AS INTEREST RATES again speed to record levels and our economy heads into another recession, frightened Americans will intensify their search for a path back to prosperity. For those who are skeptical that a return to a "free market" is either feasible or desirable, Ronald Muller's Revitalizing America offers a coherent and refreshing alternative vision.

The 1970s was a bad decade for professional economists. The simultaneous occurrence of inflation and unemployment defied the traditional policy tools of demand management. A new breed of "supply siders" -- well represented on Reagan's transition team -- despaired of "fine tuning" aggregate demand. Instead, they propose that the supply of capital and jobs would surge if only government would stop dampening market incentives. They argue, for example, that capital gains taxes have been discouraging investment, and minimum wage laws have rendered workers more expensive than their market value.

In contrast, Muller contends that we live in a "post-market" economy dominated by big corporations and unions, and a public sector which accounts for over 40 percent of the GNP. Clarion calls for a return to small government and freedom for those who supply capital and labor are therefore either naive or a guise for redistributing income to the wealthy.

An earlier, very different version of supply-side economics can be located in the "development economics" practiced in the Third World, and in the national industrial policies of Western Europe and Japan. Based on the proposition that markets often adjust too slowly or not at all, the original supply siders looked to more -- not less -- government to correct these market "imperfections." Such activities as technological innovation and investment in transportation and other basic services not profitable enough to attract private captial needed government support. Old industries needed government help to adjust to foreign competition and to stimulate firms with high growth potential, whenever adjustment through market mechanisms was either too slow or too socially costly.

Muller grounds himself in this version of supply-side economics and argues that the time has come for the United States to learn from the experience of our industrialized competitors and from the successes of the Koreas and Brazils in the developing world. Specifically, he advocates the creation of a National Development Bank to fund demonstration projects in promising industries and extend loans to assist old firms to upgrade their technology and rationalize their production. Rather than the across-the-board corporate tax cuts proposed by Reagan's supply siders, Muller would target tax breaks toward particular firms or industries.

The Development Bank would work within a broader framework established by an advisory National Industrial Development Board. The Board would review all existing and newly proposed government programs, from taxation to regulation, to ascertain their impact on U.S. industrial growth. The Board would also scan the global horizon and issue warnings to both government and business of impending competition from foreign imports.

Similar proposals for a U.S. national industrial policy were briefly considered but then shelved last year by the Carter administration. The fear was that a revived Reconstruction Finance Corporation would be captured by inefficient firms seeking government bailouts. The Treasury and the Council of Economic Advisers protested that government allocation of credit would be less efficient than the private capital markets. Carter politicos worried about predictable charges of "big government."

Perhaps the creation of a national industrial policy would not have appealed to voters in 1980. Surely Muller is correct, however, in arguing that the real choices facing America are not between big and small government, but whether our government will operate efficiently, and on whose behalf. And whereas American capital markets functioned well enough in the past, more recently the massive drainage of scarce credit into real estate specualtion and consumer loans, and the declining share of bank credit being allocated to productive investment in industrial firms, suggest that a dose of government intervention could be salutary.

Drawing from the experiences of Japan and the social democracies of Western Europe, Muller advocates closer government-business cooperation in setting national priorities. Whether those foreign lessons can be grafted onto a fragmented, pluralistic America is uncertain. A second shaky block in Muller's intellectual edifice is his faith that rational economic analysis and committee government can produce consensus mutually beneficial to employers and workers, environmentalists and polluters, and between industrial countries and the Third World. Muller's views have clearly evolved since his earlier work (written with Richard J. Barnet), Global Reach: The Power of Multinational Corporations, where conflict was more salient than cooperation and an uneven distribution of power inevitably skewed the allocation of resources.

Revitalizing America recalls Lester Thurow's The Zero-Sum Society, published earlier this year. They share the same social democratic perspective, and look to an interventionist, coherent and technocratic government to break the logjam of stagflation. Thurow's book is more carefully and clearly reasoned, more direct in confronting frustrating trade-offs, and offers a much fuller treatment of income distribution issues. But the general reader may enjoy Muller's book more. His style is snappy and he makes a greater effort to sketch new directions for policy. Muller also covers U.S. relations with the Third World much more extensively.

In his most interesting theoretical contribution, Muller argues that, in the Third World, the distinctions between socialism and capitalism have become blurred, as efficient state enterprises operate on the profit motive, and governmentsbargain with multinationals. The implications of this convergence may be especially important for our foreign policy, where the counterpart to the dogma of the domestic free-marketeers is the simplistic anti-communism of the interventionists. If our "friends" have adopted state planning, and our "enemies" are willing to bargain with U.S. multinationals, need we spend scarce resources in trying to control political events in the developing world? Or would we be better off concentraing our energies on restoring the international competitiveness of American industry?

Revitalizing America is a timely compilation of ideas currently in the air but not yet in the mainstream. Muller should succeed in his stated purpose -- to stimulate thinking that responds to the new economic realities.