic physicist Werner Heisenberg, said of her brother's uncanny perceptiveness, "He is like another Beethoven". On top of his innate gifts there was the legacy of strange and violent times in Germany. Schumacher's childhood was blighted by the first world war and the German economic collapse of 1923.

Schumacher left school and university on a lifelong quest for answers to the puzzles of existence. Although his education had given him "maps of life and knowledge ", he wrote, nothing he had been taught seemed to have any relevance or "importance to the conduct of my life". Already he was anticipating an engagement with the challenges of the 20th century. "I have a restless longing in me that cannot be fulfilled," he wrote to his sister. "Hopefully, in the future, but not yet."

Perhaps the present was too troubled. After winning a Rhodes scholarship to Oxford, making the friendships that would shape his career, and visiting the US, Schumacher returned to Berlin. Always a German patriot, like many young men of his generation, he had to navigate the rise of Hitler and National Socialism until the inner conflict became intolerable.

In 1936 he married Anna Maria ("Muschi") Petersen, and moved to England. Muschi was a loyal, long-suffering wife whose good nature perfectly complemented Schumacher's more cerebral serenity. "When you're with Muschi," said David Astor, "it's like warming your hands at the fire." She devoted herself to raising four children while her young husband embarked on his quest for answers.

Schumacher's move to England had provoked bitter family rows. In a conflict played out in countless middle-class German homes, Schumacher argued that fighting for the Fatherland meant fighting against a Germany in the grip of Nazism. By contrast, his brother-in-law, Heisenberg, chose a controversial path of co-existence that would reach a troubled conclusion in Copenhagen. Schumacher insisted that England was the only place from which to conduct this battle. To his friends, this was no surprise. As one put it, "Fritz was a German, but in his way he was also an Englishman."

Schumacher's belief in an English future was fulfilled, with a paradoxical twist, early in 1940. He was living comfortably with his family in Weybridge, working in the City, devoting himself to Muschi and the children, and developing "the possibility of an Anglo-German friendship". When Weybridge was declared part of an Enemy Protected Area, and he had to flee, his Oxford friend David Astor came to his rescue. Astor had begun to promote a European ideal through the pages of the Observer. He was also linked to Schumacher through the "Shanghai Club", which championed the leftward shift of British society during the war. A shifting constellation of the best and the brightest, its members included Barbara Ward, EH Carr, Sebastian Haffner (Raimund Pretzel), Isaac Deutscher, John Strachey and, most notably, George Orwell.

Clever editors recruit where they can, and instinctively. Astor found at the Shanghai Club, a Chinese restaurant in Soho, many of the writers and journalists who would soon become associated with the Observer. Coming to the aid of a refugee like Schumacher was part of Astor's extraordinary gift for private, creative sympathy. His family had an estate in Northamptonshire, with cottages to spare. In June 1940, the Schumacher family moved to Eydon (pronounced Eden) to begin a new life on the land. For a man used to bourgeois comforts, a farm labourer's cottage, with no gas or electricity and one cold tap, was a shock. Worse was to follow. The Battle of Britain was raging; a Nazi invasion threatened.

Across Britain, enemy nationals were being rounded up and interned, many of them on the Isle of Man. The official dragnet caught all sorts: German Jews, communists, Italian chefs, fervent Nazis, Oxbridge dons. The distinguished classicist Arnaldo Momigliano, faced with a choice of internment among Italians or Germans chose the former declaring that he would prefer to be a professor among a bunch of Italian waiters than an Italian waiter amongst a crowd of German professors.

Schumacher was comparatively lucky. When, shortly after moving to Eydon, the policeman's knock came at the cottage door, he was taken off to join about 1,400 prisoners under canvas in a hastily built camp on Prees Heath, on the Shropshire-Wales border, where every kind of refugee was herded together under chaotic conditions. His life would never be the same again.

Despite the degrading mix of misery and squalor at the camp, Schumacher remained impressively committed to his adopted country. "To leave England now would break my heart," he wrote to his wife. Soon, his instinctive optimism was focusing his attention on the future and – because he was never short of self-belief – his role in it. He began to recognise that internment was giving his life purpose. "I see my task more clearly than ever: Europe, a new Europe, coming from England." It was a paradoxical response to an episode that, to a lesser man, might have been alienating and oppressive.

His experience of Prees Heath, which actually lasted no more than a few months in 1940, shaped Schumacher's understanding of society. On this dreary stretch of common, the cerebral statistician was forced into a rapprochement with Schumacher the humane socialist. Many colleagues would later comment on his extraordinary concern for the well-being of the individual in society and his generous, inclusive nature.

Slowly, the internees began to establish discipline, routine and a measure of organisation. With such a disparate collection, it was not easy, but Schumacher's easygoing good humour was invaluable. "Give me an Italian communist any day," he would joke in later life, contrasting Italians and Viennese. Elected camp leader, he set about organising Prees Heath into a hygienic and humane regime. He wrote to his wife that his modus operandi was "based on kindness and persuasion... with so much misery about I am convinced it is the only method."

