Great economic events are usually different. They take time to become recognised, unfolding over a decade or even a generation. The Industrial Revolution was never reported in a newspaper headline. The Great Depression was not an inevitable result of the stock market crash of 1929, but crept up on us slowly.

So it should not, but it probably will, come as a surprise to know that we are living through one of the great transformations of modern history. Almost unnoticed, most of the industrialised world, especially the Anglo-Saxon part of it, has enjoyed a period of unprecedented economic stability.

Recessions were once as frequent and as regular as World Cups or general elections. Now, like hurricanes in Hereford, they hardly happen. The classic business cycle has worked for centuries in a simple, recognisable way. As an economy grows, inflation accelerates. Interest rates then rise, cutting borrowing and investment. That causes production to decline, pushing up unemployment and producing a recession. Between 1950 and 1982 the US had seven recessions, one every 4.6 years. The UK had the same number and frequency. In between those recessions, inflation rose, reaching a higher peak in each cycle.

But something historic has happened in the past quarter of a century. The business cycle has not been abolished, but in the US and the UK, it has been stretched, to improbably great lengths. In the process, the wild fluctuations of employment, output, inflation and interest rates have been firmly damped. The peaks of inflation have been lower, and the troughs of output shallower.

As Gordon Brown constantly reminds us, the UK has not had a traditional recession for 15 years. Since the bottom of the slump of the early 1980s there has been only one recession in the past quarter of a century. The US did have a recession relatively recently, but a very short and shallow one; the previous one, in the early 1990s, was similar.

Economists have coined a term for this remarkable period of stability. Taking their cue from the Great Depression of the 1930s and the Great Inflation of the 1970s and 1980s, they have called the current era the Great Moderation.

It doesn’t quite compete with the previous two for drama, does it? “What was it like in the Great Moderation, grandad?” “Ee, lad it were amazing! One year unemployment would be 6 per cent the next year it would be 5.9 per cent! You’d go to the shop for a pint of milk, and three years later it would cost exactly the same.”

One baleful consequence of stability is that it has not done much for cultural innovation and ingenuity. It is volatility and instability that produce the best in human intellectual endeavour. The Great Depression gave us John Steinbeck; the Great Inflation gave us the Beatles. The Great Moderation has given us Dan Brown and Mariah Carey.

And yet, as dull as it all may seem, the Great Moderation has been as consequential as either of the last two eras. It is surely the main reason that political volatility has declined in much of the West. In the economically turbulent 20 years to 1982, the US had six presidents — each term lasting an average of just over three years. Since then, assuming President Bush finishes his term, there will have been just four presidents in a 28-year span. In the same 20 years to 1982, Britain had six prime ministers. Since then there have been only three, with average terms lasting more than nine years.

The economic implications are much larger. In the absence of wild swings in activity, businesses and households can plan much more easily. The most obvious benefit can be seen in interest rates. Longer-term rates — such as those for mortgages or car loans — have what is called a “term premium”, an extra amount of interest that lenders require to protect them against the risks that big fluctuations in the economy and interest rates will undermine the value of their investment. But since those swings have been eliminated largely, interest rates can stay much lower.

Economists are debating the causes of the Great Moderation enthusiastically and, unusually, they are in broad agreement. Good policy has played a part: central banks have got much better at timing interest rate moves to smoothe out the curves of economic progress. But the really important reason tells us much more about the best way to manage economies.

It is the liberation of markets and the opening-up of choice that lie at the root of the transformation. The deregulation of financial markets over the Anglo-Saxon world in the 1980s had a damping effect on the fluctuations of the business cycle. These changes gave consumers a vast range of financial instruments (credit cards, home equity loans) that enabled them to match their spending with changes in their incomes over long periods.

In the City of London and New York, the creation of the secondary mortgage market, cushioned banks from the effect of a sharp downturn in their core business. The globalisation of finance meant that downturns in one market could be offset by strength overseas. The economies that took the most aggressive measures to free their markets reaped the biggest rewards.

The Great Moderation offers another precious lesson in an old truth of economics: the power of creative destruction. The turmoil of free markets is the surest way to economic stability and prosperity.

Times Recommends

• Obama is giving his party whiplash
• Mamma Mia, how can we resist them?
• This loyal soldier deserves promotion