Capitalism After the Crisis

Capitalism After the Crisis > Publications > National Affairs

The economic crisis of the past year, centered as it has been in the financial sector that lies at the heart of American capitalism, is bound to leave some lasting marks. Financial regulation, the role of large banks, and the relationships between the government and key players in the market will never be the same.

More important, however, are the ways in which public attitudes about our system might change. The nature of the crisis, and of the government's response, now threaten to undermine the public's sense of the fairness, justice, and legitimacy of democratic capitalism. By allowing the conditions that made the crisis possible (particularly the concentration of power in a few large institutions), and by responding to the crisis as we have (especially with massive government bailouts of banks and large corporations), the United States today risks moving in the direction of European corporatism and the crony capitalism of more statist regimes. This, in turn, endangers America's unique brand of capitalism, which has thus far avoided becoming associated in the public mind with entrenched corruption, and has therefore kept this country relatively free of populist anti-capitalist sentiment.

Are such changes now beginning? And if so, will they mark only a temporary reaction to an extreme economic downturn, or a deeper and more damaging shift in American attitudes? Some early indications are not encouraging.

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Mr. Zingales's article is illustrative in several regards. Firstly, it illustrates the double standard of economic rightists, in that his comment that "the free-market banner was completely appropriated by the pro-business forces" is a mainstream political sentiment, while my elaboration on legitimate differences between socialism/communism and Stalinism would be met by anti-socialist screeches that I was attempting to hide the blood-stained legacy of the former ideology. The key difference that I see is that heavily state-influenced capitalism has always been the only form in existence, with laissez-faire "free market" capitalism being a theoretical abstraction with no value outside of the textbook, whereas socialism and communism have been legitimately implemented in libertarian conditions, thus meaning that we have more to draw on than abstract and impractical theory.

The disingenuous slander of socialism and communism means that we cannot draw on Marx's insights into the various deficiencies of capitalism without idiotic reference to the USSR. The economic crisis has resulted in the renewed popularity of Das Kapital, but despite the fact that it can be explained by Marxian crisis theory, many Internet rightists turn to Peter Schiff and the Austrian school as though they possessed some unique insight, rather than the behavior patterns of all heterodox economic schools in their predictions of the failure of actually existing capitalism.

Agnapostate said:

The key difference that I see is that heavily state-influenced capitalism has always been the only form in existence,

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Examples?

with laissez-faire "free market" capitalism being a theoretical abstraction with no value outside of the textbook,

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evidence?

whereas socialism and communism have been legitimately implemented in libertarian conditions,

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examples?

DarkWizard12 said:

Examples?

evidence?

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In the context of the capitalist economy, the state's role in sustaining regulatory structure is integral, which will always render any kind of non-state or minimal-state capitalism a utopian impossibility. I most often mention Yu's A new perspective on the role of the government in economic development: Coordination under uncertainty to illustrate this. As noted by the abstract:

This paper argues that the government possesses certain unique features that allow it to restrict competition, and provide stable and reliable conditions under which firms organise, compete, cooperate and exchange. The coordinating perspective is employed to re-examine the arguments for industrial policies regarding private investment decisions, market competition, diffusion of technologies and tariff protection on infant industries. This paper concludes that dynamic private enterprises assisted by government coordination policies explains the rapid economic growths in post-war Japan and the Asian newly industrialising economies.

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Also consider this portion:

[The government] possesses some unique features that distinguish it from the firm. Such features allows the government to regulate competition, reduce uncertainty and provide a relatively stable exchange environment. Specifically, in the area of industrial policy, the government can help private enterprises tackle uncertainty in the following ways: first, locating the focal point by initiating projects; providing assurance and guarantees to the large investment project; and facilitating the exchange of information; second, reducing excessive competition by granting exclusive rights; and third, facilitating learning and diffusion of technologies, and assisting infant industry firms to build up competence. The history of developmental success indicates that the market and the state are not opposed forms of social organisation, but interactively linked (Rodrik, 1997, p. 437). In the prospering and dynamic nations, public-private coordination tends to prevail. Dynamic private enterprises assisted by government coordination explain the successful economic performances in the post-war Japan and the Asian newly industrialising economies. It is their governments' consistent and coordinated attentiveness to the economic problems that differentiates the entrepreneurial states (Yu, 1997) from the predatory states (Boaz and Polak, 1997).