Here, for the first time, was the mixture of simple exposition and philanthropic self-improvement that would later underpin his approach to changing society. "I am learning a great deal," he told Muschi, "how to deal with many different types of men. It is a hard school but a good one, and I am making some progress." Schumacher's remarkable equanimity never left him. He had no animus towards his captors. "Whatever the British are doing to us now," he wrote, "so long as they win I will be satisfied."

Schumacher had always been a Marxist. Prees Heath, he discovered, was a microcosm of society: the oppression and exploitation of the imprisoned many by the privileged few. Schumacher had grown up part of an intellectual elite, detached from reality, and mixing through birth and intelligence with an aristocracy of Anglo-German academics and professionals. Camp changed his understanding and his perception of society for good. He would return to village life in Northamptonshire like a man released from a seminar on life itself, burning with new ideas.

Throughout the war, encouraged by Astor, who supplied him with books, Schumacher devoted himself to the all-consuming question of how to make the world a safer and better place. How could real peace be won and guaranteed? What should be the shape of the postwar world? What to do about Germany?

Back in Eydon, Schumacher had also to come to terms with life as an enemy alien. The villagers thought him a spy. Signs went up in the local shops – "No Germans" – and the Schumacher home was pelted with stones. Eventually, peace was restored, but only after a public meeting in the Eydon village hall at which Fritz and Muschi were allowed to explain themselves. Fritz the amateur German farm labourer became "James" the foreign eccentric who was reputed to take tea with Lord Keynes. All his life, he would revel in a maverick identity, the good German you couldn't pigeonhole.

Schumacher was now writing regularly for Astor's Observer which became a perfect platform for his ideas. JL Garvin, who had edited the paper from 1908, had been forced by ill-health to step down in a hurry. Astor, aged just 29, inheriting a situation of journalistic chaos, turned to his friends. Schumacher's English prose needed a lot of subbing, but his fresh and innovative ideas added a vital ingredient to the mix.

The war moved into its final phase. Schumacher began to play a pivotal role in shifting a resurgent Observer into advocating new social and economic international solutions to urgent post-war problems. Some of these would become the foundation of the postwar consensus on the mixed economy and the welfare state.

Schumacher's personal journey was erratic. His ideas were in flux. As he wrote to Astor, while still on the land: "My intense interest in socialism is a new departure… What my final opinion will be I don't know, but I am pretty sure that my nature does not allow me to embrace wholeheartedly as 'final' any political creed or system, any 'ism', or any panacea."

Never an extremist, Schumacher believed in the sovereignty of reason. His daughter Barbara recalls that, in his company, "you always felt that he was very wise. If you asked him something, he would stop and think before he gave you his answer. He would always turn any discussion round and look at it in a different way, but he was always very twinkly, with a wonderful sense of humour." His second wife, Verena, remembers that "he was the easiest man to live with, incredibly even-tempered, who believed that the first Christian duty was cheerfulness."

Nevertheless, Schumacher made the re-entry into academe with difficulty. "Give me farm labourers," he wrote, anticipating his later ideas. "They will talk more intelligently than this scum of the earth called Oxford postwar Reconstruction Planners." The loathing was mutual. One of his colleagues wrote, "I don't believe that man was born. I think he came out of a bottle." For his part, Schumacher later admitted that, in those days, "I was a very arrogant young whippersnapper."

Eventually Fritz Schumacher would morph into a snowy-haired, kindly and voluble uncle of bohemian manner. But, as the war came to an end, he was still a young man in a hurry. Schumacher's increasingly singular personal quest left its mark on his family. Barbara Schumacher, born in 1946, remembers being conscious that "my home life wasn't like other people's". Her "Pop" had become an ardent vegetable gardener, and would get up at six to work his plot before commuting to work. Her sister, Virginia, recalls the domestic ritual of bread-making, a habit she maintains to this day. Despite memories of their father's addiction to physical domestic labour, both women recall that "there was something soft about him. He had very well manicured hands, and was always beautifully turned out."

Schumacher was also mixing with the elite of the postwar Labour reconstruction: Hugh Gaitskell, Michael Foot, Hugh Dalton, Jennie Lee and Stafford Cripps. Barbara says that he made no effort to disguise his origins. As a recent "enemy alien" he might have been expected to lie low, but that was not in his nature. He always spoke out, attracting the attention of Sir William Beveridge, who became another patron.

Occasionally, Schumacher's presence in the higher reaches of government inspired bitter, anti-German attacks, but when he became a fully naturalised Briton in 1945, his place and his future seemed more secure. Even his youthful appearance was on his side. At 35, he still looked about 25 and he always disconcerted those who, on first meeting, were astonished by the contrast between his youth and experience.

