Crisis? What crisis of capitalism?
31 March 2009
SUGGESTED
Monetary Policy
30 March 2009
Economic Theory
Government and Institutions
There is a strange thing about this particular financial crisis. Though some have murmured about “a crisis of capitalism”, few have yet suggested a return to full-blooded, full-frontal socialism.
In marked distinction from those wearying arguments of the 1960s, 1970s and 1980s, it would seem that that great knockabout debate on capitalism versus communism has been put to one side. It would appear that no one any longer has the stomach to point to the allegedly shining, but statistically-dodgy splendours of old-style Soviet communism.
Good heavens, have we all grown up? Have we all moved on at last? A careful reading of Arthur Seldon’s masterly tome – on Capitalism – would suggest that it is high time that we did.
For Seldon lucidly points to the fact that there has never been any time in history when any economic system has moved smoothly and continually on from good to even better: “The Marxists have made much of the fall in general incomes in some periods. But it was hardly likely that the new conditions of industry and work would proceed uninterruptedly – and the notion that socialism proceeds smoothly upwards without fluctuations is a myth. Indeed, it not only suffers from unemployment and inflation but often compounds the offence by disguising their evidence and suppressing statistics.
“Yet Marxists have been disposed to see almost every capitalist downturn as terminal – from the first crisis observed by the socialist Friedrich Engels in 1844, to the Great Depression of 1929-31 and stock-market crash of October 1987.”
But transparency about their own system’s failings was never a detail to which the old Soviet Politburo had to pay much regard. They had a famine in the 1930s that barely registered on the West’s radar.
At a time now when many are understandably fearful about their jobs, their homes, their shares, it is good to read those pithy, well-grounded reminders from Seldon of just how well capitalism has served us over the past 200 years in being the only economic system that preserves individual freedom while raising living standards. This rise, he contends, would never have taken place “…under either the medieval guilds or state socialism.”
He points to the inestimable value of the market’s pricing mechanism in “…collecting and exploiting scattered information. It conveys the vital information on earnings, costs and profits required to reach decisions on what to make, how much to make, at what prices to sell, how much to reinvest and where resources are to be used.”
Crucially, that wise economist reminds us that for capitalism to yield its best results in the long term, the political process must be confined to organising the minimal duties of the state – defending the realm, keeping the peace, some pure research, environmental protection – where the market may not be able to operate: “The prospects for capitalism in general are bright. But the living standards of the West are still restrained and unnecessarily unequal because the political process has too many beneficiaries in all political parties.
“Overall, a world of capitalist countries which minimizes the domain of government and maximizes the activities of men and women in the market, at home and overseas, is more likely to keep the peace than a world of socialist states. This is because it is more likely to create an international market in which individuals and private firms rather than governments, traders rather than politicians, do business with each other. The much-maligned multinational companies are thus by definition vested interests in favour of world peace.”
In marked distinction from those wearying arguments of the 1960s, 1970s and 1980s, it would seem that that great knockabout debate on capitalism versus communism has been put to one side. It would appear that no one any longer has the stomach to point to the allegedly shining, but statistically-dodgy splendours of old-style Soviet communism.
Good heavens, have we all grown up? Have we all moved on at last? A careful reading of Arthur Seldon’s masterly tome – on Capitalism – would suggest that it is high time that we did.
For Seldon lucidly points to the fact that there has never been any time in history when any economic system has moved smoothly and continually on from good to even better: “The Marxists have made much of the fall in general incomes in some periods. But it was hardly likely that the new conditions of industry and work would proceed uninterruptedly – and the notion that socialism proceeds smoothly upwards without fluctuations is a myth. Indeed, it not only suffers from unemployment and inflation but often compounds the offence by disguising their evidence and suppressing statistics.
“Yet Marxists have been disposed to see almost every capitalist downturn as terminal – from the first crisis observed by the socialist Friedrich Engels in 1844, to the Great Depression of 1929-31 and stock-market crash of October 1987.”
But transparency about their own system’s failings was never a detail to which the old Soviet Politburo had to pay much regard. They had a famine in the 1930s that barely registered on the West’s radar.
