Lost Prophets

Before World War II, economics had little sway over government or corporate choices. Officials had no national income statistics, so they gauged the economy's condition from stock prices, freight volumes on the railroads, and a yearly unemployment figure. Today, forecasters' predictions can move stock markets, prompt companies to change strategy, and shape political campaigns. Is their advice dependable, and is it useful at all? Their successes and failures have affected how people live and what the world looks like.

Alfred L. Malabre, Jr. has spent years as a columnist, front-page writer, and editor at The Wall Street Journal, and he brings that experience to this account. He traces how schools of economic thought such as Keynesianism, monetarism, and supply-side economics rose and declined. The book pairs its ideas with the people and places behind them, showing how well-known economists' counsel sometimes helped and sometimes harmed the economy.

The author takes readers behind the scenes at Bretton Woods, where a global monetary system of fixed exchange rates was created in 1944. That system was often given too much credit for the prosperous postwar years and then fell apart in the early 1970s as inflation hit Europe hard. Malabre also describes how interest in monetarism grew after a lavish 1969 gathering in Phoenix, Arizona, drew about 200 leaders from business, universities, government, and the press, including Milton Friedman, Beryl Sprinkel, and Allan Meltzer. He further explains how supply-side ideas gained ground through the partnership of Jude Wanniski of the Journal and Arthur Laffer, who devised the Laffer curve.

The results of these theories often differed sharply from what their advocates had expected, and the economy and living standards paid the price. The book draws lessons for today from these episodes. The collapse of Bretton Woods bears on the European Community's struggling attempts to link the exchange rates of its very different members. The 1981-1982 recession, the deepest slump since the Great Depression and linked to monetarist policies at the Federal Reserve, helps explain why the Fed has been wary of tying its policy closely to any single monetary measure. Malabre concludes that economists will remain influential, but he expects their advice to emphasize practical answers to everyday problems rather than abstract theories that events have repeatedly disproven.