The end of capitalism?

US car makers are not the only companies trying to make use of the crisis. In the queues for state aid are childcare centres and insurance companies, banks and building societies. While some assistance may be justified we should nevertheless be vigilant that the crisis does not become an excuse for pure and simple rent-seeking. And it should not become a fully comprehensive insurance policy against business failure, either.

But perhaps the greatest beneficiary of all crisis talk is government. As in all other crises from BSE to global warming, politicians love the opportunity to intervene and “do something”. We can see it in countries around the world that governments are now embracing a more active role in the markets. Whether it is the US government providing a US$700 billion bailout to the financial sector, the British government part-nationalising the country’s banks, or the Australian government providing $6.2 billion to car manufacturers: governments have found legitimacy for their new policies by referring to the economic crisis. And probably this was only the beginning. In Germany, Angela Merkel’s Christian Democrats are currently considering new caps on executive pay; the Australian prime minister has already said that he wants to take measures against the “culture of greed”. What we see is the typical way in which governments react to scare stories, and they are to a degree driven to their activist approach by the media exaggerating the problems and demanding solutions.

For liberals, these are difficult times. But they are not difficult because liberalism or capitalism had failed. They have not. The most important player in all markets, even seemingly deregulated ones, is government. The low interest rates that encouraged over-borrowing were not determined in the marketplace, but by central banks. Regulatory failures made it too easy for Americans to run away from their mortgages while keeping up the repayments on their credit card bills. And housing markets could only overheat because regulation prevented land supply from expanding to meet rising demand.

The two countries worst hit by the crisis, the US and the UK, are in sorry fiscal shape because their governments spent the past decade accumulating mountains of public debt. Far from practicing free market radicalism, both countries coupled big government with insufficient regulatory frameworks. Whoever wants to say that “Anglo-American capitalism” has failed should first show where we can find it. What is capitalistic about the UK, where nearly every second pound sterling produced in the economy goes through the hands of the state? What is free market about a US budget deficit in the hundreds of billions?

While there is no denying that markets have failed, there is certainly no lack of government failure either. There is a danger, nevertheless, that governments, the media and special interest groups will seize on the opportunity to use the economic downturn for their own purposes. And that is the challenge of this economic downturn.

The times ahead will be tough, there’s no doubt about it. But we will get through them and the free market will prevail once more. And then we will have time to be afraid of other things again. Who knows? We may even rediscover the horrors of global warming or bird flu.

So this is not the end of capitalism. But we have to be careful that the prophets of doom, the media or politicians do not make it feel like the end of the world.