Sunny writes for right-wing think-tank shock! (On Capitalism)


by Sunny
30th April, 2009 at 7:47 pm    

I was asked to contribute an article to X-Bow, the publication by the centre-right thinktank Bow Group. Here it is.

The Death of Capitalism

If capitalism isn’t dead then someone should certainly strangle it and put it out of its misery. And once that is done, it would be nice to have a sane economy back. The precipitous decline of financial companies and the knock-on effect on other industries has been described by many as a “once in a century” event. But it is clear that in many ways, capitalism and Milton Friedman’s free market model, which had become prominent since the late 70s, is now beating a hasty retreat.

Laissez-faire, as John Maynard Keynes famously said, could be at an end. Again. Here are some reasons why. For one, government intervention as a lender of last resort has become fashionable again to the point where even analysts on the American network CNBC, a haven for free-marketeers, have opined that the government may have to nationalise large parts of the financial sector to ensure it doesn’t go under.

With government intervention and rescue of banks comes added regulation. Many blame the hands-off approach in the US and UK that led to companies developing lax lending standards, but the problem here is two-fold. Not only has it become painfully obvious that governments have to maintain tight regulation in sectors including finance, but that those companies failed overwhelmingly to adequately assess their own risks and financial models. As Alan Greenspan, former Chairman of the US Federal Reserve, said recently, “those of us who have looked to the selfinterest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”

That isn’t just a crisis amongst a few banks, but a crisis of confidence in a system that assumed the brightest and best-paid examples of free market capitalism would uphold its basic principles. The last few months have also seen an outpouring of anger towards the rich bankers that are now desperately seeking bailouts. That also makes it much harder for politicians to hold up ‘wealth-creators’ with the reverence they did until recently. Not only do tax-loopholes look increasingly unjustifiable, but the awe that greeted the multi-million bonuses look like a thing of the past.

To take one example, Merrill Lynch had record earnings in 2006 of $7.5 billion, with about 5-6 billion handed out that year in bonuses. Mr Dow Kim, who managed the company’s mortgage business, was awarded $35 million in bonuses that year in addition to his nominal $350,000 salary. The compensation system, as New York Times pointed out, “turned out to be a mirage.”

With the myth of wealth creation over the past decade now exposed as an asset bubble with a heavy price, the era of huge bonuses may be over forever. But there’s always the danger in predicting the end of capitalism that any short-terms trends vanish in a few years and our economy reverts back to as it was. What’s important now is which arguments win the ideological battle. One prominent line of argument ventures that the crisis has demonstrated the importance of government intervention and the Federal Reserve in bringing stability to financial markets.

The Fed was most famously attacked by Milton Friedman as an unnecessary intervention when banks were perfectly capable of taking care of their own interests and that of the economy. When it came to the crunch, the most ideologically right-wing government for decades was forced to interfere in the economy and bring reassurance.

Concurrently, it is also arguable that just as Keynesian went out of fashion because of stagflation, the credit crunch has brought about circumstances that have rendered monetarism useless. Banks across the world have lowered interested rates to near zero, and yet despite the cheap supply of money hasn’t yet persuaded banks to lend and for the economy to recover. Related to this is the second argument; that over the past decade America has imported cheap capital and cheap goods, but has little to show for it other than a consumption fuelled boom that has come to an abrupt end.

President Barack Obama’s recently outlined plan to invest hundreds of billions to upgrade America’s technology, environmental and transport infrastructure, while creating jobs, kills two birds with one stone. If the New New Deal plan works well, then not only will the traditional American aversion to government investment become severely dampened, but it would also strengthen the argument than the government can be a force for good in the economy.

Editorials from Newsweek and the Washington Post have said the crisis heralds an end of ‘American style capitalism’ or ‘The End of Libertarianism’, but classical libertarian economists say the opposite is true. As a Reason magazine editorial said in September 2008, “The free market has nothing to do with the current crisis.”

The final ideological argument is that the capitalism of preceding decades was more corporatism than free market laissezfaire. It was an economy biased towards big corporations that encouraged oligopolies, abnormal profits, excessive risk-taking and unfair competitive practices. In this context, the fall of major corporations such as General Motors and Citigroup, both of which may be broken up, is a blessing in disguise for true free marketers, who would like to see less government support for corporatism and oligopolies.

