Market Blues : EVERYTHING FOR SALE: The Virtues and Limits of Markets.<i> By Robert Kuttner</i> .<i> Alfred A. Knopf: 362 pp., $27.50</i>

Western democracy was not the only victor in the Cold War. Free-market ideology, in contrast to Soviet-style centralized management, has been embraced more enthusiastically than at any other time in this century in the United States and in much of the rest of the industrial world. The belief in the virtues of “the market” has also been reinforced by a fortuitous circumstance--a cyclical upswing in the U.S. economy, in which free markets and individualistic social policies are typically given credit for the better performance.

And there is one other factor: Two decades of slow economic growth and stagnating wages have made Americans increasingly disposed to political arguments that favor lower taxes and fewer, less costly social programs. Slow economic growth is having a similar effect on attitudes overseas. The result has been a significant shift in sentiment away from the strong government role that evolved during the struggles of the first half of the 20th century toward smaller government, shrunken social programs, deregulation and privatization.

In part, this has certainly been beneficial. But also in part, it decidedly has not. Robert Kuttner, a syndicated columnist and co-editor of “The American Prospect,” has long been one of America’s most prominent economics writers and a tireless skeptic of the unmitigated embrace of free-market ideology.

He has brought many years of experience and wide reading to his new book, “Everything for Sale,” and produced the best survey of the limits of free markets that we have. Kuttner believes in the power of markets to distribute goods and services efficiently. But he argues that social, political and psychological influences are too pervasive for unfettered markets and laissez faire politics to provide answers to all our problems.

Kuttner’s book appears at the right time. The pendulum has swung too far. Free-market enthusiasts, for example, have argued strenuously that the nation’s unemployment rate could not fall below a so-called natural level of 6% to 6 1/2% without risking a serious rise in inflation. But the rate has hovered between 5 1/4% and 5 1/2% for more than a year, and there has been no rise in consumer inflation.

Similarly, mainstream economists have generally argued that raising the minimum wage, as was done in 1996, would cause many people to lose their jobs. For several months now, the federal government has reported that the higher minimum wage has had no discernible effect on unemployment.

But Kuttner believes he cannot effectively take on mainstream economists on such public policy issues unless he also attacks them at the root of their economic theories. At this, he generally succeeds because in no small part, I think, he loves economic theory every bit as much as the doctorate-brandishing economists he criticizes, and he knows its limitations well.

What are we to make of rational economic man who is always said to act in his own best financial interest? Altruism can prevail over monetary self-interest, Kuttner notes. The private free market in blood supply in the U.S., for example, has resulted in less blood per person and higher prices than the voluntary system in Britain, where payments for blood are illegal.

What of the unmeasurable nonfinancial benefits of publicly subsidized services? Some free-market dogmatists want to cut subsidies for public libraries, for example. But Kuttner points out that free libraries create an environment that nourishes the value and joy of learning and makes it universally available regardless of income or class. Doesn’t this also help create a more productive work force?

Kuttner takes on the excesses of deregulation in the airline and electric utility industries. He discusses the complexities of health care and the labor market in general, showing that free markets cannot adequately safeguard against the abuses of power and lack of information inherent in these fields. He mixes it up with portraits of the Nobel-winning free-market intellectuals of the University of Chicago and the new law-and-economics legal scholars, a few of whom go so far as to claim that if it is in one’s economic interest to breach a legal contract, then do so.

Kuttner cites the widely respected economist Joseph Schumpeter as the preeminent forerunner of the theory he espouses, taking as his main point that a principal driving force behind America’s extraordinary economic growth since the mid-19th century has been the large, stable, oligopolistic corporation that stands well above the economic laws of free-market price competition. These corporations have been the source of enormous steady employment, high wages, major capital investments and huge outlays for research and development.

Some readers will justifiably complain that Kuttner pays lip service to the value of free markets but doesn’t portray their triumphs as fervently as he does their failures. He has also written a survey--a “tour,” as he calls it--that jumps necessarily from subject to subject, occasionally sacrificing narrative drive in the process.

I have my own quarrels here and there with his arguments. Most important, Kuttner believes too much in the contribution political reforms have made to America’s historically exceptional growth, much as conservatives attribute too much of our success to free markets and individualistic morality.

I would argue that it was unusually rapid economic growth that had more to do with the nature of American politics, ideology and social institutions than the other way around. Now that Americans no longer enjoy unmatched advantages over their rivals around the world and growth has slowed, government action may ironically prove more important to our future than it was in the past, even as it is increasingly belittled by free-market foes.

Kuttner remains an optimist about the economic possibilities of political reform. But his intention is not to provide yet another laundry list of proposals for a better economy. Rather, he believes our distrust of government has gone so far that he is obliged to return to square one and make a broad, theoretically sound case for the value of government and democracy. His underlying message is that no matter how much we may wish it were not so, it will take government to set us back on the right course as a nation.

Unfortunately, the constituencies in favor of such change will probably develop slowly because those who are bearing economic hurt most in this country have little public voice or political power.

Meanwhile, free-market ideology continues to prevail after two decades of historically slow economic growth, high unemployment rates and average wages that have stagnated and even fallen for those able to go only to high school (despite the dubious recent proposals to adjust inflation and productivity data). So pliable is economic theory that those wedded to free-market ideology can ignore such failures and claim unbridled success. They can claim even further that such success would have been all the greater if we had unshackled the markets still more.

We have come to a point where respected free-market deregulationists, for example, are taken seriously for arguing that seat belt laws have caused more injuries than they have avoided because drivers now feel free to drive carelessly. No wonder naive gushing about how we have reached a pinnacle in human history--indeed, the end of history--can gain prominence despite the everyday facts to the contrary.

Kuttner’s intention is not to promote a liberal ideology to balance the prevailing one, though some may read him this way. His is a much-needed plea for pragmatism: Take from free markets what is good and do not hesitate to recognize what is bad. Kuttner’s is not the sort of book that alone will start the political pendulum the other way. But when it does finally reverse direction, “Everything for Sale” will be one of its touchstones.