The Capitalism Delusion

I despair at the state and quality of economic debate these days. Time and again we are subjected to editorials, debates and conference discussion forums in which progressive elites assure us that ‘Capitalism’ is terminal, having been once and for all irrefutably and devastatingly discredited.  For these progressive intellectuals, the current global financial crisis is an ideological godsend, akin to the mainstream Right’s revelry in the collapse of the Soviet Union.

In almost every instance I’m referring to, Capitalism is defined as the unfettered free market system. This is perfectly fine as it goes, but this is not the source of my despair. My despair lies with the utterly false misconception that the system that fostered the global economic crisis was a capitalistic one. That is, to argue that the unfettered free market was responsible for our present crises is to completely miscomprehend the nature of our political economy and the set of conditions that precipitated near total financial calamity.

Little more than a cursory and objective glimpse into the nature of our economic system for the past number of decades, right up to the 2008 crash, and indeed since 2008, will show that unfettered free market capitalism could not have been responsible for the global financial crisis, because unfettered free market capitalism did not exist!

The truth is we have never lived under a more regulated and controlled economic system than we have in modern times. Economies are profoundly controlled and regulated, and have been for many years. Select committees decide on what the interest rate should be. Government departments shift vast chunks of capital and income around the economy on a political whim. Laws are enacted that favour certain groups over others. Trade barriers and industrial subsidies are commonplace, and where these have been reduced other covert forms of protectionism have been erected.

In 2002, Congressman Ron Paul summed it up best in a speech to the US House of Representatives,

“Capitalism should not be condemned, since we haven’t had capitalism… Capitalism cherishes voluntary contracts and interest rates that are determined by savings… It’s not capitalism when the system is plagued with incomprehensible rules regarding mergers, acquisitions, and stock sales, along with wage controls, price controls, protectionism, corporate subsidies, international management of trade, complex and punishing corporate taxes, privileged government contracts to the military-industrial complex, and a foreign policy controlled by corporate interests… Add to this centralized federal mismanagement of farming, education, medicine, insurance, banking and welfare. This is not capitalism!

To condemn free-market capitalism because of anything going on today makes no sense. There is no evidence that capitalism exists today. We are deeply involved in an interventionist-planned economy that allows major benefits to accrue to the politically connected of both political parties. One may condemn the fraud and the current system, but it must be called by its proper names — Keynesian inflationism, interventionism, and corporatism.”

At the onset of the financial crisis in October 2008, George Reisman explained the absurdity of labelling the current economic system Laissez-faire Capitalism, emphasising that the US government at the time was determining how 40 cents on every dollar of national income was spent (excluding off-budget spending and bailouts); that 9 federal cabinet departments and over 100 federal agencies and commissions existed for the very purpose of regulating housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce; that the Federal Register contained seventy-three thousand pages of detailed government regulations; and that this extensive federal regulatory structure EXCLUDED by-laws, departments, agencies, and regulations at the state and local level.

Reisman concluded,

“The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez-faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional.”

It is worth also reprinting here an excerpt from author Professor Thomas J. DiLorenzo’s powerful summary of the gargantuan nature of the regulatory bureaucracy, [own emphasis]

“According to the White House website, there are also hundreds of federal regulatory agencies and commissions, among the better known of which are the Army Corps of Engineers, Bureau of Alcohol, Tobacco and Firearms, Commodity Credit Corporation, Commodity Futures Trading Commission, Consumer Product Safety Commission, Department of Veterans Affairs, Drug Enforcement Administration, Employment and Training Administration, Employment Standards Administration, Environmental Protection Agency, Equal Employment Opportunity Commission, Farm Credit Administration, Federal Aviation Administration, Federal Communications Commission, Federal Deposit Insurance Corporation, Federal Election Commission, Federal Energy Regulatory Commission, Energy Efficiency and Renewable Energy Commission, Federal Highway Administration, Federal Trade Commission, Nuclear Regulatory Commission, and others. New “commissions” are being formed all the time, and their budgets and responsibilities expanded. This is a short list…

