(First published in the Nelson Mail and Manawatu Standard October 29.)
The international financial meltdown may have had at least one beneficial effect. It has triggered a useful debate about the forces at work in the global economy and resulted, one would hope, in a slightly more informed and economically literate public.
It remains true that economics is an inexact science, and that if you put six economists in a room you’ll get eight different opinions. Yet there seems to be a broad consensus about what caused the crisis – namely, dodgy lending by greedy and irresponsible American financiers, using highly contrived financial instruments, to people who had no prospect of paying back the money they had borrowed.
That created a domino effect which, in a globalised economy where money flows freely across borders, quickly spread fear and panic worldwide.
On other aspects of the crisis there is far less unanimity. Some economists suggest the seeds were sown by left-wing politicians and bureaucrats in the Clinton administration distorting the financial markets by promoting policies aimed at getting low-income people into their own homes. Others argue the exact reverse, blaming a lack of intervention by right-wing politicians intent on protecting their friends on Wall St.
Simultaneously, there is a more urgent debate going on about how to deal with the meltdown, and still another about what the longer-term implications might be.
On the first of those two issues some of the reactions have been fascinating, with many “pure” laissez-faire capitalists arguing that governments should have stepped back and let shaky financial institutions collapse.
There’s an undeniable appeal about this brutal school of economic Darwinism, which holds that failure and regeneration is part of the natural economic cycle and should be allowed to run its course. Certainly the view that greedy financial institutions should be made to suffer for their sins, rather than be bailed out by the state, strikes a chord with most taxpayers. The “moral hazard” argument, which holds that people who don’t bear the consequences of their actions are likely to go on behaving badly, is a hard one to rebut.
But politically, of course, the hands-off approach was unrealistic. No democratic government could stand by, as happened in the early 1930s, and watch passively as economies crashed, taking jobs and homes with them.
Alongside all these other debates, it has been interesting to see the number of triumphant obituaries written for capitalism and the free-market economic model. The British magazine The Spectator, commenting on the recent British Labour Party conference, noted a mood of “revivalist socialist zeal”. But the obituaries for capitalism are as premature as they are predictable.
It’s certainly true that capitalism’s image has been badly tarnished, but that’s hardly new. For centuries, capitalism has gone through periodic crises of varying severity.
Only the most one-eyed free-market advocate would argue that capitalism is perfect. It has always been susceptible to greed, vanity, corruption and venality. In other words it’s as imperfect as humankind itself.
But it just happens to be the best economic system humanity has discovered so far – the one most likely, especially in conjunction with democracy, to deliver prosperity and freedom. A glance at any table ranking the world’s freest, fairest and most prosperous countries will confirm this.
Right now we are seeing capitalism work spectacularly in Asia, where countries that New Zealanders raised aid money for when I was a child, to ensure they didn’t starve, have now overtaken us in the OECD rankings.
And just try suggesting to the economically rampant Chinese that they revert to the disastrous state control that caused millions to die of starvation under Chairman Mao. Deng Xiaoping, Mao’s successor, was smart enough to realise that free enterprise was the most effective way of unleashing China’s vast human potential, and there are now encouraging signs that a degree of democratic reform may follow to complete the package.
Among capitalism’s many failings is that each generation tends to forget the lessons of the previous one and has to make the same mistakes all over again.
The New Zealand economy got intoxicated on its new-found freedom following deregulation in the 1980s, leading to a frenzy of crazed speculation that resulted in the 1987 stock market crash.
One generation on, the same “irrational exuberance”, to use a phrase made popular by for the former US Federal Reserve chairman Alan Greenspan, drove the manic property boom of recent years. The consequences weren’t as dramatic, but the behavioural pattern was similar.
Nothing new here. Capitalism is fuelled by self-interest, and it doesn’t take much for self-interest to morph into naked greed. That has always been a hazard in capitalist economies, which is why governments apply controls in an attempt to check its worst excesses.
The argument, as in so many things, is about getting the balance right; determining how far the state should go in regulating private enterprise. Too far, and it risks stifling enterprise and economic activity; not far enough, and it places too much power in the hands of greedy and/or stupid people who either can’t see or don’t care about the possible consequences of their behaviour.
But as for the old familiar socialist condemnations of capitalism’s “boom and bust” cycle, which have been so predictably revived following the world financial crisis, there is a simple rebuttal.
Yes, capitalism periodically undergoes crises. They cause pain, but invariably capitalist economies recover.
Cars crash too, because their drivers sometimes behave badly or make silly mistakes, but no one argues (well, excluding the Greens) that cars should be banned. We accept that the benefit of motor vehicles far outweighs the damage they cause.
The crucial point to remember when capitalism is floundering in one of its occasional crises is that they are just that: occasional. Most of the time, capitalism works. Socialism never does, never has.
Wherever it has been tried socialism has been associated with oppression, deprivation, economic collapse and the crushing of the human spirit. Yet still the tired old voices of the “progressive” Left – and what an ironic ring that word “progressive” has – seek to persuade us that capitalism is doomed and we must place our faith in a benevolent state to guarantee our wellbeing. Fat chance.