Has Capitalism really failed?

In a review of Richard A. Posner’s book, A Failure of Capitalism, the following “facts and causes” of the current financial crisis and recession/depression are cited:

… excess savings flowing in from Asia and the reckless lowering of interest rates by the Federal Reserve Board; the relation between executive compensation, short-term profit goals, and risky lending; the housing bubble fueled by low interest rates, aggressive mortgage marketing, and loose regulations; the low savings rate of American people; and the highly leveraged balance sheets of large financial institutions.

The idea contained in the title of this book is that because these conditions arose, capitalism failed. So, many people argue, since Capitalism can fail, then perhaps we should try something else: perhaps bigger government and more control, directly or indirectly, of the means of production. Posner’s conclusion is that:

… the pendulum swung too far and that our financial markets need to be more heavily regulated.

But the NYT's review says Posner goes even further:

We are learning,” Posner writes, “that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails… Posner thinks laissez-faire economics has nothing relevant to say.

To those who accept Posner’s conclusions, the possibility that government interference in the market economy was the original cause of, rather than the cure of, the current crisis is never mentioned. The possibility that the current government interference is aggravating the current downturn is also dismissed. The Wikipedia post on Capitalism asserts that there is "little controversy that private ownership of the means of production, creation of goods or services for profit in a market, and paid employment are elements of capitalism."

Ok, since there’s “little disagreement” for these elements, let’s start with them. Based on these, it appears that the idea of Capitalism is really not much more than an ideal similar to the free, non-monopolized, yet, non-regulated markets theorized by economists when they talk about the concept of “pure, or perfect competition”. Thus, for example, Wikipedia’s definition of perfect competition indicates that the economy’s markets, if they were “ideal” and fit the definition of “perfectly competitive”, they would be characterized by:

• Many buyers/Many Sellers – Many consumers with the willingness and ability to buy the product at a certain price, Many producers with the willingness and ability to supply the product at a certain price.
• Low-Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly competitive market.
• Perfect Information - Prices are assumed to be known to all consumers and producers.
• Transactions are Costless - Buyers and sellers incur no costs in making an exchange.
• Firms Aim to Maximize Profits - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
• Homogeneous Products – The characteristics of any given market good or service do not vary across suppliers

Of course, no economy has perfect competition and… no economy represents the ideal Capitalism. For example, let’s take “private ownership of the means of production”. If a few individuals, or a few private groups own (or control) all the means of production, we have monopolies or oligopolies. Technically, we might have some vague form of “capitalism”. But most of us would agree (except the lucky owners) that this kind of “capitalism” is far from the ideal. Also, this version dominated by monopolies and oligopolies, will ultimately, fail.

Now let’s combine the next two items in the list of accepted elements relating to Capitalism: “creation of goods or services for profit in a market" and "paid employment”. When we combine these two elements, we are merely lumping the return to capital and the return to labor together, for simplicity. Although one might be traditional and include “raw land”, too; both labor and capital are, in fact the main “means of production”. So the essential elements of capitalism include a return or remuneration to the owners, or controllers of the means of production. Ok, our ideal Capitalism now involves private owners, or controllers of the means of production (labor and capital) AND, from the previous paragraph, we don’t want monopolies or oligopolies to be the owners or controllers.

To the extent that monopolies and oligopolies control the means of production and to the extent that our government directly owns the means of production (communism), or indirectly controls it, through taxation and regulation (socialism), we don’t have the Capitalism ideal. Indeed, a growing special interest group that includes the current President of the United States, despises and opposes the very idea of private ownership or private control of the means of production, even by monopolies or oligopolies – unless, of course those oligopolies are subject to the control of the government elites. To the extent that these groups are in control in our country, we cannot say that Capitalism has failed, since we don’t have Capitalism.

So when our markets lock up, prices go extreme (up or down), and unemployment rises, does that mean that Capitalism, or perfect competition failed? Duh! We don’t have those things! They are ideals – theoretical concepts - that did not exist to begin with, and cannot logically be said to have failed.