On top of all of this, state and local governments have literally thousands of regulatory agencies and commissions that regulate everything from allergies to zoos. As just one example…the state of Alabama has regulatory agencies and commissions that regulate retirement systems, geological surveys, public health, education, conservation and natural resources, industrial relations, agriculture, seniors, tourism and travel, veterans affairs, environmental management, forensic science, business development, rehabilitation, banking, insurance, labor, transportation, youth services, children’s affairs, film making, ports, disabilities, arts, real estate, oil and gas, forests, ethics, surface mining, alcoholic beverages, auctioneers, and “faith-based initiatives.” And Alabama is a relatively conservative state with a modest-sized government compared to, say, New York, California, or Washington DC…

I have highlighted US agencies in the quoted text above that were and still are responsible for regulating the area of commerce, trade, credit, derivatives, banking and insurance.  Seeing as the apex of the financial crisis is was in the banking system itself, it is important to understand whether indeed banks were the unfettered, unregulated cowboys they have been made out to be, or whether in fact the house of cards was a regulatory one.

The Federal Reserve itself is the chief regulator of the financial system with huge influence on finance, insurance, investing and banking through its various policy levers.  But, as DiLorenzo points out, [own emphasis]

“…the Fed [also] performs dozens of regulatory functions. According to a Fed publication entitled “The Federal Reserve System: Purposes and Functions,” the Fed regulates bank holding companies, state-chartered banks, foreign branches of member banks, edge and agreement corporations, state-licensed branches, agencies, and representative offices of foreign banks, nonbanking activities of foreign banks, national banks, savings banks, nonbank subsidiaries of bank holding companies, financial reporting procedures, accounting policies of banks, business “continuity” in case of economic emergencies, consumer protection laws, securities dealings of banks, information technology used by banks, foreign investment by banks, foreign lending by banks, branch banking, bank mergers and acquisitions, who may own a bank, capital “adequacy standards,” extensions of credit for the purchase of securities, equal opportunity lending, mortgage disclosure information, reserve requirements, electronic funds transfers, interbank liabilities, Community Reinvestment Act subprime lending demands, all international banking operations, consumer leasing, privacy of consumer financial information, payments on demand deposits, “fair credit” reporting, transactions between member banks and their affiliates, truth in lending, and truth in savings.”

A common response is that this regulatory web became inconsequential once a provision in Glass-Steagall had been repealed in 1999.  However author Thomas E. Woods, Jr. notes that, [own emphasis]

In the United States we have 115 agencies that regulate the financial sector, and the Securities and Exchange Commission never had a bigger budget or staff than under George W. Bush. There has been a threefold (inflation-adjusted) increase in funding for financial regulation since 1980. For reasons I’ve explained in my 2011 book Rollback, the repeal in 1999 of one provision of Glass-Steagall had zero to do with the financial crisis. Europe has never operated under Glass-Steagall-style restrictions and is none the worse for it. There is no repealed regulation that would have prevented the crisis…

The banking industry is by far the least laissez-faire sector of the U.S. economy.”

Yet the narrative that laissez-faire capitalism is the reason for our economic malaise has now become rote, already etched into the collective psyche and recorded for posterity in revised editions of public school history books.  This is the 1930s all over again.  Then, as now, progressive intellectuals seized the initiative and made sure the great crash of 1929 and subsequent depression was chalked off as the fault of ‘laissez-faire’.  Then, as now, they were wrong.  But caricatured laissez-faire lends itself neatly to demonization, emphasising base human frailties such as greed and fear and manipulation.

Stories of rapacious men in suits fleecing an unsuspecting public in rags, as much as this is a ludicrous depiction of the free market, sell broadsheets.

On the other hand, the socialist case is the domain of the intellectually lazy, making it an easily-packaged message for mass consumption.  And it doesn’t help that supposed defenders of the free market have put together only limp-wristed defiance, seemingly spluttering over their own conflicted and contradicting world views and offering, at best, a frail defence of economic liberty.