He believed that there was a social, even moral, dimension to the crisis of resources he observed on an official visit to the shattered ruins of postwar Germany. The doctors, engineers and lawyers of Germany had not failed as experts but as people. In one of his earliest public lectures, given in March 1948, he described man's task as twofold, first "to fully develop oneself" and second, "to form one's relationship to other people – family, groups, one's countrymen, mankind – sensibly, ethically, or expressed quite simply, with joy."

It's a fair bet that no other government economist of these years was formulating a role for "joy" in social policy, but Schumacher was becoming a most unusual public intellectual. Now in his late 30s, he was asking the questions about the nature of existence he had first confronted on Prees Heath. What is the purpose of one's life? Are there any useful tools available to humanity beyond scientific fact and optimism ?

Once he joined the National Coal Board as economic adviser in 1950, he began to see the future more clearly. He would devote the rest of his life to environmental questions. For 20 years, the Coal Board gave him a niche from which to test these in the field of energy. "I am completely submerged in COAL," he told his wife. He and Muschi had moved to Caterham. Holcombe was a big, rambling house in four acres of garden in the Surrey green belt. The growing family of four had a vegetable patch, and Schumacher devoted himself to sustainability.

The relative affluence and stability of the 1950s gave Schumacher the opportunity to indulge his fascination with existential questions. In his drive better to understand the individual, he became obsessed with astrology, insisting on doing his children's horoscopes. Schumacher himself was a Leo, a king of the jungle, a leader and shaman. "The mysteries of life were what interested him," Barbara remembers. "He was on a lifelong quest for answers. I think he was always troubled by the German catastrophe." How was it possible that the Fatherland, the home of Beethoven, Kant, Goethe and Marx, could have fallen under the spell of the Nazis? "For me," says Barbara, "my father's greatness lies in having the courage to question all the certainties of life."

In 1955, immersed in the search for inner stillness, Schumacher took a three-month sabbatical in Burma, another turning point. Thereafter, he began to develop a Buddhist approach to economics. He had already reduced the problems of "nature's larder" (the earth's resources) to the single issue of energy. Now he began exploring what a "Buddhist economy" might mean. There should, he wrote, be a "distinction between renewable and non-renewable resources. A civilisation built of renewable resources is superior to one built on oil, coal, metal etc. The New Economics would be a veritable Statute of Limitation – and that means a Statute of Liberation." After his trip to Burma, there was in Schumacher's mind the slow fusion of an energy-centred economic system with Gandhian and Buddhist ideas of non-violence. In August 1960, these ideas found expression in an Observer article entitled "Non-violent economics".

It was a very difficult time. Muschi was terminally ill with cancer, and her husband found it hard to muster the psychological resources to cope with her loss. Eventually, he would marry Verena, his children's au pair, embark on a second family and focus his attention on questions of "Intermediate Technology", the application of technology from the developed world for daily use in the developing world, using local materials. Schumacher's interest in the needs and resources of the rural poor coincided with the Observer's now celebrated stand on African liberation. Astor and Schumacher, as editor and contributor, were now echoing each other's preoccupations about the future development of the planet.

The climax of these years occurred in August 1965, when the Observer ran a milestone Schumacher article about Intermediate Technology on the front of the Review. His focus on world poverty struck a chord that resonated with readers. The paper was swamped with letters which in turn led to the foundation in 1966 of the Intermediate Technology Development Group (now "Practical Action").

Once he had retired from the Coal Board in 1970, Schumacher found a liberation in a new way of life, undoubtedly inspired by marriage to a woman 30 years his junior. He began to take an interest in the practical application of his theories. Peter Segger, an influential champion of the organic food movement, who has devoted his life to Schumacher's ideas and now lives in deepest Wales, remembers his mentor's visit to his farm. "He was so warm, enthusiastic and generous. To a beginner like me, he was a huge inspiration. His book was seminal."

Segger believes that Schumacher's biggest achievement, as an outsider, was to articulate a dissenting view of society in which "you could start on whatever scale you chose". Verena concurs that her new husband was "very intellectual, but not frighteningly so. He was always utterly inclusive. It was his natural inclination to explain. He never made you ill at ease, but he did like to be provocative."

Increasingly, his provocations were international. As well as a punishing schedule of talks and meetings, Schumacher began to translate his lifelong struggle with the conundrum of existence into two books. The first, an unorthodox spiritual roadmap with the title A Guide for the Perplexed, was a summary of his quest for happiness. The second, initially titled "The Homecomers", and finally published in 1973 as Small Is Beautiful, would become the global bestseller that dominated his last years.

