IS AMERICAN CAPITALISM DISCREDITED?
Joseph Stiglitz is out with a Vanity Fair article that is harshly critical of American capitalism. His conclusion is that the system that built this great country has been discredited. He writes:
Every crisis comes to an end—and, bleak as things seem now, the current economic crisis too shall pass. But no crisis, especially one of this severity, recedes without leaving a legacy. And among this one’s legacies will be a worldwide battle over ideas—over what kind of economic system is likely to deliver the greatest benefit to the most people. Nowhere is that battle raging more hotly than in the Third World, among the 80 percent of the world’s population that lives in Asia, Latin America, and Africa, 1.4 billion of whom subsist on less than $1.25 a day. In America, calling someone a socialist may be nothing more than a cheap shot. In much of the world, however, the battle between capitalism and socialism—or at least something that many Americans would label as socialism—still rages. While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism. This has consequences we’ll be living with for a long time to come.
I couldn’t disagree more. Capitalism has not failed us. We have failed capitalism. There was a time when we allowed the free market to function normally. There was a time when the Federal Reserve did not intervene to set interest rates. There was a time when the losers lost and the winners won. There was a time when we did not bailout every company that deserved to fail. There was a time when mistakes went punished. That time, unfortunately, is not now. Our government intervenes at every downturn and the Federal Reserve believes they have a magic bullet with their constant tinkering of interest rates and money printing.
For those that need a refresher course on the definition of capitalism (as Mr. Stiglitz clearly does) –
Capitalism - is an economic system in which trade and industry are privately controlled for profit rather than by the state. (Emphasis added).
This country was built on this foundation. Although Wall Street is an unpopular place with Main Street, it is the foundation of this country. The innovation that has resulted from free market capitalism is what built General Electric, Proctor & Gamble, The Coca Cola Company, Microsoft, Apple, and thousands of other companies that create millions of jobs and produce incredible products that enhance the lives of billions of people. It is not a system without its faults, but in its short lifespan the United States has grown into an economic powerhouse in a little over 100 years. That is a staggering feat. And I credit it mostly to American capitalism. But what we have been living under for the last 10-15 years is not pure American Capitalism.
The Federal Reserve and its Fractional Reserve Banking system believe that its okay to tinker with a free market. It’s okay to print money and set interest rates. It’s okay to choose who wins and who loses. That is not Capitalism. The policy actions of our government have not instilled confidence in the system. They have nearly destroyed it. How can a Capitalist system function properly when the government is constantly intervening and disrupting the natural Darwinian nature of that system? The results of the last 15 years speak for themselves.
There seems to be universal agreement that the Federal Reserve caused the current debt binge with their interest rate policy, yet we are making the exact same mistake now. Obama and his administration keep saying that they don’t want to run companies, but they seem to keep taking stakes in companies. Is that a free market? Or is that a pseudo-socialist state? There is no Pragmatic Capitalism in Washington, that’s for sure….
American Capitalism works. In fact, this crisis has proven that American Capitalism works better than ever. Unfortunately, we refuse to let it work. The system told us that the banking sector was overleveraged and too large. The system tried to decapitate the losers and reward the winners, but we bailed out the losers and told the winners they could grow larger or face government action. The system told us that the entire marketplace was overleveraged and tried to eliminate the debt by forcing pain on millions, but our government decided that the system was wrong and printed trillions of dollars in more debt.
American Capitalism works. It works better than it ever has. Unfortunately, our leaders refuse to let it work….
If you’re going to go out on a limb and actually argue this point, you’re going to have to do better than repeat republican punditocratic truisms. We have finally learned that the myth of the efficient market is a myth!!
Your view is also historically thin. It fails to take into account a number of things that allowed the US to develop at a pace that it can no longer develop at: 1) the great advantage that American capitalism for the 100 years prior to the 20th century in which it essentially expropriated land that it didn’t own and then profited from it enormously 2) Two world wars effectively destroyed Europe and Asia, leaving America with the great majority of production capacity. That percentage of world productive capacity has done nothing but go down since the 1950s, suggesting that, whatever else may be true, in fact, American capitalism has been losing market share for a long, long time. 3) A cold war that maintained–and this is the big secret that no one will ever admit to–a military-industrial complex that is still in place. In other words, the US has not been a pure market since WWII, and anyone who pretends otherwise is being disingenuous.
