As another decade passes, the real joy of Andy Beckett's account of the 1970s is the way he avoids crudely mocking 10 years generally reviled as those of three-day weeks, political decline and loud trousers. Instead, Beckett also dips into the 1960s, 1980s and beyond to explain the cause and effect of the policies of the major politicians of the time: Heath, Wilson, Callaghan and of course, Thatcher. She foreshadows a large chunk of a book almost thriller-like in tone, but never once does Beckett fall for the too easily accepted view: that her accession to prime minister was inevitable. Required reading for anyone who grew up in what were, as this enthralling and enjoyable book explains, defining times.

How familiar does this sound? A febrile boom, stimulated by unregulated bank lending, comes to a halt. Unemployment figures go up and a Labour government is forced to implement savage public spending cuts. The mood of the country swings from elation to anxiety, and the Conservatives are preparing for power. Right now, it seems as if the 70s are back.

Andy Beckett's survey of British politics during that misunderstood decade recognises this topicality with an epilogue in which he notes the return of such 30-year-old terms as "stagflation" and "government bail-out", but events between delivery and publication have made When The Lights Went Out even more relevant than he could have hoped.

The 70s already have their retro shorthand - a healthy dollop of Life on Mars with a bit of punk and The Good Life thrown in. However, nostalgia is not history: the former is riddled with cliché, the latter with surprises - such as the fact that, according to a recent index of "national, economic, social and environmental well-being", the happiest year since 1950 in the UK was 1976.

Beckett's purpose is both to celebrate, and to dispel the misconceptions about, a decline-haunted political era that "for all the gothic prose it prompts, was about moments of possibility as well as periods of entropy". As he rightly observes: "right up until the last days of the 1979 general election, Margaret Thatcher was not the only possible answer to the questions the decade posed."

So When the Lights Went Out is divided into 19 chapters that move from the technological optimism of the first Heath government, through the shock of the 1973 oil crisis and the paralysis of the three-day week, to the showdown in 1979, when the postwar consensus collided with the new right. The story is familiar, but there are many surprises.

Before Mrs Thatcher polarised British politics, there were several shades of grey. Beckett points to the connection between Edward Heath and astringent TGWU leader Jack Jones (they met during the Spanish civil war). The Labour prime minister, James Callaghan, was, as Tony Benn stated in 1977, "openly right-wing", with his traditional morality, his populist embrace of the silver jubilee and his enthusiasm for military intervention in the Falklands.

At the same time, the definition of politics expanded during the period that saw the full working-out of 60s energy and idealism. This was the time of the National Women's Liberation Conference and of the Gay Liberation Front, and successful magazines that came out of the fundamental desire to see equality for marginalised social groups: Spare Rib and Gay News.

However, the book's main thrust is not personal but parliamentary politics. Beckett has a sharp eye for the tensions and power plays involved in trying to run a country, and his enthusiasm for the process shines throughout. He is excellent on the practical essence of politics, which could be described as the art of reconciling different, if not opposing, positions and translating them into action.

So there is a description of the "carefully orchestrated" cabinet sessions that Callaghan held between 23 November and 14 December 1976 in order to discuss a vital IMF loan, the terms of which involved swingeing public spending cuts. Benn remembered these meetings as "the most interesting discussions I ever attended in my life".

As an experienced journalist, Beckett keeps things fresh by interviewing as many of the major players as he can. He doesn't get to Thatcher, but his encounters with Heath (snotty), Jones (dry but idealistic) and Jayaben Desai, focus of the Grunwick strike (frail but passionate) - to name but three - are well observed and informative.

Beckett also visits various key locations, such as the Sullom Voe oil terminal in Shetland, the now-demolished coke plant at Saltley near Birmingham (which saw the first successful use of mass picketing), and the disused aerodrome at Watchfield in Oxfordshire - the site of the first and only government-sponsored Free Festival in 1975.

In most cases the action has gone elsewhere, with poignant results - as in the case of a nearly deserted workers' paradise, the TGWU holiday centre in Eastbourne, or the foundations of Heath's failed techno-city at Maplin sands, now largely claimed by the elements. Even the one successful 70s new town, Milton Keynes, has the problems of other, older developments. Utopias rarely work, but the aspiration towards a better life is a human necessity.

Beckett's meta-narrative here is that currently popular genre, the personal journey. Born in 1969, he revisits the country of his childhood with a sense of longing: "politics was rawer and more honest". Visiting Hull to talk to a union leader about the 1978-79 winter of discontent, he observes that "British politics is a shrunken thing compared to the seventies".

