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This U.S. election campaign is being billed as a battle of big ideas. That is a good thing. But it is a shame that the fight is not being waged in the 21st century.

In choosing Paul Ryan as his running mate, Republican presidential contender Mitt Romney swapped his Massachusetts pragmatism for a proudly ideological commitment to limited government. The Democrats, by contrast, believe in the essential role government plays, and are willing to raise taxes, at least on the rich, to pay for it.

This a clear and important battle line in the United States. But the argument about the size of the state comes with little regard for the economic realities of this era. Like generals fighting the last war, U.S. politicians are solving the economic challenges of the past century.

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The intuitive sense that the economy is becoming less predictable and less secure is right. As a result of globalization and the technology revolution, the nature of work, the distribution of the rewards from that work and maybe even the economic cycle itself are being transformed.

But one would not know it from the U.S. political debate, whose familiar melodies of small state versus large state, higher taxes versus lower taxes and the importance, or not, of balancing the budget could have been played in any decade since the Second World War. They are an inadequate response to the economic demands of the 21s century.

Thanks to smart machines and global trade, the well-paying, middle-class jobs that were the backbone of Western democracies are vanishing. The paradoxical driver of this middle-class squeeze is not some villainous force – it is, rather, the success of the world's best companies, many of them American.

The record profit at Caterpillar, for example, is a tribute to the company's skill at operating in a global marketplace and adopting cutting-edge technologies. But for many of its workers in Illinois, that good news translated into a six-year wage freeze.

This is the knottiest economic problem of our time: Figuring out how to manage an economy whose engines of growth are enriching the few but squeezing the many.

Americans understand this is happening. That is why the Democratic ticket, despite the complaints of some of its wealthy backers, has stuck with its critique of Mr. Romney's former company, Bain Capital, as an outsourcer of jobs. The point that middle-class workers sometimes suffer from the same decisions that increase shareholder value is one that many Americans know from their own life experiences.

But what neither party likes to talk about is that this socially malignant outcome is being driven at least in part by the forces of free-market capitalism that most people welcome. The attacks on outsourcing do not convince everyone, because they know that Mr. Obama has no intention of outlawing it – and that if he did, the economic impact would be devastating.

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The tempting answer, which I heard most recently in an interview with Glenn Hubbard, an economic adviser to Mr. Romney, is to optimistically assume that, just as the early traumas of the Industrial Revolution gave way to widespread prosperity in much of the world, the economic transformations of today will eventually work out.

"If you were to go back to 1940 and have this debate, we might worry, well, what if people are going to lose their farm jobs?" Mr. Hubbard said. "Then the debate was over manufacturing, then over service. And if an economist is honest with you, the best he or she can say is, what we need to do is allow those opportunities to happen, and they will."

There are a few problems with this happy prediction. First, while the Industrial Revolution did eventually make ordinary people richer than at any other time in history, it took two world wars and communist revolutions in Russia and China for the world to iron out the kinks. Second, to make industrialization work, the West created an elaborate set of new political, social and economic institutions, including universal public education, trade unions and the social safety net.

It took more than the spinning jenny or the steam engine to transform local, agrarian, family-based communities into national, urban, individualistic ones. New political and social institutions will be needed to midwife the latest shift into global and virtual communities. Inventing those institutions is difficult, and talking about them can be frightening, but that is the political conversation the Western world should be having.

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