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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: Neo.liberal
By MAIA on 9/23/2008 5:29:35 AM , Rating: 2
Oh my oh my... "Just don't touch my capitalism !!!"

Well I know libertarians are unabashed free marketeers, and generally can see no wrong with the market, either historically, philosophically, or economically. In this they overlap strongly with neoliberals. The rest of the world can though. Libertarians generally hysterically reject anything criticizing capitalism, such as the notion of classes, despite the fact that capitalism is well known to have severe problems.

Let me give you the example of New Zealand. It was one of the "neoliberal good examples". But it has been so long since anyone in the business press has praised the New Zealand "miracle," it's almost as if we imagined the whole thing. But, of course, the current silence is really no mystery. The 15-year free market experiment has been an unmitigated disaster. The suffering caused among ordinary New Zealanders is well known: the highest youth suicide rate in the developed world; the proliferation of food banks; huge increases in violent and other crime; the bankruptcy of half the farms in the country; the economic disruption of hundreds of thousands of lives; health care, education and other social services devastated by the mad marketplace scientists.

But, of course, neo-liberal ideologues don't hold much truck with the human consequences of their experiments. So let's examine those things they do care about. The revolutionaries promised to tear down the "debt wall," unleash spectacular economic growth, spur foreign investment and productivity, create enormous new wealth and new and better jobs.

They failed on every count. Instead of a brave new economy, they delivered an economic version of Frankenstein's monster. The initial wave of changes -- deregulation, privatization, tariff elimination -- was justified by the infamous debt crisis. This was a ruse all along.

As for the debt in 1984, it was NZ$22-billion, but after 10 years of experimenting, it had doubled to NZ$45-billion -- in spite of the sell-off of NZ$16-billion in state enterprises . Today, it has finally returned to 1984 levels, but only through more Crown asset sales.

And economic growth? In the years 1985-92, average economic growth in the OECD countries totalled 20%, while in New Zealand it was negative, at -1% . The promised creation of enormous new wealth went into reverse: Real GDP in 1992, at 5%, was below the 1985-86 level. A burst of growth from 1993 to 1995 petered out, and the economy steadily declined until it dipped into negative territory in 1998, posting the fourth-worst growth in the OECD.

The transformation of the economy was supposed to spur foreign investment, but it mostly meant a feeding frenzy on domestic corporate assets. In 1993, the proportion of GDP in investments was just 70% of what it was in 1984.

The restructuring of the economy failed most dramatically on the unemployment front, and the country has never managed to get back to anywhere near the 1984 level of 4%. The "workless and wanting work" figure peaked at more than 18% in 1993. In 1999, that figure had been reduced only to 11.2%.

The radicals also promised increases in productivity, but again, they failed to deliver. After eight years of restructuring and massive labour deregulation, New Zealand's productivity began a steady decline in comparison with its neighbour, Australia. From 1978 to 1990, the rates had been similar. The gap steadily increased between 1990 and 1998, with Australia posting a 21.9% increase and New Zealand just 5.2%.

Only the wealthy in New Zealand could see any benefit from this destructive exercise in social engineering. Between 1984 and 1996, the top 10% of income earners measurably increased their share of total income. The lowest 10% lost 21.6% of their 1984 income. More than 50% of the total working population had lower real income in 1996 than in 1984.

There are lessons from New Zealand, but they do not involve adopting that tortured country as a model.

The first lesson is that the unfettered application of ideology is inevitably destructive -- not just to democracy, social peace and equality but to the economy. Even as the revolution continued to deliver disastrous results, its promoters claimed it was because it had not gone far enough.

The second lesson is that parliamentary democracy Anglo-Saxon style has proven extremely vulnerable to the ravages of ideology. A virtual executive dictatorship can implement policies that are never even debated during elections -- as happened in New Zealand in 1984. The only thing that stopped the zealots from going even further was the introduction of proportional representation in the early 1990s and the subsequent election of minority governments.

And that leads to the last lesson : Globalization is not inevitable, nor is it irreversible. The current New Zealand government (a coalition of a chastened Labour party and the left-wing Alliance) is unfortunately still committed to signing free trade and investment agreements. But it is reversing many of the most destructive policies. Included in this rethink are a reversal of the privatization of Accident Compensation Insurance; an immediate rise in pensions; a halt to the sale of public housing and a commitment to rebuilding the public housing stock; the appointment of a review committee on electricity pricing; the freezing of tariffs on clothing and footwear; and the re-recognition of unions.

The pity is that New Zealanders had to suffer through so much in the first place. Now, how come some people still say this neoliberal religion is going to get us anywhere ? It doesn't, it's all a mirage. It's a system that works only for a few and destroys most of the social warranties many people need to survive. Neoliberalism is an ABOMINATION of man's greed and it must be stop as soon as possible.

Less emotional now ?

RE: Neo.liberal
By sigilscience on 9/23/2008 2:17:10 PM , Rating: 2
Nice cut and paste job, but if you're trying to make us feel sorry for New Zealand, it won't work. It's one of the richest economies in all of Asia, and has one of the lowest unemployment rates in all the OECD. Compared to the terrible state of their economy 20 years ago, the experiment has succeeded wildly.

RE: Neo.liberal
By Ringold on 9/24/2008 9:54:47 PM , Rating: 1
Less emotional now ?

Not really; instead of doing any sort of analysis including multiple countries, you chose a single data point. How about that fantastic unemployment rate in Belgium, eh? See, I can pick outliers as well.

You also happened to pick a country that's located in an part of the world, and is relatively small, so I'm not going to bother double-checking your entirely uncited data that fell from the sky.

Also not sure why you call neo-liberals revolutionaries. Pretty darn sure Smith (born 1723) and Ricardo (1772) predates Marx (1818). And in your entire wall-o-rant, made lots of absolute claims of causation and complained about globalization and free trade agreements, but didn't try to tackle any of the underlying theories at the heart of neo-liberalism, such as comparative advantage in trade. Of course, that'd require intellect. You're also pigeon holing a whole group as opposed to any regulation; that's a lie. Adam Smith himself made such provisions for the necessity of oversight.

But we do agree on one thing! Democracy has serious flaws. I for one wonder if the Chinese are proving their current model superior. Time will tell.

RE: Neo.liberal
By jtemplin on 10/8/2008 1:38:07 PM , Rating: 2
Whatever wind was left in the sails of your reply left
Of course, that'd require intellect.

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