I didn’t read Stiglitz piece, but a crisis of this magnitude should at least humble those who have taken it as an article of faith that there is no system better than our own. Last I knew, capitalists weren’t really religious. The minute they become religious believers, they’re dead. It’s at that point that they are no longer thinking long-term. The fact of the matter is that state-capital hybrids, first Europe and now China are kicking our butts because they can allocate capital for necessary investments that the market deems unattractive. Hasn’t the crisis proven to you that the market is inefficient. That’s the only argument American capitalism had going for it. It certainly doesn’t socio-political arguments. US capital has fled to China instead of making the necessary infrastructure investments here. Wages have collapsed. The US now has a higher rate of unemployment than Europe. So, in short, the Reagan-era laissez-faire doctrine is dead in the water.
for what it’s worth, tpc — brilliant blog, by the way — the kind of social uniformity that untethered capitalism might have functioned under no longer exists.
the point of managing the business cycle with monetary and fiscal policy, if i may be blunt, is to keep the heads of the elite attached to their bodies.
for unbridled capitalism of the kind you seem to be eulogizing to work, the social strata farthest down must be willing to shoulder the brunt of deep depressions without rising up. this they can only muster the will to do only if the belief that the society is all in the same boat and working through setbacks toward a worthy common goal is pervasive.
it became obvious in the 19th century that the social contract which stayed the hand of the proletariat in previous centuries had broken down. if the revolts of 1848 and rise of anarchism in the latter half of that century were not evidence enough, the events of 1917 ended all debate. the social disorder and populist utopianism which increasingly accompanied wars and liquidation cycles, if they were to be prevented from overwashing the west, presented a challenge which had to be met. the countermeasure of the elite, forged in the exploding civil unrest of 1933, turned out to be the accomodation of labor under a political-industrial corporatocracy which is variously termed ‘fascism’ or ’socialism’, depending on the means of providing leadership.
one can more easily argue that the management of the cycle has been wanting — that seems to me self-evident. but i think to pine for the good old days (which, let’s face it, are always idealized in retrospect and never were really all that good) in which we made no attempt to manage to return is in part to miss how society has evolved over the last 200 years or more. the rise of demoticism in large part forced us to smooth the business cycle as best we can — and i think the more thoughtful among the current elite, however dissolute or predatory, still understand that the abandonment of such smoothing countermeasures would lead relatively quickly to fracture and civil warfare. people sometimes forget that sections of the american midwest were largely ungovernable in the depths of the last depression, with farmers pulling judges off the bench and threatening sheriffs bearing foreclosure notices with armed vigilante groups.
and — while the economic outcomes of necessary compromises may not be optimal — i think the transition toward a more managed economy need not be (at least by itself) the death knell of the united states. civilization has a ten thousand year history, and very little of it is dominated by what we would today call ‘libertarian’ economic ideals. just my two cents, of course.
While I agree with your defense of capitalism and the condemnation of current government actions, isn’t Stiglitz arguing that support for American style capitalism may be discredited in the future? That is, it’s the perception that capitalism doesn’t work by those in the third world (that may not know any better) that is becoming increasingly possible, and that this perception may lead to an uptick in the perceived value of socialism in those parts of the world. That argument, I think, may have some validity.
@ Paul
This post has no political bent to it so please don’t try to turn this into a political argument. This is not a political site and will never turn into one. Your conclusion that I somehow back a Reagan style Republican belief is far from the truth, but either way it’s irrelevant.
You claim that my view is “historically thin” yet you claim that 10 years of failures overrides 100+ years of successes. Explain that to me.
The efficient market hypothesis and capitalism/politics have nothing to do with one another. Regular readers know that I am the farthest thing from an EMH believer….
This article has nothing to do with religion. Nothing.
I blame the Greenspan Fed for this crisis. I blame the Fed’s interest rate tinkering for this crisis. This pseudo government intervention is what caused all of this. If we had let the free market work I am quite certain we would not be in this mess. Your conclusions are politically driven, but carry no merit based on your false assumptions of my background and personal beliefs.
@ Gaius –
Perhaps depressions are necessary? I wish I never got sick, but sometimes my body needs to fight off a virus. Is an economic downturn not a similar way of removing the “bad seeds”?
I agree with just about everything else you say though. Thanks for the compliments.
@ Chris –
I could very well be reading too much into the article, but it sounded to me like he is implying that the system has failed the global economy which has resulted in the negative perspective.
You’ve touched a nerve with the leftys! Not a popular position right now TPC!
@ Hank
Although this can be viewed as a politically driven post it is the farthest thing from that. I have an odd mixture of political beliefs that can’t be labeled as democratic or republicna and will never be imposed on readers….
My main point was economic not political (though you can’t really seriously deny that those are merely two facets of the same point–the one you were making about “American” capitalism. Your implicit claim was that somehow it was superior to European capitalism, or some kind of managed state-private hybrid. I was suggesting that “American capitalism” as you are defining it–a pure market that allocates resources and capital by means of a “creative destruction” dynamic, which the Austrians claim is the only way to get out of this crisis, is largely a fiction, and the reasons for its relative success (I say relative because there have been a great many failures, as well, the current crisis being only the worst; the US auto industries were the largest and most successful, for example, but Volkswagon and Toyota have been slapping Detroit around for a long time), are more complicated, and may perhaps have less to do with the system than with a combination of geo-political and demographic factors.