Supposed market-friendly publications such as The Economist and The Financial Times have gone all soft and squidgy.  All these folk seem to be able to offer to the debate, apart from an implicit concession of defeat, is that perhaps new areas of economic theory, such as behavioural economics, should be explored in order to find ‘new’ answers to our problems.

Discussion and opinion forums have sprung up titled “The Future of Capitalism” or “Capitalism in Crisis” or “How to Save Capitalism”, while others simply get to the point: “The World after Capitalism” or “Capitalism is Dead: What next?”

In a debate I had a few weeks back with the South African minister of trade and industry, I was met with an incredulous frown for denying that the free market had caused our current crisis.  The minister, a central planner, could not believe someone was even offering another version of events.  In his mind the evidence had been submitted by the clerk of the court, the judge and jury had deliberated, the verdict passed and the sentence delivered.  The free market was behind bars where it belonged and the keys had been thrown into a deep dark pit.

This is strange.  Aside from the huge regulatory overhang in all modern economies, surely the manifestation of the crisis itself should leave one under no illusions as to the genesis of the problem.
The US subprime mortgage market was blown up into a huge bubble that popped.  It is now commonly accepted that the Community Reinvestment Act, the George Bush initiative that promoted low income home ownership, was among the key reasons for this bubble and knock-on crisis.  The federal agencies Freddie Mac and Fannie Mae also played a huge role in the creation of the bubble.  Again this is well documented and widely accepted.  Their need for a bailout was proof of how poorly these federal institutions were run.  Then there is the Federal Reserve itself.  It is also now commonly accepted that under Greenspan and Bernanke this institution kept interest rates too low for too long and fuelled the build-up of imbalances and bubbles.

Is it perhaps because George Bush was erroneously labelled a free market capitalist that his era is mistakenly labelled as laissez-faire?

Then there’s Europe, whose fiscal quagmire is by definition the making of sovereign states themselves, not the free market.  If the European mess does not demonstrate the abject failure of the socialist model then surely nothing will.

Last week, Martin Wolf of the FT penned a summary of a panel debate he moderated in Davos on “The Future of Economics”.  Read Wolf’s short post.  It is instructive for what it leaves out rather than what it includes.

According to Wolf, the panel of Nobel laureates and professors of economics believe the cult of market efficiency needs to end; the role of human behaviour, institutions, culture and so forth needs to be studied; humans are not rational calculating machines; time matters in economic processes; theoretical equilibrium is not realistic; a different approach is required than to hard-science physics; the world is not ‘computable’; economics is about complex human behaviour; and economic policy is highly complex and must take into account all possible impacts and outcomes.

What Wolf, and indeed any of the panellists, fail to spot is that their recommendations represent not a move away from free markets but a move toward them!  In fact, the Austrian School of Economics, the very embodiment of laissez-faire and libertarian economics, agrees with just about all of Wolf’s summary above.

The Austrians reject neoclassical quantitative models and hyper-rational caricatures of humans; they reject the efficient market hypothesis and hard-scientific methods; they understand the role of behaviour and human action; they study time in the formulation of market prices, profits and interest rates; they do not fixate on unrealistic ‘perfect equilibrium’; they believe the total effects of economic policy need to be considered on all groups over all time-horizons, and that because economic policy is complex, it should be kept to a minimum.

Wolf’s predominantly pro-state panel of experts don’t even know it, but they’re advocating for a ‘new’ approach to economics that was perfected decades ago by the Austrians from Menger to Bohm-Bawerk, Mises to Hayek, Rothbard to Hoppe.

And indeed this is the nub of the problem.  The economic debate has become so pretzelled and convoluted that most of the protagonists don’t even quite know what they’re talking about anymore.  Down is up.  Black is White.  Regulation is Laissez-faire.  Socialism is Capitalism.
The thing is, if you’re misdiagnosing the problem, you haven’t a hope of fixing it.
This might be one of the greatest intellectual heists ever pulled by the statists.  Create a crisis, blame the free market, and grow even more powerful and overbearing.  A confused debate that never gets resolved, but only helps perpetuate the status quo.  The status quo is big statism, welfarism, and corporate cronyism that always and only means one thing: Bigger Government.

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