Economic Rivals in a Laissez-Fairyland : THE END OF LAISSEZ-FAIRE : National Purpose and the Global Economy After the Cold War <i> By Robert Kuttner (Alfred A. Knopf: $22.95; 304 pp.)</i>

<i> Havemann The Times' correspondent in Brussels, specializes in the European economy. </i>

Historic turning points, to judge from the headlines, occur at least as often as hemlines go up or down in French fashions, and with equally profound results. Yet with the end of the Cold War, the world may indeed be undergoing a historic transition from global military rivalries to global economic competition. In place of the Cold War with the Soviet Union, the United States may soon find itself waging unrestrained economic wars with the likes of Japan and an increasingly powerful and cohesive Western (and maybe one day Eastern) Europe.

It is Robert Kuttner’s good fortune that he completed “The End of Laissez-Faire” at precisely this moment. If we are, as Kuttner asserts, in a great divide in U.S. public policy, then “The End of Laissez-Faire” asks some necessary questions. Should the U.S. government actively pursue an “industrial policy"--an explicit effort to support certain industries as they compete worldwide? Should it erect trade barriers to protect certain industries from foreign competition? More generally, should it abandon as too costly its role as chief defender of today’s world economic system?

Good questions, but though Kuttner’s journalistic writing style--a former Washington Post reporter, Kuttner is now economics correspondent of the New Republic and a weekly columnist for the Boston Globe--lends an air of objectivity, it also masks a strong commitment to a centrally controlled and regulated economy. He might be right, and he might not be. Regardless, “The End of Laissez-Faire” is far from a dispassionate analysis of the economic roads that the nation might follow at the end of the Cold War.


In Kuttner’s analysis, there are just two such roads. One, favored by what he calls the “orthodox school” of economic thought (“Cold Warriors, private capitalists and traditional economists”), is the way to perfectly free markets in the United States and open trade between nations. The other, advocated by a diverse “dissenting camp” of economists, trade unionists and even journalists, leads to an economy that is at once more productive and more gentle than the laissez-faire of Adam Smith and Ronald Reagan. Guess which side Kuttner is on.

It’s no contest, because Kuttner’s “orthodox school” is a straw man. Free markets may have reigned largely unchecked in the 1920s, before the Depression and the New Deal. They haven’t since. Kuttner portrays Ronald Reagan as hell-bent on restoring those good old days. In fact, the Reagan Administration was in some respects a highly interventionist one.

By embracing (or at least tolerating) quotas on Japanese cars and other forms of shelter for agriculture, textiles, steel and semiconductors, Reagan’s was arguably the most protectionist Administration in history. And its policy of federal deficits approaching 5% of U.S. gross national product had enormous economic impact.

It is difficult to contest Kuttner’s assertion that pure laissez-faire is inherently unworkable for reasons both national and international. At home, certain tasks with major economic consequences--protecting the environment, building roads, maintaining a national defense--inevitably belong in the public sector. And on the world stage, it takes two to tango, and only the United States pays so much lip service to the ideal of free and open trade. To the extent that lip service becomes practice, the United States will finish a poor second in global economic competition to such highly regimented systems as Japan’s.

Here Kuttner strikes a resonant chord. The costs to the United States of defending the world’s industrial countries are enormous and unfair. The Gulf War made this obvious. It is the United States that committed most of the young men and women--and most of the money--to waging war against Iraq. Its two chief global economic rivals, Japan and Germany, hid behind their post-World War II constitutions and largely rooted from the sidelines.

Military dominance aside, Kuttner argues that America’s determination to dominate the global economy carries other costs. For one, it implies a commitment to open trade that other nations need not match; if the United States is dominant, it has no need to close its borders to goods and services from abroad. For another, the dollar’s role as the world’s dominant currency carries economic costs because it makes U.S. monetary policy hostage to foreign holders of dollars.

Kuttner does a better job tearing down his laissez-faire straw man than in supporting his own alternative, in which the government intervenes in the economy in all varieties of open and subtle ways. He finds a lot to borrow from Japan and Western Europe, which do not share America’s free-market ideals. Kuttner’s government (like Japan’s) would finance and otherwise support some industries as they sought to develop and market new products.

High-definition television is a case in point: Japan is far ahead in this potentially lucrative technology, Kuttner says, because its government promoted the development of what figures to be the next generation of television receivers.

Many of Kuttner’s ideas are intriguing and deserve careful consideration. For example, the International Monetary Fund, instead of demanding economic austerity from Third World governments, would make development funds available much as the Marshall Plan financed the reconstruction of Western Europe after World War II.

Ultimately, “The End of Laissez-Faire” is flawed by its offer of a black-and-white choice between pure free markets (which do not and cannot exist) and Kuttner’s own interventionist ideal (which is bound to look good by contrast). In the real world, there is a long spectrum from laissez-faire to Kuttner and even beyond. The question Americans should ask is not which is the correct end of the spectrum but where they want to be in between.

Kuttner himself acknowledges this almost in passing: “The challenge is not how to move ever nearer laissez-faire, but how to produce the best blend of a price-auctioned system of supply and demand and an efficient and just civil society.” It is a challenge for a future author to meet.