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The Financial Times gave a tepid review to a new book by two economics editors that attacks "the version [of post-WWII capitalism] that has developed since the late 1960s, with its emphasis on free trade, free capital movements, and a bloated financial sector." -- Authors Larry Elliott and Dan Atkinson "see a virtual conspiracy between the New Olympians in Wall Street and the City of London, international organizations such as the International Monetary Fund, the World Bank, the World Trade Organization, and the European Commission, and some free-market economists such as the late Friedrich Hayek and Milton Friedman, who met on Mount Pelerin in Switzerland," Samuel Brittan wrote, but "[t]he managed capitalism of [the late 1960s and early 1970s] did not go away because some senior civil servant read Hayek’s The Road to Serfdom. It was hit by the collapse of the Bretton Woods system of semi-fixed exchange rates, the double-digit inflation provoked, although not directly caused by, the first oil price explosion, and, in the U.K. at least, by the replacement of postwar trade union leaders by a new, militant generation who chanced their luck as far as it would go." ...

[Review of Larry Elliott and Dan Atkinson, The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future (Bodley Head, June 2008). 304pp. £12.99.

Almost exactly a year ago, two economics editors published a book, Fantasy Island (which I discussed in my column on May 25 last year), devoted to the thesis that public and private debt were the greatest threat to the British economy. I remarked that there might be “something in the alarmist case.” But, not being able to foresee the future, I merely concluded that forecasting uncertainties should be resolved in favor of caution.

Fortune has favored these authors. For within three months of their book appearing the credit crisis burst on the world; and they cannot resist coming back to the chase with a second book that inevitably covers much of the same ground, but is considerably broader and more international in scope. Their new book is engagingly written, with frequent references to classical mythology and recent pop songs to relieve the description of credit market instruments.

The authors claim to accept the post-Second-World-War version of capitalism, which was combined with a welfare state and hemmed in by many controls. But they detest the version that has developed since the late 1960s, with its emphasis on free trade, free capital movements, and a bloated financial sector. They see a virtual conspiracy between the New Olympians in Wall Street and the City of London, international organizations such as the International Monetary Fund, the World Bank, the World Trade Organization, and the European Commission, and some free-market economists such as the late Friedrich Hayek and Milton Friedman, who met on Mount Pelerin in Switzerland.

Financial booms and busts have been a feature of capitalism from the very beginning. The late Charles Kindleberger tabulated more than thirty of these, starting with the South Sea Bubble. Although the packaging and presentation of The Gods that Failed suggests imminent disaster, the authors are considerably more cautious in their final assessment, remarking that, while the globalization of finance has made the economies of the U.S. and the U.K. vulnerable to a crisis, “not every slowdown turns into a recession and not every recession turns into a slump.”

To clinch the perfect storm scenario the authors have to embark on political futurology. They imagine that George W. Bush launches air strikes against Iran as the last act of his presidency, Iran retaliates by cutting off oil supplies to the West, Saudi Arabian militants launch a coup against their royal family, a category five hurricane shuts down half of the U.S.’s oil refining capacity, the Chinese growth rate halves as a result of domestic anti-inflationary action, and China dumps a quarter of its dollar assets in a spat with the U.S. Congress. If even some of these events were to occur, it would not matter whether or not the U.S. brought back the Glass-Steagall Act, as the authors would like, separating investment from commercial banks.

When it comes to more mundane acts of economic policy there seems no way that central bankers or finance ministers can win. If central banks embark on cheap money to maintain activity they are accused of provoking nemesis by flooding the economy with debt. If they take a more austere line they stand condemned for abandoning postwar full-employment policies. Suppose the torch is passed to finance ministers? If they borrow to maintain activity they are accused of excessive budget deficits, and of neglecting their duties to the real economy if they do not. One might suppose the authors would at least approve of the increase in public spending over which Gordon Brown, the U.K. prime minister, has presided. But they deride the waste of money on bogus posts such as facilitators and co-ordinators, with a verve that would do credit to the “rightwing” Social Affairs Unit.

In their conclusion the authors say that “social stability and tranquillity are more important than market efficiency or shareholder value.” They might be surprised to hear that I agree. But there is also a third value: personal freedom. Although Elliott and Atkinson say they would balance greater economic regulation with less of New Labor’s control freak tendencies over our personal lives, I doubt if such a trade-off is feasible. My main difference with them goes back to the late 1960s and early 1970s. The managed capitalism of the period did not go away because some senior civil servant read Hayek’s The Road to Serfdom. It was hit by the collapse of the Bretton Woods system of semi-fixed exchange rates, the double-digit inflation provoked, although not directly caused by, the first oil price explosion, and, in the U.K. at least, by the replacement of postwar trade union leaders by a new, militant generation who chanced their luck as far as it would go. New Olympians, or economists meeting on a Swiss mountain, had little to do with it.