Small Is Beautiful was a word-of-mouth phenomenon. The book itself is an occasionally repetitive collection of essays and lectures written over many years, some of whose themes had first been tried out in the Observer. On publication, it secured few reviews, and sales were initially slow. Its readers, however, were devoted. Schumacher's ideas spread among a generation troubled by ecological "survival", and in search of a new blueprint for the future. Long before global warming dominated the environmental and political agenda, Schumacher's book sales went viral, partly propelled by the oil price rise of 1974, but more probably inspired by his message.

First, he argued that the "natural capital" of the earth's resources is irreplaceable. Global capitalism, squandering fossil fuels, threatens our civilisation. Squander "the capital represented by living nature" and you "threaten life itself". Second, to address the challenge of how to change man's relationship with the planet, society needs to mobilise a combination of "freedom and order", two apparently irreconcilable concepts. For Schumacher this meant "lots of small, autonomous units", committed to "the indivisibility of peace and also of ecology." Typically, Schumacher expressed his ideas in memorable phrases: "good husbandry will help people to help themselves".

Finally, asserting the four cardinal virtues given him by his new-found faith in Roman Catholicism, Schumacher declared that mankind's duty was both simple and disconcerting: "We can, each of us," he writes, "work to put our inner house in order." The guidance for this task, he concluded, should not come from the state, or from science and technology, but from humanity itself, "the traditional wisdom of mankind".

Schumacher enjoyed only a few years of recognition for his vision of a better, more holistic society. The non-stop schedule took its toll. In September 1977, he dropped dead on a train to Zurich. He was not yet 70.

The afterlife of a cult bestseller is always interesting. There was a memorial service in Westminster Cathedral, addressed by Yehudi Menuhin, followed by a lot of talk about "Schumacher centres". Different pressure groups found different messages in Small Is Beautiful. "It was a bit like the early church," says one observer. "Everyone thinking they have got hold of the truth, but each has got a different part."

The Soil Association, of which Schumacher had been president, received a direct legacy from its mentor in the shape of royalties from Small is Beautiful. Jonathan Dimbleby, another former president, is delighted to see his predecessor back in fashion. "Small Is Beautiful really does mean something now," he told the Observer last week. "Schumacher has become a man for our times. I believe we must go back to Schumacher to find a future that works."

Dimbleby is not alone. Long before the Arab revolutions threatened oil supplies or the Japanese tsunami wreaked its terrible nuclear aftermath, David Cameron and the coalition had begun to look at Schumacher's ideas. In 2005, Cameron addressed the Soil Association, the key pressure group for alternative agriculture on the importance of sustainable farming. Patrick Holden, director of the Sustainable Food Trust, says: "Cameron gets it. Food and water will be the big electoral issues of the 21st century."

Rohan Silva, senior policy adviser to the prime minister, places Schumacher in a tradition of 20th-century anti-utopian thought represented by Karl Popper and Isaiah Berlin. Speaking for himself recently in Downing Street, Silva explained the government's "emphasis on breaking up large-scale institutions into smaller elements. This," he continued, "is absolutely what we are seeking to prosecute." Repeating Schumacher, Silva said: "Smaller elements will enable people to choose a human scale – with an emphasis on the environment and well-being. There is more to progress than narrow economics, and more to life than GDP. We will be the first government to implement a measurement of well-being."

Celebrating the concept of "enoughness", Silva claimed that "the three pillars of the 'big society' are all consistent with Schumacher". These pillars are, first, the decentralisation of power; second, public service reform; and third, social community reform helping people to come together to work responsibly for the common good. We have, said Silva, "an urgent sense of needing to embrace enoughness".

When I challenged him to reconcile some of these ideas with the all-powerful vested interests of global capitalism, Silva smoothly responded that "this is one of the great challenges for this government". He quoted Cameron's desire to build "a contributor society rather than a consumer economy". So is Schumacher then a household god in Downing Street? Silva seems wary of becoming the prisoner of pressure group politics. "We talk about policy in practical terms," he replies carefully. "We try not to talk about philosophy, but we do like to really engage with as many thinkers as possible."

The spirit of Schumacher seems to be alive and well and at the centre of coalition thinking. From the window of my meeting with Silva there's a view of the No 10 garden. Will the PM follow Michelle Obama and introduce an allotment to Downing Street? Silva replies that there's not enough time in the day to go gardening, but asserts that "the prime minister is most comfortable digging his garden [in Witney, his constituency] and tending to his vegetables".

In Britain in 2011, the man of many names and more enthusiasms has coalesced into "Schumacher", the mirror in which those who want to grapple with ideas for a new and better future can find their reflection, and perhaps derive some comfort. The coalition will probably never completely embrace him explicitly. Privately, however, some of them will sign up to his ideas. Members of the cabinet from David Willetts to Jeremy Hunt, who may possibly keep a dog-eared copy of the paperback bestseller on the bedside table, are known to sympathise with Schumacher's basic message. This can be expressed in a simple, serene sentence: "Our task is to look at the world and see it whole."