What did fail? Well…how about government? Is it not government that is supposed to prevent special interests from gaining “unfair” monopolistic advantage? Is it not our government that is “supposed” to avoid favoritism between special interest groups? And who are the special interests who have recently obtained so much control that they now effectively control the government itself? Well…for one, the banks control the Federal Reserve and the Federal Reserve says it must remain free from “government oversight”, meaning it wants to remain a creature of the banks. Recall that Posner said the easy money policy of the Federal Reserve was a major cause of our current predicament. Further, Simon Johnson (among many) argues the banks have captured the government in a “Quiet Coup”. So, government has failed us miserably in fostering Capitalism. But Capitalism hasn’t failed; it’s government that failed! Our government has been taken over by the special interests.

One of the best analysts on Wall Street, Josh Rosner muses on the question of recent potentially illegal or unethical activities by financial institutions:

…in a time of national crisis we had institutions that were unwilling to put aside their lobbying, put aside their will to power, and recognize they had a greater obligation to the country. This is part of why I said capitalism in its purest form doesn’t work because they would assert their primary duty is their fiduciary obligation to their investors. However, I would say part of fulfilling your fiduciary obligation to your investors is to make sure there is a playing field on which to bring your ball and bat every week. Do I think they tried to maximize their returns in this crisis and minimize the losses they would have to recognize? Absolutely, no question. Is that wrong? I’m not an ethicist, so this is one man’s opinion: Yeah, I think in some sense it is wrong. How do we square that circle? That’s for the government to determine. But I do question whether our Founding Fathers intended for corporations to have the same rights as citizens.

Indeed, the government must create a level playing field without bias and payoff…and it has failed miserably to do so with respect to the financial institutions. But the banks and the ideologues are not the only special interests that control our government and direct it to allow the subversion of practical Capitalism. Not hardly. Besides the banks, other large corporations, notably the oil companies, as well as labor unions and political action groups, all have gained so much sway over our government that – until we eliminate that sway - Capitalism will never flourish in the United States. Indeed, the failure of government to remain free from the special interests is a central argument in favor of laissez-faire economic policies. The Wikipedia post on laissez-faire economics says that the laissez-faire champion, the Chicago School of Economics and other advocates:

…claim to favor a state that is neutral between the various competing interest groups that vie for privileges and political power in a country. They are critical of mixed economies on the grounds that it leads to an interest-group politics where each group is seeking to benefit itself at the expense of another and the consumer… any government intervention such as regulation, protectionism, creating legal monopolies, competition laws, or taxes, interfere with the [market’s judgment] being reflected accurately in the [market] price and the maximization of economic utility.

Laissez-faire assumes the existence of a vigilant, but unbiased government. The collusion between government and the special interests is possibly many things, but conducive to Capitalism is not one of them. Washington’s blog has a good post which suggests that the partnership of the special interests and the government that is preventing Capitalism in the United States is not really communism, or even socialism, it’s fascism:

Some, however, argue that the economy is more like fascism than socialism. For example, leading journalist Robert Scheer writes:

What is proposed is not the nationalization of private corporations but rather a corporate takeover of government. The marriage of highly concentrated corporate power with an authoritarian state that services the politico-economic elite at the expense of the people is more accurately referred to as "financial fascism" [than socialism]. After all, even Hitler never nationalized the Mercedes-Benz company but rather entered into a very profitable partnership with the current car company's corporate ancestor, which made out quite well until Hitler's bubble burst.

Is Scheer right? I don't know. But Italian historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because "the State pays for the blunders of private enterprise... Profit is private and individual. Loss is public and social" (page 416). This perfectly mirrors Roubini's statement about the American government's bailout plan….Remember that one of the best definitions of fascism - the one used by Mussolini - is the "merger of state and corporate power".