This approach allows only one mis-step: an all-too-brief chapter about the hard-left student politics of the day, "Marxism at Lunchtime", that relies entirely on the experience of Beckett's cousin. How that kind of radicalism infused British life is a fascinating story. But in general, this is a generous, passionate book that reclaims the past with clear thought and a gripping, well-paced narrative.

When the Lights Went Out makes it clear that, on one level, 2009 is not 1979. The second world war is passing out of living memory. The power of the unions is diminished. There is still terrorism, to be sure, and the continuing sense of a country punching above its weight globally, but that all-consuming sense of decline has dissipated amid higher personal prosperity and expectation.

However, the new national identity of celebrity-driven, individualistic materialism is at considerable risk from the downturn and climate change. Rising unemployment will foster morbid social and political symptoms. Cuts in public services will reduce the quality of life. This contiguity with the 70s suggests that stormy seas lie ahead, unless a fresh common purpose is found.

 Jon Savage's Teenage: The Creation of Youth 1875-1945 is published by Pimlico

In his superb previous book, Pinochet in Piccadilly, Andy Beckett presented us with some bewitching Gabriel Garcia Marquez-like scenes: a sick General Pinochet in an English country garden being served by his butler, awaiting leave to return to Chile; our former chancellor, Lord Lamont, after attending a pro-Pinochet rally at a Blackpool cinema, scuttling nervously out through a side exit, "like a court defendant".

Now, with a slightly different cast, Beckett takes on the 1970s, and obviously the material is more familiar. I can remember a huge ironic cheer going around our suburban neighbourhood during the miners' strike when the lights went out. But Beckett's avid eye and novelistic flair for detail render the characters as weird as if they were Chilean.

Reality does assist him. For a start, there are Arthur Scargill and Edward Heath, the latter interviewed by Beckett not long before he died. And then there was Harold Wilson, already losing his mind, making the Dylanesque pronouncement to a pair of young Observer reporters shortly after his resignation in 1976: "Sometimes I speak when I'm asleep. You should both listen. Occasionally when we meet I might tell you to go to Charing Cross Road and kick a blind man standing on the corner."

By the mid-1970s, the Labour government was in a state not unlike that of the present one. Knackered, in other words, without ideas or ideals, and most of its talented people dead or gone. Then it was called "declinism". What was known as the "60s" had lost its way; peace and love would be replaced by anarchy and hate, living standards were falling, the price of property had crashed and there was a stock-market slump. Punk was foreshadowing the destructiveness of Thatcher. In the winter of 1974, Jim Callaghan, the foreign secretary, said: "Sometimes, when I go to bed, I think that if I were a young man I would emigrate."

With the story of the 1970s, as with a rerun of a football match, you know what's coming and it's always Mrs Thatcher. But it's easy to forget that when the 1970s gave way to the 1980s, and we began to talk about "the transformation of Britain", this meant the devastating economic crisis of the 1980s, inflation at 20%, high unemployment, IRA violence and race riots.

Not that the 1970s, along with the other postwar decades, were entirely lacking in creativity. There was Muriel Spark, Doris Lessing and JG Ballard, and the films of Lindsay Anderson and Derek Jarman. And there were the theatre workers - writers, actors, directors - building on the oppositional legacy of John Osborne and the Royal Court Theatre; the 1970s were a high point when it came to a theatre of dissent and opposition. Along with the Grunwick dispute, which was led by a diminutive Bangladeshi woman, with Labour ministers attending the picket line, the Gay Liberation Front, Spare Rib, union recognition and Rock Against Racism were all formed. This culminated, in April 1978, with a concert in Victoria Park, east London, attended by Asians, rastas, punks and hippies. It was the biggest anti-fascist rally since the 1930s.

Now that global capitalism is in its deepest crisis for decades, having been brought down not by Marxism, Islam or the trade unions, but by its own lack of self-control (if it were an individual, the person our state would most resemble would be a teenage crackhead), we yearn for the return of the parents, for regulation and nationalisation. Thatcher was proud of having sold off the council houses, something many Labour ministers regretted not doing. But it was giving mortgages to those who couldn't afford them that helped precipitate our present condition.

In the 1980s, our democracy gave away too much power to entrepreneurs whose most significant virtue, from Thatcher's point of view, was that they had no sense of moral responsibility.Like her, they pretended not to know what "society" was. Beckett reminds us that in the 1970s, Britain was more egalitarian than today, there was more social mobility and the abyss between rich and poor increased during Blair's tenure without much complaint.

Now, though, in the middle of what is more of a dive than a decline, it seems obvious that we have lost more than we understand. We can get some of it back - cohesion, social purpose - but only if, this time, the people retain their power. Beckett's excellent account of the 1970s is a necessity if we want to understand now as well as then.

Hanif Kureishi's most recent novel is Something to Tell You (Faber and Faber).