The Road from Ruin: How to Revive Capitalism and Put America Back on Top

Published by EH.NET (June 2010)

Matthew Bishop and Michael Green, The Road from Ruin: How to Revive Capitalism and Put America Back on Top.? New York: Crown Business [Random House], 2010. viii + 373 pp. $27 (hardcover), ISBN: 978-0-307-46422-4.?

Reviewed for EH.NET by Robin F. Neill, Department of Economics, Carleton University, Ottawa and University of Prince Edward Island.

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There are three separate narratives in The Road from Ruin.? The first is an account of the events immediately leading up to the crash of 2008 (chapters one through five).? The third is a set of proposals to rectify the causes of the crash (chapters six through ten).? Giving point to these is a pervasive third narrative, a case-substantiated thesis about a fundamental element in all sudden economic downturns.? The first case presented is the collapse of ?tulip mania? in 1637.? The last cases are the deflating of the dot com bubble in 2000, and the subprime mortgage debacle of 2008.? Apart from the substantiation of the thesis, there is little in the narrative of the immediate causes of the crash of 2008 that cannot be found in any number of other works.?

The set of proposals in the second half of the book indicates that the commentaries flowing from the 2008 crash have turned from simple chronologies of events and the assignment of blame to more sober second thoughts about correcting the deficiencies in the system in which the crash occurred. There are two elements in the set of proposals, a number of suggested polices growing out of the historical thesis, and a general injunction about the reformation of the capitalist system.? The latter is a theme previously put forward by the authors in book form and on the web under the title Philanthrocapitalism (Bloomsbury Press, London, 2008).? The Road from Ruin adds nothing new to this proposed possible reformation of the capitalist market system of economic organization.

The main contribution of The Road from Ruin is its historical thesis, though saying even that is saying too much; because similar theses have been put forward by Charles P. Kindleberger (Manias, Panics, and Crashes: A History of Financial Crises, 2005), Carlota Perez (Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, 2003), Carmen Reinhart and Kenneth Rogoff (This Time It?s Different: Eight Centuries of Financial Folly, 2009), and Richard Lipsey, Kenneth Carlaw, and Clifford Bekar (Economic Transformations: General Purpose Technologies and Long Term Economic Growth, 2005).

What is distinctive in this particular book is its very readable exhaustive listing and description of the historical events that support its substantial thesis.? For example, the 1636 tulip bubble followed the first appearance of limited liability ownership of shares in business enterprises, and the first appearance of a market for shares that included contracts to be fulfilled at some future time.? The South Sea Bubble collapse of 1720 followed the introduction of government support for the value of shares in a particular enterprise. The crash of 1920 followed the introduction of the ticker tape, stock brokers? loans, investment trusts, and the Federal Reserve system.? The crash of 1987 followed the introduction of portfolio insurance and computerized formula trading.? Late twentieth century and early twenty first century crashes followed the introduction of derivatives, hedge funds, credit default swaps, subprime mortgages, and mark-to-market valuations.? Accounts of a number of nineteenth century banking crises and panics and of innovations in financial instruments and institutions associated with them provide material filling in the narrative.

The point being made is that, for the most part, the intruding new instruments and institutions that at first were written down as the causes of financial collapse survived the calamities with which they were associated.? When the smoke cleared they proved to be useful, efficiency generating, innovations.? In fact, their continuing use facilitated and has continued to facilitate the progressive development of the capitalist market system.? Accordingly, the moral with respect to reform following the crash of 2008 is ?don?t throw the baby out with the dirty bath water?.? On the one hand, adjustments in regulation and in the behavior in the private sector will be required to tame the excessive hubris associated with the arrival of new opportunities.? On the other hand, legislation emerging from personalized blame, from political accommodation of an emotional demos, and from a simple reversion to something that worked in a past and obsolescent world will do more damage than good.?

Evidently, Bishop and Green have placed the suggestions of both Paul Krugman (The Return of Depression Economics and the Crash of 2008), and John Brian Taylor (Getting off the Track: How Government Actions Caused, Prolonged and Worsened the Financial Crisis) on the not-useful list.

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Note on the authors: Matthew Bishop is U.S. Business Editor of the Economist and a former faculty member of the London Business School.? Michael Green is a London-based writer who previously taught economics at Warsaw University and was a senior official in the British government.

Robin F. Neill, Professor Emeritus, Economics, Carleton University, Ottawa; Adjunct Professor of Economics, University of Prince Edward Island.? Recent publication: ?Varieties of Scientific System: From Veblen to the Postmoderns,? Journal of Economic Issues, September, 2006, pp. 673-691.? Current interest: the principles of Economics.? E-mail: rneill@upei.ca.

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