POETIC JUSTICE The Literary Imagination and Public Life. By Martha C. Nussbaum. 143 pp. Boston: Beacon Press. $20.

IS reading fiction good for us? The novel came in with the modern world, the cocky young upstart among literary forms, and there have always been detractors skeptical of its social value. In the 18th century, novels were often disguised as plain fact yet attacked for making things up. Puritans castigated novels as lurid and immoral, while sober realists scorned them for encouraging flights of fantasy. There were always intellectuals who loathed novels for being too popular, and solemn men of affairs who considered them irrelevant to the serious (male) business of running society.

To Martha C. Nussbaum, the novel is "a living form," still central to our culture, "morally serious yet popularly engaging." But novel reading has usually been seen as an intimate experience grounded in personal feeling, the domain of a largely female audience. Few critics have mounted a case for its social benefits, as Ms. Nussbaum does with great verve in "Poetic Justice."

Martha Nussbaum is a distinguished philosopher and classicist whose previous work revolved around Greek tragedy, classical Greek philosophy and Hellenistic ethics. But she has also published a remarkable collection of essays on philosophy and literature, "Love's Knowledge" (1990), concentrating on novels by Dickens, Henry James, Proust and Beckett. Where "Love's Knowledge" mapped the close connections between modern novels and ethical concerns, "Poetic Justice" sets out bravely to apply the lessons of fiction to economics, social thought and jurisprudence.

Since John Rawls published "A Theory of Justice" 25 years ago, an increasing number of philosophers have entered into a broad conversation with economists, sociologists, legal thinkers and political theorists about how our society should be organized. This discussion has not usually engaged the general reader, since it dealt with fundamental principles rather than policy issues, but in "Poetic Justice" Ms. Nussbaum makes a determined effort to reach a wider audience. Her previous work was by turns eloquent and verbose, brightly personal yet clogged with references to her own writing. "Poetic Justice" is a more concise, accessible work, densely argued but also timely and urgent. Its unspoken context is the wave of budget cutting and hardhearted social theory that helps drive the current backlash against welfare liberalism -- and Congress's diminished sympathy for society's losers, the poor, the ill and the elderly. Some of this can no doubt be traced to class anger, race prejudice and economic self-interest, but some of it arises from a willed ignorance of how the other half lives. Because we all lead insular lives, largely segregated by class and race, the poor remain part of a distant underclass and take on no individual reality. This ignorance makes possible what Ms. Nussbaum calls "the economist's habit of reducing everything to calculation," of seeing only "abstract features of people and situations."

She objects to seeing individuals as figures in a numbers game rather than creatures beset by conflict and moral choice. Compared with novelists, utilitarian economists are "blind to the qualitative richness of the perceptible world; to the separateness of its people, to their inner depths, their hopes and loves and fears; blind to what it is like to live a human life and to try to endow it with a human meaning."

This attack on purely economic models was made brilliantly in the 19th century by John Stuart Mill, whose father was a radical reformer who worked closely with the founder of utilitarianism, Jeremy Bentham. When Mill himself, brought up by his father to become a thinking machine, suffered a nervous breakdown at 20, he turned to the poetry of Wordsworth, which rescued him from depression and tapped a vein of deep feeling scanted by his education.

Like Richard Rorty, who makes a similar case for fiction in "Contingency, Irony, and Solidarity" (1989), Ms. Nussbaum looks to novels (and to poets like Whitman) for exactly what Mill took from Wordsworth, a sense of the richness, mystery and complication of individual lives. Where Bentham had developed a crude calculus of pleasure and pain as a way of providing "the greatest happiness of the greatest number," Mill, like his contemporaries Carlyle and Ruskin, insisted on ethical distinctions that took account of the quality of life. Ms. Nussbaum picks up directly from this critique as it was slashingly fictionalized in Dickens's "Hard Times" (1854), an angry novel about industrialism and an inhuman system of education.

Just as Newt Gingrich invokes Victorian virtues to bolster his crusade against the welfare state, Ms. Nussbaum turns back to Dickens to assail the economic-utilitarian rationale behind our new legislative order. One focus of her criticism is the law and economics movement represented by Richard Posner, a Federal judge and prolific legal scholar to whom the book is warmly dedicated. "Poetic Justice" is a Dickensian rejoinder to his readable and influential book "The Economics of Justice" (1981), which centers on "wealth maximization" as a principle of common law. Early in Ms. Nussbaum's book, he appears as the arch-calculator, the modern equivalent of Mr. Gradgrind, Dickens's "man of facts" who is "ready to weigh and measure any parcel of human nature, and tell you exactly what it comes to." By the end, he emerges as the model jurist whose subtly written opinion in a sexual harassment case beautifully defines the novelistic insight of the literary judge.

"Poetic Justice" is a tract for the times in the guise of a defense of the literary imagination. Ms. Nussbaum's tour de force is her inspired translation of "Hard Times" into the language of social theory, backed by briefer discussions of Richard Wright's "Native Son" and E. M. Forster's "Maurice," which explores homosexuality. Ms. Nussbaum shows how these novels, in their metaphorical language and their focus on individual feelings, give us rare knowledge of people in remote corners of society. This is just the kind of empathy she urges on legislators, ethical thinkers and judges alike. But she muddies her case for fiction as a genre by focusing on three social-problem novels about the hot-button issues of class, race and sexual preference. She does not distinguish between the fierce social polemic of "Hard Times," which she paraphrases and updates, and the formal properties it shares with other novels. "Hard Times" is not even typical of Dickens himself, let alone novels in general.

This leads to the major misstep in "Poetic Justice," the suggestion that because of the way we identify with fictional characters, a "concern for the disadvantaged is built into the structure of the literary experience." Are novels really this virtuous and high-minded? They can also seduce us in illicit and unexpected ways. There are novels in which we identify with the rich and successful, not the "disadvantaged"; novels that turn people into butts of satire, even hatred; novels manipulating our fantasies rather than enlarging our sympathies; and, finally, post-Brechtian or modernist novels that, compared with the classic works of realism, involve us less with the fate of individual characters. Ms. Nussbaum's argument depends too much on novels up-to-date in their politics but strictly 19th-century in their storytelling conventions.

Far from finding literature intrinsically liberal, critics from Hazlitt to Trilling argued that its sympathies were often anti-democratic. "The language of poetry naturally falls in with the language of power," Hazlitt wrote of Shakespeare's "Coriolanus." Novels, with their concern for the mundane and the ordinary, may well be different, but recent academic critics have taken Hazlitt much further, regularly debunking art as ideology. Ms. Nussbaum's love of literature and insistence on its social value are refreshingly old-fashioned.

Her defense of fiction for its unruly humanity recalls how writers as different as Henry James and D. H. Lawrence once idealized the novel as "the one bright book of life." At a time when Gradgrinds dominate the social debate, when Congressional leaders are more concerned about privatizing or cutting social services than making them work, when even the official guardians of literature seem to regard it with suspicion, Ms. Nussbaum's appeal to the outlook of fiction as a model for judicial and social policy is bracingly utopian and immensely heartening. "Poetic Justice" is less a study of literature than a lay sermon for beleaguered liberals, in which the novel serves as a potent metaphor for a better understanding of ordinary people's lives.