My simple point is that capitalism largely destroyed itself twice allowing us to fill a gap, but ever since then, we have been losing the economic competition game in industry after industry. Our model underinvests in education, health care and human capital in general, while the managed economies, whatever their weaknesses achieve economies of scale in a number of sectors (energy, education, transportation). The fact is that Europe is a far more efficient economy than ours. My god, man, Fiat is buying Chrysler. FIAT!!! An Italian car company???!@!! China is buying Hummer. And GM is limping along while Mercedes, BMW, Volkswagon, Toyota, Honda, etc, are healthy, well-run companies.
Traditional American capitalism is dead or dying today because the country doesn’t produce people who want to experience the downside of risk. Americans today want security. They want the government or some other entity to take care of them much like their parents did for them when they were kids. They don’t want the responsibility of being adults. They want the government to provide all that is necessary for them to just go about their lives only being concerned with what makes they happy and comfortable. Privatize happiness and socialize responsibilities. Happiness here being buying things. Consumer goods has taken the place of savings, responsibility and thrift. Americans today are more then willing to make the government provide for their healthcare, housing, food, transportation, retirement and anything else that would be basic survival skills for a responsible adult. Once these basic survival needs are met, the person is freed to pursue pleasurable needs like 52′ HD tv’s and other cheap electronic gadgets, cars, boats, houses, clothes and whatever else that can be bought preferably on credit. That “pursuit of happiness” line in the Dec. of Ind. has been twisted out of proportion to be the main point of the document.
Good old “mericn greed and gluttony” is the new politics of the future and whatever government that keeps americans fat, comfortable and in a permanent state of adolescence will be the government of the future.
Paul,
I see your point. They’re well taken, but I just don’t think you can come to those conclusions based on 10 years of hardship. There is no doubt that the U.S. has been lost in its ways for a decade, but implying that China and Europe are superior because of recent performance is no different than saying that Palm is better than Apple than because their stock is up how many hundred % over the last 3 months.
And there is just no comparing the long-term track records of Europe & China vs the USA. The U.S. has done more for economic growth in 100 years than China and Europe achieved over hundreds of years. All they’ve done in recent years is create extensions of the very system the U.S. created.
Brian,
I can’t really deny that, as a society, we have lost our initiative and guidance. But that is more a reflection of the people rather than the system in my opinion. The system greatly rewards those who use it to their advantage. But like you said, most (not all) are not willing to put forth the effort.
Why put forth any effort when you know you’ll reap the rewards by someone else’s efforts? If I’m successful, it’ll be taxed away in the name of “fairness” like I won some kind of lottery or something.
I’d love to see how much of an “american” people really are if all the wealth is suddenly stripped away and people had to provide for their own real survival like my and your grand or great grand parents had to. I’m willing to bet there would be very few.
Can’t disagree Brian. But I would only add that the main cause of our higher taxes is the boom bust cycle that our misguided fraction reserve banking system created.
We’ll agree to disagree. I don’t think what I’m talking about is limited only to the past decade. I mean, the Reagan-era boom was largely debt-driven, too, and lest people forget, that ended in what was then considered a huge debacle, the S&L age.
Where “American” capitalism has an edge is that it is more creative and when it finds something that it can build out, it tends to do it well. I’m thinking technology, i. e., the computer, which has been the only real driver in the past three decades, and has been responsible for the creation of huge amounts of wealth (France, for instance, had the “minitel” system in the early 1990s, an internet on which you could buy tickets for the movies, plane tickets, and things like that. It couldn’t develop it). Much of the reason for this is that it has a huge internal market that allows it to achieve a scale that Europeans can only match at the European level, not the national level.
However–and this is the big sea-change that has come upon us–China, India, and Brazil, are now emerging as far larger populations, and this effectively negates the advantage that the US had in the 20th century. Add to that the fact that we have not yet learned the management techniques that the Europeans were forced to adopt in order to compete Efficiency, I think is the word here. For example, the European citizen uses about 1/3 the energy a US citizen does, produces 1/3 the trash). If you had to calculate the true cost of gas for us by pro-rating our military expenditures, I would bet that we pay somewhere to the tune of $5 and up. France gets 85% of its electricity from clean and safe nuclear. People don’t drive nearly as much and use a clean, efficient transportation system that employs many, many people. Etc. etc.). And don’t even get me started on health-care. If you have lived in Europe, y
Meanwhile, we have California on the verge of collapse because they are completely RETARDED!!!
My main point is that I think the idea of “American” pure capitalism is really keeping us from becoming a modern, 21st century high-education, high-productivity society. China, India, and Europe are kicking our butts in engineering, and the one advantage we continue to have–high tech–is rapidly narrowing.
Good thoughts Paul. Nothing wrong with disagreeing. Have a nice weekend.