Demonstrators from both the left and the right want to make a shocking point and gain attention by portraying both the previous president and the current one as fascist, but underneath there appears to be instinctive recognition by society of this trend toward fascism . One can hope so...before it's too late:

Whatever the name of this demon: Socialism, Communism, or Fascism… it needs exorcism. However, just electing a new party that promises “change” is obviously not good enough. In the recent election, we merely swapped one set of special interests (like oil companies and oil service companies) for another (like unions and socialists). New laws ARE necessary - perhaps even a change or two in our constitution – to eliminate the control of our government by “partnering” special interests. In general, the sway that special interests now have over our election cycle is pitiful.

Making all campaign contributions from any entity (other than $2500 per individual) illegal would be an awesome step in the right direction. In addition, we need to stop all special interest advertising for six months prior to congressional and presidential elections. Ten year term limits on all congressional seats would also be an excellent way to make the influence that any special interest may gain over any particular congressman or woman to die a natural death when their term expires.

More specifically, the Ponzi scheme that is the Federal Reserve needs to be eliminated. Our new special interest-free government should be able to take over supervision of the Federal Reserve from the banks that now perform that function. Indeed, banks regulating themselves just won’t cut it! Further, NO bank or any other firm should be allowed to get large enough to control 5% or 10% of an industry. We have laws that preclude this sort of thing (i.e. Sherman Antitrust Act and other banking laws) that are already on the books! But our government has failed to enforce them. Why? It’s simple: SPECIAL INTERESTS OWN OUR GOVERNMENT.

View the original article at the Swamp Report:
Has Capitalism really failed?

Comments

[Anonymous]

I wanted to stop reading here...was pretty good until the crap started flying...and oh...did he mention, Nazis?

"Indeed, a growing special interest group that includes the current President of the United States, despises and opposes the very idea of private ownership or private control of the means of production, even by monopolies or oligopolies – unless, of course those oligopolies are subject to the control of the government elites. To the extent that these groups are in control in our country, we cannot say that Capitalism has failed, since we don’t have Capitalism."

[RagnarDanneskjold]

Somehow I don't see how fascist laws restricting speech will solve this problem. 

A simple constitutional amendment, the "Equality Amendment" along the lines of, "The Federal government may not discriminate on the basis of age, income, race, religion, profession, education, disability, sex, etc. All existing conflicting laws are hereby repealed." Or, "What the government does to one, it must do for all." 

No more Social Security, Medicare, welfare, affirmative action, American w/Disabilities Act, mortgage deductions, mileage deductions, charitable deductions, agricultural subsidies, tariffs, grant money, student loan subsidies, export support, etc. etc. and so forth and so on.

Then, there would be no special interest because no interest group could push for exclusive benefits.

[aldousd]

Here here!

[Anonymous]

Libertarian - kick them all out. Privilege has been embedded in Washingon too long. Any one notice that the collective bonuses of the Board of Washington (Goldman) would almost single-handedly wipe out the entire municipal budget gap of NY? Any wonder why Fed-manufacured $$ to the POMOs happens? Line the coffers of the elite, and all the NY troubles disappear ... next step: move Wall Street to California. Unreal. If the masses ever turn off Survivor, we will soon be waiting for the pitchforks. Too bad it will not happen and it will be too late.

[jbou]

I like a lot of what you wrote. I would add that the US should move towards universal health care so the country can compete better on a global stage. Right now some of our oldest companies are being saddled with benefit obligations that cripple them. If we had not tied benefits to the job then we would not have the issues we have today.

[McGriffen]

Great post and hits a lot of highlight items.  As for further government involvement...what did 25+ years of FNM and FRE bring about?  The housing markets became marginally easier to finance & bring mortgage rates down, but that eventually came at a larger cost that few would have foreseen 15 years ago.  And any who did were summarily shouted down.

Campaign finances and term limits...happy hour starts early I guess.  One can wish though

[Anonymous]

One could say that it was the private interference in the government, attempting to gain privilege, that is responsible.

[jbou]

In reality we the people are to blame. We elected these folks and the folks we elected came from our schools, our businesses, our universities, they are our fathers and mothers, brothers and sisters, friends and neighbors. They are us. They are greedy, self involved people who look out for themselves first and foremost, just like the rest of us.

[Anonymous]

amen to that!