Fighting off the Keynesians was the chancellor's easiest challenge

George Osborne has won the wager with his Keynesian critics. In his first Budget in 2010, the chancellor pledged to restore growth while bringing public debt under control. The recovery has been slower than he thought, and deficits higher, but Mr Osborne's plan has borne fruit. Debt has stabilised as a share of output. Growth is stronger than in most rich countries, and 2m jobs have been created.

This is a substantial recovery, and it has taken place squarely on the Chancellor's terms. In America, where the economy has followed a similar path, fiscal contraction was not a matter of choice - it was more or less imposed on the administration by the Republican opposition in Congress. The British government, by contrast, set its own course.

On the eve of the 2010 election the three biggest rating agencies had all warned that the UK could be about to lose its AAA status, putting the country on "negative outlook". Mr Osborne's position was that action was needed to preserve the creditworthiness of the Treasury - and sure enough, by early 2013, Moody's and Fitch had taken the debt down a notch. Now the credit rating is again stable, and Britain has managed to maintain its AAA rating with Standard & Poor's.

Critics warned that fiscal austerity would doom fragile economies to continued recession. In America Paul Krugman led the attack, with persistent calls for bigger deficits in the US and Europe to combat what he called a depression. Yet the rapid fall in unemployment in the US and UK, alongside a significant reduction of the budget deficit, casts doubt on this Keynesian refrain.

The Keynesians misunderstood the 2008 crisis and misjudged the policy mix most effective for cyclical recovery. The cyclical downturn that began in 2008 was triggered by the end of the housing bubble in America, Britain and other overleveraged economies. But it was exacerbated by a financial calamity, and this calamity - above all, the US Treasury's ham-fisted mismanagement of the Lehman Brothers collapse - was to blame for its remarkable depth.

The distinction matters. It suggests that the key to recovery lay not demand stimulus per se, but a reversal of the post-Lehman global financial panic.

And that, indeed, is what the historical record shows. Central banks were the real heroes. By creating money to fund asset purchases, they restored confidence - in sharp contrast to their gross mishandling of the financial panic in the Great Depression.

The Federal Reserve was the first to move, and the US was the first to recover. The Bank of England came next - and the sputtering British economy, too, found a new lease of life. The Bank of Japan followed, too. Amazingly, it took Mario Draghi at the European Central Bank until this January to overcome Germany's deep distrust of monetary ease to follow suit. Only now does the eurozone have the prospect of matching the recovery now under way in the other big developed economies.

Mr Osborne was right to keep his cool. Fiscal prudence preserved the UK's creditworthiness while expansionary monetary policy restored growth. This policy mix has repeatedly been effective in the wake of financial panic.

Yet Keynesians have tended to downplay the role of monetary policy, arguing that once nominal interest rates hit zero, further monetary expansion becomes futile - a theory known as the "liquidity trap". This view was mistaken: even at near-zero interest rates, monetary expansion boosts stock market valuations.

The chancellor has won this battle. But he is a long way from winning the long-term macroeconomic war. Neither the UK nor any other major economy has come close to doing enough to see that the benefits of growth are widely shared.

Creating jobs is not enough. Economic progress means raising living standards - not only for bankers in New York or London, but throughout society. and not through environmentally dangerous fossil-fuel-led growth but through a shift to low-carbon energy.

Mr Osborne can claim his fair share of credit for Britain's cyclical recovery. Attaining it was hard. But Britain's challenges, and the world's, are deeper still.

The writer is director of the Earth Institute at Columbia University