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The aforementioned point about infant industries is perhaps the most illustrative aspect of the role of state protectionism in facilitating maximum development because of the simplicity of the infant industries argument. Rather than merely permitting the benefits of immediate unrestricted trade accrue to the benefit of one more powerful nation due to underdevelopment, a government protection of infant industries is established until such time as they "grow up" and can thus be expected to be legitimately competitive industries, thus maximizing dynamic comparative advantage in the long run. I'm certainly in favor of drastically minimizing and ultimately eliminating the role of the government in public affairs. But that objective is not consistent with the continuation of capitalism.

DarkWizard12 said:

examples?

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As a libertarian, I usually argue that the Spanish Revolution, the anarchist social revolution that occurred during the Spanish Civil War, is the best and most expansive example of socialism in action. For example, as noted by Gaston Leval:

In Spain, during almost three years, despite a civil war that took a million lives, despite the opposition of the political parties . . . this idea of libertarian communism was put into effect. Very quickly more than 60% of the land was very quickly collectively cultivated by the peasants themselves, without landlords, without bosses, and without instituting capitalist competition to spur production. In almost all the industries, factories, mills, workshops, transportation services, public services, and utilities, the rank and file workers, their revolutionary committees, and their syndicates reorganized and administered production, distribution, and public services without capitalists, high-salaried managers, or the authority of the state.

Even more: the various agrarian and industrial collectives immediately instituted economic equality in accordance with the essential principle of communism, 'From each according to his ability and to each according to his needs.' They coordinated their efforts through free association in whole regions, created new wealth, increased production (especially in agriculture), built more schools, and bettered public services. They instituted not bourgeois formal democracy but genuine grass roots functional libertarian democracy, where each individual participated directly in the revolutionary reorganization of social life. They replaced the war between men, 'survival of the fittest,' by the universal practice of mutual aid, and replaced rivalry by the principle of solidarity . . .

This experience, in which about eight million people directly or indirectly participated, opened a new way of life to those who sought an alternative to anti-social capitalism on the one hand, and totalitarian state bogus socialism on the other.

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Other possible examples might include the Free Territory of Ukraine, the municipalities of Chiapas controlled by the Zapatista Army of National Liberation, the Paris Commune, the Israeli kibbutzim (to some extent), etc. We can also consider microeconomic analysis into the superior efficiency levels of worker-owned enterprises and labor cooperatives and extrapolate the empirical research into such forms of workers' ownership and management to the potential framework of a socialist economy.

Agnapostate said:

The aforementioned point about infant industries is perhaps the most illustrative aspect of the role of state protectionism in facilitating maximum development because of the simplicity of the infant industries argument. Rather than merely permitting the benefits of immediate unrestricted trade accrue to the benefit of one more powerful nation due to underdevelopment, a government protection of infant industries is established until such time as they "grow up" and can thus be expected to be legitimately competitive industries, thus maximizing dynamic comparative advantage in the long run. I'm certainly in favor of drastically minimizing and ultimately eliminating the role of the government in public affairs. But that objective is not consistent with the continuation of capitalism.

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An anarchist defending tariffs. Hilarious.

phattonez said:

An anarchist defending tariffs. Hilarious.

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Many of us are consequentialists, and will distinguish between state programs that provide generally positive consequences and state programs that provide generally negative consequences due to our socialist interest in aiding the working class. That said...I've considered supporting extreme rightism, since I know it would lead to the destabilization of capitalism. Should we let the bad times roll?

Agnapostate said:

Many of us are consequentialists, and will distinguish between state programs that provide generally positive consequences and state programs that provide generally negative consequences due to our socialist interest in aiding the working class. That said...I've considered supporting extreme rightism, since I know it would lead to the destabilization of capitalism. Should we let the bad times roll?

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Hmm, then what are your deontological beliefs?

phattonez said:

Hmm, then what are your deontological beliefs?

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I have none; I'm a utilitarian. Please stay on topic.

More important, however, are the ways in which public attitudes about our system might change. The nature of the crisis, and of the government's response, now threaten to undermine the public's sense of the fairness, justice, and legitimacy of democratic capitalism.

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Bailouts and stimuli are not capitalism. You may say that capitalism is doomed to these things, but once these things go into effect, then you no longer have capitalism. If there's any system to blame, it's corporatism, not capitalism. I think you share my sentiments on corporatism though.

phattonez said:

Bailouts and stimuli are not capitalism. You may say that capitalism is doomed to these things, but once these things go into effect, then you no longer have capitalism. If there's any system to blame, it's corporatism, not capitalism. I think you share my sentiments on corporatism though.

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That's the exact position of the article, which you don't appear to have read. Capitalism necessitates the private ownership of the means of production, market exchange as the primary means of resource allocation, and wage labor, all three of which continue to be present in our existing economic structure. Reference to the absence of laissez-faire conditions is purposeless, since "free market" capitalism remains a theoretical abstraction with no historical record of existence or practical implementation, as mentioned. Unless you want to claim that capitalism has never existed, I wouldn't use it as your standard.