At a time now when many are understandably fearful about their jobs, their homes, their shares, it is good to read those pithy, well-grounded reminders from Seldon of just how well capitalism has served us over the past 200 years in being the only economic system that preserves individual freedom while raising living standards. This rise, he contends, would never have taken place “…under either the medieval guilds or state socialism.”
He points to the inestimable value of the market’s pricing mechanism in “…collecting and exploiting scattered information. It conveys the vital information on earnings, costs and profits required to reach decisions on what to make, how much to make, at what prices to sell, how much to reinvest and where resources are to be used.”
Crucially, that wise economist reminds us that for capitalism to yield its best results in the long term, the political process must be confined to organising the minimal duties of the state – defending the realm, keeping the peace, some pure research, environmental protection – where the market may not be able to operate: “The prospects for capitalism in general are bright. But the living standards of the West are still restrained and unnecessarily unequal because the political process has too many beneficiaries in all political parties.
“Overall, a world of capitalist countries which minimizes the domain of government and maximizes the activities of men and women in the market, at home and overseas, is more likely to keep the peace than a world of socialist states. This is because it is more likely to create an international market in which individuals and private firms rather than governments, traders rather than politicians, do business with each other. The much-maligned multinational companies are thus by definition vested interests in favour of world peace.”
6 thoughts on “Crisis? What crisis of capitalism?”
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Two thoughts of Arthur Seldon occur to me in response.
(1) Capitalism is corrigible, socialism is incorrigible. (Actually I prefer to talk about the ‘market system’ and the ‘political system’ respectively.) For instance, talk of more regulation of financial markets threatens to reinforce failure.
(2) We should take more risks of under-government. How politically incorrect can you get? But once bureaucratic empires are been established it seems to be extremely difficult to dismantle them.
The European Union is an example-in-progress.
Two thoughts of Arthur Seldon occur to me in response.
(1) Capitalism is corrigible, socialism is incorrigible. (Actually I prefer to talk about the ‘market system’ and the ‘political system’ respectively.) For instance, talk of more regulation of financial markets threatens to reinforce failure.
(2) We should take more risks of under-government. How politically incorrect can you get? But once bureaucratic empires are been established it seems to be extremely difficult to dismantle them.
The European Union is an example-in-progress.
This is all very well, but it concedes too readily that the current crisis is due to shortcomings of markets. In fact, I submit that Governments played a vital part at several points:
1. A sine qua non was the flood of dollar liquidity emanating from the Fed in the aftermath of the tech stock crash
2. The dollar deluge resulted in a massive US balance of payments deficit(as in International Economics 101, and hence would never have inflated an asset price bubble if the Chinese authorities had not recycled the dollars back into US capital markets
3. Banks lent to risky borrowers because they knew they could count on being bailed-out by the Government, as they had been in the 1990
This is all very well, but it concedes too readily that the current crisis is due to shortcomings of markets. In fact, I submit that Governments played a vital part at several points:
1. A sine qua non was the flood of dollar liquidity emanating from the Fed in the aftermath of the tech stock crash
2. The dollar deluge resulted in a massive US balance of payments deficit(as in International Economics 101, and hence would never have inflated an asset price bubble if the Chinese authorities had not recycled the dollars back into US capital markets
3. Banks lent to risky borrowers because they knew they could count on being bailed-out by the Government, as they had been in the 1990
The issue is a bit phylosofical. Communism is based on the principle: “From everyone – what they can, to everyone – what they need, providing more or less equality”. Capitalistic point of view may create ineuqality, although it provides (tries to) the rights for each to prosper in business, and live more or less in better welfare. The truth is somewhere in middle, and current period is actively pushing towards finding that needed solution. Without communists in Russia and Germany back in 1917-18 and their threat of them coming to power there would be no current well based, quite social capitalism.
The issue is a bit phylosofical. Communism is based on the principle: “From everyone – what they can, to everyone – what they need, providing more or less equality”. Capitalistic point of view may create ineuqality, although it provides (tries to) the rights for each to prosper in business, and live more or less in better welfare. The truth is somewhere in middle, and current period is actively pushing towards finding that needed solution. Without communists in Russia and Germany back in 1917-18 and their threat of them coming to power there would be no current well based, quite social capitalism.