We argued in the first part why declaring the end of laissez-faire is intellectually confusing. Marx had a better understanding of capitalism, better than Keynes and Lenin. Marx said that capitalism has a tendency to go through cycles and crises. No one should expect capitalism to be free of cycles. Keynesian economics created the illusion in the West for 25 years after the Second World War that cycles were gone.

When full employment and militant trade unionism led to fall in profits, capital moved away from the West to economies where labour was cheaper. Globalisation was born. The US and UK liberalized their capital account to help restore profitability.

The post-Keynesian intellectual battle in economics was fought between salt water (East Coast US universities) and sweet water (US Midwest Universities) territories. The sweet water territory?Chicago, principally?won. Fiscal policy had to be responsible on debt and deficits .There had to be medium term, pre-announced fiscal strategy. Markets did not like surprises. Bond markets punished irresponsible governments.

Interestingly, Hayek, rejected in the 1930s, and feted in post-Keynesian times, did not make the grade in terms of public policy. Hayek had a theory of how it was banks which made mistakes of ?mal-investing? if credit was too cheap and how when they realised their error they jacked up the cost of credit and caused a crisis. But even Mrs Thatcher thought that his recipe was too severe. Hayek did not believe in rescuing banks or reflating the economy. He believed that capitalism only works if players are able and willing to take costs as well as rewards of free market.

Hayek lost but Chicago was triumphant. Bill Clinton and Tony Blair became globalisers. Clinton balanced the budget and Gordon Brown promised some golden rules to avoid booms and bust. There were more converts.

For 15 years between 1992 and 2007, the global economy prospered in part because China and India saw a substantial increase in growth rates and poverty reduction. Perhaps 750 million came out of poverty in Asia, more than ever before in human history. The global economy grew at an average of 4 % per annum all those years.

Except for North Korea and Cuba, capitalism was the rule everywhere. And there were a variety of capitalisms?Scandinavian, German, Japanese, Anglo-Saxon, Asian. As we rue over the meltdown, let us not forget the fantastic growth of 15 years. Even Sub-Saharan Africa began to enjoy 4-5% growth in the early years of this decade. This is because while foreign aid stayed at a miserably low level around $50-$75 billion, private capital flows to developing countries were already $200 billion in mid 1990s and reached $900 billion in 2007.

This tells us a very important thing that all the talk about ending laissez-faire is missing. Private capital flows have been enormously beneficial. They can continue to be so. Therefore, private capital flows must be resumed and so banks? confidence must be restored and regulatory systems revamped. And the root of the crisis is not private finance but public finance.

The US had double deficits for most of the time through the Bush presidency. Even Brown, who had laid down Golden Rules for public finance, piled up debts. Funding of Anglo-Saxon deficits by Chinese gave a false sense of security.

Despite endless talk about globalisation, policymakers did not realise that it was the global flow of surpluses from Asia to the West that was the real dynamic behind the boom. These flows were not sterilised. All the US did was to blame China for not letting its currency move up against the dollar.

Recall Keynes while looking at under-consumption in the East funding over-consumption in the West. Keynes would fault both the under-savers and the under-consumers. He had proposed that the IMF becomes an institution that would balance these deficits and surpluses. What really happened in the 1990s and 2000s is that the private financial system did this job via the US Treasury Bill market.

So, what are we looking at? First, there?s the medium run task of raising savings in rich countries and consumption in Asian countries. Second, we may also be at the cusp of a longer run shift of economic power from Europe to Asia. China will become powerful and India has the ability if it adopts market-friendly policies. Third, the US has the ingenuity to make a dynamic recovery but I doubt that Europe has. Countries of Central and Eastern Europe that joined the EU only recently are on the verge of bankruptcy. Fourth, the immediate task is therefore to enhance the IMF?s capacity to lend money to stricken countries. This cannot be done with the IMF as it exists but via a reformed IMF.

The most important outcome is that private capital flows are resumed. The developing world benefited enormously from the 2002-2007 boom period. They should tell the West the world needs more, not less, capitalism.

?The author is a prominent economist and Labour peer