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An anti-capitalism poster from 1911, published in the Industrial Worker, a socialist-anarchist newspaper
Fire, the wheel, the printing press...and the capitalist economic system.

When listing all the numerous inventions that improve our lives, one of the most important is usually ignored: the capitalist economic system.  With recent market turmoil causing some observers to claim capitalism itself has failed, it's apropos to take a closer look at the technology behind it.

Capitalism is an invention, no different than the transistor or the automobile. Like those others, it's comprised of many smaller inventions: the corporation, the bank, the stock market, commodities, securities, futures, etc. All together, they are a group of technologies invaluable for efficiently converting labor and resources into goods and services. Nothing we've devised has ever worked so well.  Most of our prosperity and standard of living derives from it.

Take Russia. By far the world's largest country and the richest in natural resources, it has a highly educated and hard-working populace. Yet when Putin took over, their GDP was barely larger than the tiny island of Hong Kong's, and despite quintupling in the last few years, it's still a tenth of the US economy. Or consider China which, after allowing a small bit of capitalist endeavor to penetrate its system, transformed into the world's fourth-largest economy nearly overnight.

One of the reasons so many people (including some misguided economists) have trouble accepting capitalism is its apparent simplicity. It just seems impossible that a system so seeming chaotic can outperform something intelligently planned by trained economists. But that assumption is itself incorrect. Where a planned economy is like a single-core processor, capitalism is a neural-net processor with millions of nodes. A socialist economy is run by a few government-appointed individuals. But in a free market, every time you buy or sell a product, you're adding a calculation to the system. Whether you buy a car, rent a movie, or get a haircut, you're contributing to the price and quantity of goods and services. Cut a trip to the mall because gas went up another 5 cents, and you've input data to force down the price. Go anyway and you've voted to raise the price further.

The system appears simple, but in reality it's an enormously complex, self-regulating, highly adaptive mechanism. And like most mechanisms, it works best when no one pours sand in the gears.

There's a strong theoretical basis that any intervention in a market reduces its efficiency. But still governments keep trying to tinker under the hood. Their shade-tree efforts invariably do great damage. Our current fiscal mess is a marvelous case in point. It's been cast as something too difficult for average people to understand, but it’s really very simple.

Consider.  A couple applies for a loan. They make $60K a year, and need to borrow $700K. Their credit history is poor or nonexistent. The house has doubled in value in recent years-- only because all the other homes around it have as well. And the only reason they can afford the payments is because interest rates are so low and they're being offered a balloon mortgage that, if rates climb or their house depreciates will surely bankrupt them.

Does it really take a rocket scientist to know how risky this is? And that a bank with a large portion of its portfolio in such loans is also in peril?

So why did so many banks take such risks for so long? Here's the key to the whole problem: government intervention. In a free market, interest rates will rise in step with rising risks. They didn't -- thanks to the Fed. And government-sponsored enterprises (GSEs) such as Fanny Mae, Freddy Mac, and the Federal Home Loan banks kept the music playing. With most of the risk ultimately guaranteed by the federal government, no one really cared.

The bailout will ultimately cost a trillion dollars. It's also left us an industry that's effectively been nationalized, and a precedent that will encourage future industries to take more inappropriate risks. But worst of all, we have people on both sides of the political aisle calling for still more government involvement. Capitalism hasn't failed here-- government intervention has.

What goes up must come down. When a market rises too fast, it must eventually decline. The longer one prevents that, the harder that fall will be. Very simple. It's a shame our politicians can't understand that.

But the technology itself is still sound. And if we just leave the machine alone, very quickly it will start working again.

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RE: now, that was pathetic
By rvd2008 on 9/22/2008 10:21:41 AM , Rating: 0
If capitalism is left unregulated, it will kill this country and then will parasite on its dead flesh today. Of course, it will later re-born just to bloom for one day and than die inevitably the next day. Free market is always short term - just look at the stock market swings. BTW, the Great Depression was interrupted only by entering the planned economy when the war began. After the war there was a long battle of free market vs planned economy swinging both ways on multiple occasions. Finally, regulated capitalism settled here.

Now, back to the article. I disagree with the argument about government fault playing with overnight interest rates. As a matter of fact, 30 year fixed mortgage interest rate appeared to be immune to a large extent to this manipulation. The actual villain to blame in my opinion is ... capitalism. Greediness of corporations to make a quick buck while everybody else can go to hell. Profit at any cost. Namely, huge leverage, deceptiveness and general accounting malpractice. And the government obviously knew all that and decided not to intervene although it had all the necessary tools to stop it. Why did it not? Because it had its cut on every transaction and widespread legal corruption aka lobbying.

RE: now, that was pathetic
By pmonti80 on 9/22/2008 10:39:17 AM , Rating: 4
Capitalism will probably regulate itself as the laws of free market dictates. The problem is we don't want to deal with that fact. Because that means that there will big ups but also big downs and the regulation of those downs may take a lot of time and be very hard. That is not acceptable by our current standards, so we use regulation and government intervention so that ups go up and downs don't go down.

RE: now, that was pathetic
By FITCamaro on 9/22/2008 1:02:44 PM , Rating: 3
Exactly. If capitalism were allowed to play out, people would lose their homes. As they should. But its bad for votes so they'll spend our money to save those people from their own mistakes.

RE: now, that was pathetic
By jgvandemeer on 9/22/2008 11:15:16 AM , Rating: 2
If capitalism is left unregulated, it will kill this country and then will parasite on its dead flesh
Ever notice that the more capitalism a country has, the better it seems to do?

The actual villain to blame in my opinion is ... capitalism. Greediness of corporations
So why didn't this happen years ago? Do you think corporations just suddenly got greedier?

Your rantings don't have much to do with the real world.

RE: now, that was pathetic
By pmonti80 on 9/22/2008 11:28:48 AM , Rating: 2
That is just an opinion. Some people think capitalism is a means to an end, just until we find something better. And to other people the free market an end in itself.

RE: now, that was pathetic
By jgvandemeer on 9/22/2008 11:41:43 AM , Rating: 2
His was just an opinion also.

But as a wise man once said: "the difference is MY opinion is right".

RE: now, that was pathetic
By rvd2008 on 9/22/08, Rating: 0
RE: now, that was pathetic
By Ringold on 9/22/2008 9:57:28 PM , Rating: 2
Not close?

.951 HDI, which heavily weights all your pet peeves, versus the highest score of .968, Iceland, a tiny island in the Atlantic largely untouched by the world. As the UN takes care to point out for you, we come darn close and have 1/3 more purchasing power than France. Figure 2 notes that, contrary to your post, we rank higher than the OECD average, and supporting the person's post you were responding to, the further down on Figure 2 you go the less capitalism you find.

Not that I expect you guys to work with data, but there it is.

Unregulated capitalism is like driving a car without any rules. No good.

Adam Smith would agree. The key is balance.

RE: now, that was pathetic
By Ringold on 9/22/2008 10:00:31 PM , Rating: 2
. BTW, the Great Depression was interrupted only by entering the planned economy when the war began.

Again, your lack of data is no surprise, but if you look at unemployment data from the era, you'll notice the "Great Depression" was in recovery before the war, but really only turned in to the Great Depression after exactly what you claim saved it started to be implemented; government control over the economy. I'm not aware of any economist or historian of any integrity that still believes otherwise, as history is pretty clear.

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