Agnapostate said:

That's the exact position of the article, which you don't appear to have read. Capitalism necessitates the private ownership of the means of production, market exchange as the primary means of resource allocation, and wage labor, all three of which continue to be present in our existing economic structure. Reference to the absence of laissez-faire conditions is purposeless, since "free market" capitalism remains a theoretical abstraction with no historical record of existence or practical implementation, as mentioned. Unless you want to claim that capitalism has never existed, I wouldn't use it as your standard.

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It hasn't fully existed, but can I argue that the basis of the crash is government intervention and not capitalism? Easily.

Quoted from the linked article excerpt:

The nature of the crisis, and of the government's response, now threaten to undermine the public's sense of the fairness, justice, and legitimacy of democratic capitalism.

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It's entirely possible, maybe even probable, that the general public has no idea what capitalism really is. We have had a quasi-capitalistic system since at least as far back as the early 20th century. Public sentiment has very little to do with reality.

lizzie said:

It's entirely possible, maybe even probable, that the general public has no idea what capitalism really is. We have had a quasi-capitalistic system since at least as far back as the early 20th century. Public sentiment has very little to do with reality.

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I'd argue that it's been more pseudo-capitalist since the Depression.

phattonez said:

It hasn't fully existed, but can I argue that the basis of the crash is government intervention and not capitalism? Easily.

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I hope I am not moving too far off subject on this (by responding to a question to the basis for the crash/crisis), but I have often had arguments with friends of mine regarding this. If you do Not agree that it started with the housing market (or perhaps that was the first extremely noticeable consequence) then yes we will have to save that debate for another thread. But this transcript (if you prefer to read vs. listen) of this NPR radio broad cast entitled "The Giant Pool of Money" (click icon on left for "full episode") seems to adequately sum up exactly what government role was in regard to the current crisis. Which largely seems to be a distinct LACK of regulation regarding certain financial markets and even a general "easing" of regulation regarding them. Now if you are equating a relative complete Lack of government intervention as de facto government intervention well then yes I will have to agree with you, however the statement "The government intervened by NOT intervening" simply provides nothing of value to a logical transmission of ideas and merely attempts to confuse the situation.
In summation IF you chose to listen to this broadcast (admittedly it is a bit lengthy) from "This American Life" on NPR AND Believe it to not be scripted thus merely a tool to try and figure out what spawned this problem I believe you will walk away with a couple distinct revalations:

1. Gov't Reduced the Interest rate
2. Financial Sector Investment houses wanted to find a more profitable means of investment.
3. Banks Started becoming less and less choosy re: eligibility of loans in response to the increasing demand for home loans as a means of profitable investment greater then The FED's rate of return (Home buyers equally participated in this by means of accepting loans they new they could not pay back)
4. As these loans defaulted and became toxic these investment in large part became valueless.

Now I know you have no reason to believe me but my Uncle, after debating him on this issue over a family get together said: "You really want to get a better idea of how this all went down?" then referred me to the above mentioned NPR broadcast. His Job for the past 10 years: Buying and Selling of Credit default swaps. The aforementioned investment tools discussed in the broadcast.

An artificially low interest rate is a lack of intervention? Interesting.

phattonez said:

An artificially low interest rate is a lack of intervention? Interesting.

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True. I completely agree however the creation of the investment tools that are believed to actually caused the housing crisis were the sole ownership of private industry. In essence Private Industry was under no duress (other than mere greed) to choose riskier investment vs. a stable (albeit dismal) Federal return rate.

EDIT: "I agree that an artificially low interest rate IS Gov't Intervention"

Thinkforyourself said:

Which largely seems to be a distinct LACK of regulation regarding certain financial markets and even a general "easing" of regulation regarding them.

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In reality, it was probably both lack of regulation and government intervention on a social level. When the Glass Stegall act was repealed, regulations were loosened on financial institutions. Although many will poo-poo the idea that CRA had anything to do with the housing crisis, it created an attitude of unrealistic hopes and dreams of every individual being able to obtain home ownership, and lending institutions were pressured to meet government criteria of doing business in "underserved" communities in order to maintain FDIC ratings. No doubt there was plenty of slight-of-hand practices in the credit default swap business, but when government gets involved (think Freddie and Fannie), there is (imo) an implied guarantee that government will bail you out if you screw up. Guess what happened? I personally think it was a very complicated process that led to the crisis, and that irresponsible individuals borrowing money for homes they could not afford were as responsible as the irresponsible government and financial insitutions that enabled them. I am an equal opportunity blamer.