PS – It’s beautiful here in California.
Your point about the Fed’s role in providing easy credit is accurate (and not political in that both GOP and Dem’s were at fault), but it is not the only reason for the failure of market capitalism in the US. As George Soros has pointed out, there are three causes for the crisis: (1) massive credit expansion over three+ decades(for many reasons, not just Fed policy); (2) globalization in ways that empowered the “developed” financial powers (US, UK, etc.); and, (3) market “fundamentalism” leading to massive deregulation that ignored economic history (e.g. Dutch Tulip Bulbs, UK “Dutch East Indies Co.”; US “robber barons”). “American capitalism” has never been inherently pure and has always abused monopolistic, oligopolistic, and political power when it could. The difference was that the US legal and political system worked to keep the worst tendencies of capitalism in check. Our political system has been increasingly corrupted by money/power, changed the set of incentives for the players (Fed, CEOs, BoDs, politicians-turned-lobbyists), and removed any accountability for failure. Greenspan and the Fed responded to this set of incentives and thus allowed the immediate crisis to occur. But their failure is simply a symptom of a larger failure of an American culture that both politically and economically is rotten at its core. We need a Teddy Roosevelt. (p.s. Your blog is superb!)
JR,
Thanks for the kind words. Your comments are an excellent addition to my general commentary. Thanks.
TPC,
I wonder if the beauty has something to do with the situation in Cali!:)
Have a good weekend, too. I very much like your blog, though I don’t always agree.
Cheers.
No doubt Paul. No one would put up with the tax status in this state if it wasn’t 70 degrees and sunny every day. Nothing would ever get accomplished if we all agreed all the time. I hope my readers will challenge my writing when I am wrong or out of line. Have a nice weekend.
Looking forward to higher taxes in CA (and eventually moving to Texas when the tax rate hits 50%),
TPC
You’re entitled to your views, of course, but to claim that they aren’t political while making the argument that you have is rather disingenuous.
Faulting the entire blowout on low-interest rates and the Fed is straight out of the Austrian economics playbook. Not only is the Austrian school considered to be a fringe view (mainstream economists in all camps reject it), but it also goes hand-in-hand with libertarian politics, with its fixation on blame of central banks as a proxy for a loathing of government in general.
It’s also a difficult argument to support. There’s really no evidence to support that the price of money (the overnight interest rate) was the sole cause of the crash. There were housing bubbles around the world in countries where structural interest rates were higher than in the US, such as Australia which saw price run-ups that were comparable to the US.
Likewise, to blame the Fed is to ignore the fact that long-term rates are ultimately decided by the free market. Securitization clearly contributed to that because it provided a much larger potential supply of money to borrow, which increased competition among lenders, which led to a widespread effort to lower standards in order to grab customers. In order to pursue profits, we larger amounts of money to more money to more people, creating a deleveraging bomb in the making.
The Soros-camp leverage arguments are far more compelling, and don’t fall into the libertarian blame-the-Fed-cuz-that’s-just-what-we-do trap. The market convinced itself that we could avoid risk by hedging for it (while earning a lot of fees in the process), and ignored the fact that systemic risks cannot be eliminated simply by reallocating them. (There was a reason why banks used to have higher down payment requirements.) Anyone with a finance background knows that higher leverage levels create more risk, at all tiers of borrower quality.
We had bubbles and crashes occur more frequently back in the good ol’ days of American capitalism when we had even fewer restraints. Some people do not want to see that, and you have to ask yourself why it is that they don’t.
MBA,
Excellent and convincing comments. I have studied the leverage notion, but this seems to simply be an extension of the low interest rate environment. The bankers simply used the low interest rates, carry trades, etc to create these nifty financial products were essentially leveraged interest rate bets. Buying an adjustable rate mortgage or really any adjustable loan is a bet on the bond market.
As for my “disingenuous” argument about this not being political – it’s not. There are times when Austrian Economics is applicable and there are times when Keynesian Economics is applicable. No two economic situations are the same and all of them will require different answers. Why people have to categorize everything in the world into these black and white categories is beyond me. My guess is it simplifies things. I have voted Republican and I have voted Democrat. It all depends on the situation. And no, I am not a libertarian despite your assumptions. The fact that one facet of my argument happens to be in-line with Austrian/libertarian thinking doesn’t mean you should come to single conclusions about my thinking.
Thanks for the good comments.
American capitalism? You mean Fuck You Capitalism! Indeed it has failed. It has failed because Fuck You Capitalists won’t play by the rules. When you do its after your bought and paid for congress and judiciary passes laws and makes rulings that benefit Fuck You Capitalists at the expense of everyone else.
In spite of your repetition of the ‘big lie’, in the way Hitler repeated his big lies, Fuck You Capitalism doesn’t work, has never worked and most definately not what America was founded upon.
Me thinks thou doth protesteth too much!
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