The end of capitalism?

The financial crisis is of a different dimension and it is real. Real damage has been suffered by financial institutions around the world, and the damage is substantial. The Bank of England estimated that the crash had cost financial institutions around the globe the incredible sum of US$2.8 trillion. Other calculations show even higher figures. According to CNBC the US government and Federal Reserve have already committed more than US$4.2 trillion to various assistance schemes. How much the final bill will be nobody can say. It is clear, however, that we are dealing with a crisis of dramatic proportions and there is no point denying it.

On the other hand, however, there are some remarkable analogies between our usual scare stories and the economic crisis.

Take the media first. It is scarcely possible these days to read a newspaper, listen to the radio or watch TV without being bombarded by economic crisis stories. There seem to be hardly any other stories left that are worth reporting. And indeed, the problems of the world economy are big and the dangers real. But I cannot help feeling that the way the media have pushed the crisis has made matters worse than they should have been. Ludwig Erhard, whom I mentioned earlier, is often quoted estimating that 50 per cent of economics is psychology. Perhaps I would not go that far. But if it is true that our current economic crisis is predominantly a crisis of trust, then we can understand the significance of the media. Put simply, trust cannot be restored if the media keep frightening us. Take Northern Rock, the first British bank run in more than a century. When it happened, Northern Rock was not bankrupt but it simply could not access additional funds to continue its aggressive mortgage lending. The impression that Northern Rock customers got from a number of sensationalist reports on BBC TV programs was quite different, though, and it was this impression that triggered the run on the bank.

There is a danger that the actual crisis and the media reporting about it have now become a vicious circle. Bad stories about the economy destroy the very trust and confidence that is needed most for a quick recovery. With every new piece of bad news consumer confidence will plunge further, and what was once pessimism becomes outright panic. While the media are playing the role that they have traditionally played in all other scare stories, namely to exaggerate and frighten, in this case they are probably a part of the problem, too.

The other parallel with conventional scare stories concerns the prophets of doom. As in other crises, we are now confronted with “experts” who predict with certainty that this really is the end of capitalism. They are quick to point the finger at “neoliberalism”, deregulation and privatisation - all of which they believe are responsible for the crisis. Never mind that some of the things were clearly caused by governments rather than the absence of governments. Take this example of muddled thinking from a guest comment in the Australian Financial Review (Seismic shift in global politics, November 18, 2008). I quote:

The global credit crisis is the product of unregulated capitalism. Governments of both persuasions in the US relaxed home-lending standards to stimulate the economy and promote home ownership for the poor. It didn’t work.

These words of wisdom were written by Ross Buckley, a law professor from the University of New South Wales. Apparently he couldn’t quite make up his mind whether it was unfettered capitalism or government intervention that caused the crisis, but he didn’t realise it anyway. The only thing he was certain about was that capitalism did not work and that more government was needed.

The financial crisis presents the perfect opportunity to those who never thought much of markets, liberalism or capitalism in the first place. Rather than actually trying to understand what had really caused the crisis, their reflex is to proclaim the end of the free market.

But this is nothing new. In fact, the prophets of the end of capitalism have been around for as long as there has been capitalism. In every crisis of the past they came out and declared boldly that this time, really it was the end of the free market. And they were never showing signs of self-doubt in doing so. “The deep crisis in Capitalist lands is the strongest proof that the downfall of the Capitalist world is approaching!” said Valerian Kuybyshev, once head of the Soviet Supreme Economic Council. But that was in 1932. The Soviet Union is long gone, but capitalism is still with us.

Four decades later, amid the oil crises of the 1970s, seven Nobel prize-winners, including the economists Gunnar Myrdal and Kenneth J. Arrow, signed a declaration. The group condemned Western capitalism for the crisis because it produced “primarily for corporate profit” and called for developing “alternatives to the prevailing Western economic systems”. That was in 1975, but the drive for corporate profits has subsequently given us the personal computer, better cars, the Internet, microwave ovens, flat screen TVs and much more. Not bad for a system that is failing, you could be forgiven to think.

The prophets of the end of capitalism have always been on standby, ready to propagate their economic recipes of more state control, more government, and more regulation. But why would anyone still want to believe them? Their forecasts always had far less life in them than the markets they pronounced dead. The real danger is that we actually take their policy recommendations seriously.

This brings me to the final point in which our current economic crisis shows parallels with scare stories of the past. Crises are often the gateways for special interest groups and governments to pursue their very own agenda. That this is the case in the economic turmoil today is hard to deny. The best example of this was the joint testimony of the CEOs of Ford, Chrysler and General Motors to the US Senate. They blamed the failure of the global credit system for driving down car sales and plunging their firms into crisis. But this view conveniently ignored the fact that their three companies had been in trouble for a long time, thanks to bad product policies and high cost structures. It also failed to mention that there are other car makers in the US which despite the economic downturn do not need any government subsidies. But to the former “Big Three” the economic crisis presented the perfect opportunity to gloss over their mismanagement and ask for taxpayers’ money.