Thinkforyourself said:

True. I completely agree however the creation of the investment tools that are believed to actually caused the housing crisis were the sole ownership of private industry. In essence Private Industry was under no duress (other than mere greed) to choose riskier investment vs. a stable (albeit dismal) Federal return rate.

EDIT: "I agree that an artificially low interest rate IS Gov't Intervention"

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But would those have been so popular with a more natural interest rate?

phattonez said:

But would those have been so popular with a more natural interest rate?

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Who can say... that requires a level of speculation I don't not believe I am qualified to make. i.e. I am not a member of any sort of Financial market trading nor do I have any information regarding the subject other than other peoples opinions and statements who are and have written about it. However you very well may be correct. In the absence of a "natural interest rate" these types of "tools" very well may not have been looked at or created... I cannot dispute the possibility of this statement.
However, this seems to me to be a slippery slope. It can perhaps sound to some to be similar (if not identical in philosophy) to a rapist defending his actions by inferring that his actions were motivated by sexually provocative clothing or behaviors on behalf of the victim.
Neither argument in my mind makes either situation acceptable. It may however lend insight to the reasons by which these decisions were actually made. However just as the rapist defense is NOT allowed as an Affirmative defense in such cases neither should it be allowed as an affirmative defense of private industry in regard to the crisis.

I apologize in advance for the use of such a crude example but it was one I believed most people have heard of and preemptively apologize to anyone whom it may have offended. That was NOT my intention.

The natural rate of interest cannot curb excessive speculation exponetiated by leverage. As assets value continues to rise, a psychological phenomena (greater fool theory) takes hold. Those who did not invest are now suddenly pressured into seeking high returns, even though proper risk aversion would dictate investors scale back from dynamic investments into a more fixed return structure. The investors who already made decent returns begin to scale back as thirsty investors look to leverage to obtain returns on investment, which sets the stage for a pullback leaving the new investors in the mud. Quite natural in developed financial markets.

However; if these investment vehicles are a bubble, you will witness massive asset devaluation in those assets, however the same psychological phenomena is set loose.

The question therefore should be: Does central bank monetary policy create bubbles?

To answer it with any accuracy, let us assume a time without a nationalized central banking authority. Did asset bubbles exist? Were there major impacts of the business cycle?

Goldenboy219 said:

To answer it with any accuracy, let us assume a time without a nationalized central banking authority. Did asset bubbles exist? Were there major impacts of the business cycle?

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Doesn't necessarily give you an answer though because not all other variables are controlled. For example, fractional reserve banking is theorized to lead to bubbles, and it existed then as it does now. So, eliminating central banking wouldn't necessarily avoid bubbles.

Thinkforyourself said:

However, this seems to me to be a slippery slope. It can perhaps sound to some to be similar (if not identical in philosophy) to a rapist defending his actions by inferring that his actions were motivated by sexually provocative clothing or behaviors on behalf of the victim.

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I don't think it's the same because what the investors did is not inherently evil like rape is.

phattonez said:

Doesn't necessarily give you an answer though because not all other variables are controlled. For example, fractional reserve banking is theorized to lead to bubbles, and it existed then as it does now. So, eliminating central banking wouldn't necessarily avoid bubbles.

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Austrian sentiment that asset bubbles are created by artificially low interest rates is incorrect. For it to hold true, low federal funds rates would have to precede all bubbles.

Goldenboy219 said:

Austrian sentiment that asset bubbles are created by artificially low interest rates is incorrect. For it to hold true, low federal funds rates would have to precede all bubbles.

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They don't have to cause all bubbles however, they still often can

DrunkenAsparagus said:

They don't have to cause all bubbles however, they still often can

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We have yet to see any evidence that they cause bubbles at all (they have yet to provide valid correlation let alone causation).

Agnapostate said:

That's the exact position of the article, which you don't appear to have read. Capitalism necessitates the private ownership of the means of production, market exchange as the primary means of resource allocation, and wage labor, all three of which continue to be present in our existing economic structure.

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And how did these specific aspects of capitalism contribute to the economic meltdown?

Reference to the absence of laissez-faire conditions is purposeless, since "free market" capitalism remains a theoretical abstraction with no historical record of existence or practical implementation, as mentioned. Unless you want to claim that capitalism has never existed, I wouldn't use it as your standard.

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How does this change the fact that government "stimulus" plans and bailouts are not elements of capitalism?

The financial meltdown was the consequence of economic central management, not private ownership of the means of production, wage labor, or market exchange.