September 16, 2013
Has Capitalism Revived/Survived?
Has Capitalism Revived/Survived? Posner
Capitalism is the economic system in which the assets used to produce goods and services are privately owned, and the owners determine the price at which to sell those goods and services. Private markets, because they organize and direct production and consumption, are the basic institutions of a capitalist system. Government regulation of markets is (in capitalist theory) limited to correcting situations in which externalities (positive or negative) distort output and therefore reduce value. Sometimes correction of the failings of free markets requires governmental proprietary rather than merely regulatory activities (the standard example is national defense), and government levies taxes to finance those activities. Taxes can also be regulatory devices (taxes on emissions of pollutants, for example) or redistributive; if they are made redistributive in order to correct an externality (for example, underinvestment in human capital of poor children), they are also consistent with the aims of a capitalist organization of the economy.
There are libertarians who believe that the only true capitalism is a system in which there is no government at all; this is "anarcho-capitalism"; a prominent spokesman is the economist David Friedman, who teaches at Santa Clara University. Most defenders of capitalism stop well short of anarcho-capitalism, and admit a substantial regulatory and proprietary role for government. The Scandinavian nations admit the largest such role; yet they are still capitalist countries—and more prosperous than most even more capitalistic countries.
I agree with Becker that there was a journalistic overreaction to the latest economic crisis, as to previous ones. Journalism thrives on exaggeration and fear-mongering. But capitalism has survived intact a long, long history of economic crises, including the Great Depression of the 1930s. The major modern challenges to capitalism came not from that or any other depression, but from the two world wars of the twentieth century, without which it is hard to believe that the European nations would have lost their colonies, experienced a great depression (in the 1930s), or (in central and eastern Europe) become communist. Without World War I, it is very doubtful that Russia would have become communist; and without the Soviet conquests in eastern and central Europe in World War II, neither would Poland, Rumania, etc. have become communist.
The recent (actually current, though diminishing) depression kicked off by the worldwide financial crisis of September 2008 has not created any new communist or socialist countries. What it has done is give rise in almost all countries to a demand for more stringent regulation of banks and other financial institutions, and of some of their financial instruments, and to large public deficits; but neither of these developments is a harbinger of socialism. It's no longer even clear what "socialism" means, or who has a coherent program of socialist administration of a modern economy.
One reason that capitalism has easily survived the economic crisis that began in 2008 is the collapse of communism in the Soviet Union, its satellites, and China, in or around 1990, and the continuing dreadful performance of the communist economies of countries like Cuba and Vietnam, and of socialist economies of countries like Venezuela and until recently India. The issue today is not communism or socialism versus capitalism; it's how much regulation of capitalism is optimal. Clearly, financial regulation was too lax in the late 1990s and early 2000s (pursuant to Alan Greenspan's mistaken dictum that banks and other financial institutions are "self-regulating," to the "Greenspan put," to the incompetence of the SEC, and to not a little outright fraud), and this laxity played a significant role in the 2008 collapse and ensuing depression (as I regard it). So we'll have—we need—more regulation. If we get it, that won't be communism or socialism.
In the last half century the United States has experienced substantial deregulation and privatization movements, coupled with lower taxes, but at the same time has experienced increased regulation in areas such as employment discrimination, job safety, welfare benefits, and environmental protection, and increased economic inequality. Whether on balance the country is more capitalist or less capitalist than it was in 1953 is unclear, but I think it is more capitalist—notwithstanding the post-2008 movement for tighter regulation of financial markets.
Capitalism's Return from the Financial Crisis-Becker
Karl Marx saw every major depression in the nineteenth century as the final crisis of capitalism, due to its " internal contradictions", that would usher in the era of socialism and communism. Alas for Marx, each time he was proved wrong because the end of these depressions was often followed by an even stronger capitalist surge.
Something similar has taken place during the past few major world financial crises. The Asian crisis led to a book in 1998 by the eminent financier George Soros called "The Crisis of Global Capitalism", although eventually he retracted his forecast that this was the major crisis of capitalism. The collapse of Lehman Brothers and the resulting financial crisis and Great Recession created a robust market for the collapse of capitalism forecasters. The well-respected Lerner News Hour on Public Television in 2008 posed the question whether "capitalism is dead". The British newspaper The Guardian had an article in 2008 called "Not the Death of capitalism, but the birth of a new order. The free market model has been discredited and now its champions are panicking at what might emerge in its wake".
In 2009 the Financial Times commissioned a series of articles with very different viewpoints, most pessimistic, on the future of capitalism in the wake of the financial crisis. Kevin Murphy and I had the most optimistic article in this series, too optimistic for its critics, with the title " Do not let the 'cure' destroy capitalism". We said among other things, "…in devising reforms that aim to reduce the likelihood of future severe contractions, the accomplishments of capitalism should be appreciated. Governments should not so hamper markets that they are prevented from bringing rapid growth to the poor economies of Africa, Asia and elsewhere that have had limited participation in the global economy", and
"The Great Depression induced a massive worldwide retreat from capitalism, and an embrace of socialism and communism that continued into the 1960s. It also fostered a belief that the future lay in government management of the economy, not in freer markets. The result was generally slow growth during those decades in most of the undeveloped world, including China, the Soviet bloc nations, India and Africa."
In taking stock at this point of what happened now that the crisis is over and the recovery is under way, it has become clear after considerable uncertainty that capitalism has mainly won out, and those calling for radical changes in the world economy have been defeated. To be sure, regulations of banks have increased through greater capital requirements, scrutiny of pay practices, and in various other ways formulated in the Dodd-Frank Act and other laws in Europe and elsewhere. But the main investment banks like Goldman Sachs, J.P. Morgan, and others are still big, profitable, and very active, and quasi-government companies like Fannie Mae and Freddie Mac may be forced to cut back their extensive and unwise activities.
Outside of the financial sectors in the United States and Europe, capitalism is more prominent than ever. Country after country is reducing the scale of its public enterprises and expanding the scope of the private sector. For the first time in almost 70 years, Mexico has opened it oil and other energy sectors to greater participation by private firms. The new leaders of China have expressed dissatisfaction with the performance of public enterprises, and have called for greater participation by private firms in many sectors, including financial markets.
The formerly mainly socialist government of the very poor nation Rwanda has been encouraging private companies to increase its role in the limited landlocked Rwanda economy. India is trying to reduce its many labor market and other regulations so that direct foreign investments will increase in India, and its own private firms will expand their activities. On the other side of the ledger, nations like Venezuela that has conducted a war on the private sector has seen poverty grow and its economy stagnate.
The reason behind these pro-capitalist activities is that more and more countries have realized that despite is many flaws, capitalism is the only system yet devised that brings hope of lifting the masses out of poverty and creating a robust middle class. Most people realize this, and have prevented political leaders from using the reaction against capitalism brought on by the financial crisis to try to radically transform a system that has brought so much wealth and health to the peoples of the world.