Much of how these arguments now develop depends not only on events but, as I said earlier, on how successful government efforts deal with the crisis are. It is also likely that financial markets are unlikely to give receive such support and incentives in the past, or be seen so readily as engines of growth. Capitalism then, in the form it has developed over the last generation, is now dead. A new era will rise from the ashes but its too early to say what that will look like. In a generation, as the Indian and Chinese economies become dominant, the models will have to change again. Call it the creative destruction of capitalism itself.

————
The article was published here.


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  1. pickles

    New blog post: Sunny writes for right-wing think-tank shock! (On Capitalism) http://www.pickledpolitics.com/archives/4437


  2. Ernie Vogel

    Pickled Politics » Sunny writes for right-wing think-tank shock … http://bit.ly/VaMRt




  1. Rumbold — on 30th April, 2009 at 8:08 pm  

    But it was corporatism that caused these problems. We had thousands of laws and spent tens of millions on regulators. Yet they failed to regulate the banks. Why? Because they were all nice and cosy with one another.

    What I would like to see would be a genuinely free market, with appropriate safeguards and taxes to take into account externalities. Banks could be regulated a lot better without needing more laws and more spending. All you need are a few simple rules to set deposit/lending ratios, so banks can absorb shocks themselves.

  2. marvin — on 30th April, 2009 at 8:20 pm  

    Clearly you have not read Capitalism And Freedom

    .. we need an Umpire. These then are the basic rules of government: to provide a means whereby we can modify the rules, and mediate differences among us on the meaning of the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play the game… The role of government is to do something the market cannot do itself, namely to determine, arbitrate and enforce the rules of the game

    – Milton Friedman

    Sounds like the Umpire has been having a long nap whilst the teams have been taking the piss.

    The failure is that of the government to determine effective rules of the game, to pay attention and modify the rules to make a fairer game.

  3. marvin — on 30th April, 2009 at 8:33 pm  

    The Death of an Excessive and Irresponsible Laissez-Faire Approach would be something approaching reality.

    Death of Capitalism? With headlines that you should be a writer for the Castro regime. Perhaps you’re angling for an offer…

  4. Sunny — on 30th April, 2009 at 9:05 pm  

    Rumbold – I did address your point in my penultimate paragraph.

    Banks could be regulated a lot better without needing more laws and more spending. All you need are a few simple rules to set deposit/lending ratios, so banks can absorb shocks themselves.

    How would you regulate without ensuring that corporations cannot buy each other and become oligopolies? Does that mean you’d regulate banks to stop being past a certain size? And how would you prevent them getting cosy with regulators and politicians… given that many politicians – especially the Tories – already have directorships at big companies incl banks?

  5. Sunny — on 30th April, 2009 at 9:05 pm  

    And marvin, you’ve become a parody of yourself.

  6. Narinder Purba — on 30th April, 2009 at 9:20 pm  

    From an ideological standpoint, capitalism is inherently flawed. The monopoly of finances and output by the few creates disproportionate economies where the rich get richer and the poor stay poor. It isn’t always a deliberate in keeping those on low incomes down in the lower echelons of the so-called rich list, but the natural offshoot of a society based on capitalism.

    Now, till we come up with a better ideology, it is still going to be cause for financial collapse. One would have assumed that after the Great Depression of the 1930s, the adage of “never again” would have led to safeguards that meant future financial collapses of such magnitude wouldn’t occur, but they did, and they still do. Much like war, “never again” is quickly forgotten and the same mistakes are made over and over again.

    I agree that much of what Keynes said is worth looking at again – and I am no Keynes expert, so apologies if I am misguided – especially greater regulation of banks and appropriate punishments.

  7. Cjcjc — on 30th April, 2009 at 9:53 pm  

    Capitalism is neither dead nor dying.
    In two years’ time that kind of talk will have stopped.
    We will obviously have a very different regulatory regime for banks, but that will be about it.

    Nicely written article though.

  8. billericaydicky — on 1st May, 2009 at 9:48 am  

    Sunny,

    Either you are saying Capitalism is dead or that it should be resusitated, make your mind up.

  9. Rumbold — on 1st May, 2009 at 9:15 pm  

    Sunny:

    You did indeed address this- it would be interesting to hear what you think on the matter. Did the banking system suffer because it was an oligarchy? No, not really. It suffered because it didn’t understand what it was doing.

  10. comrade — on 3rd May, 2009 at 9:31 am  

    cjcjc

    Capitalism is neither dead nor dying.

    I agree with your above comments.
    Capitalism does not die a natural death, it has to be abbolished. No filthy rich will ever part from his vast wealth, which it has accumulated, through exploition and fraud.

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