It is fashionable today to talk about the failure of capitalism and the global financial system. The dot-com bubble, the tech bubble, the mortgage bubble, the private-equity bubble, and the commodities bubble are all part of the recent financial history of the last decade. Throw in all of the great bubbles from history — tulip bulbs, railroads, the Nifty-Fifty — and it seems hard to argue that there is nothing "wrong" with the capitalist system.
The Failure of Capitalism: Harvard’s Hubris
Today, you often hear that "they" should do something. This is a scarcely veiled cry for government intervention. The promise of the Obama administration was to assemble a group of the most capable people in the country who will rationally assess problems, and then provide disciplined, measured solutions. Sounds good. You gotta wonder why Barack Obama genuinely thinks he’s the first person in history to try it.
Coming from a family of academics myself, I’ve always given book smart people the benefit of the doubt. But today, they scare the heck out of me. William F. Buckley once famously observed, "I’d rather entrust the government of the United States to the first 400 people listed in the Boston telephone directory than to the faculty of Harvard." And if you recall, Buckley, with his faux patrician accent and demeanor, wasn’t exactly "Joe the Plumber."
Consider the case of Larry Summers, the former president of Harvard, and now director of the White House’s National Economic Council. Yes, Summers was the youngest-tenured Harvard professor at age 28, two years younger than when his boss Barack Obama graduated from law school. But for all of his economic academic prowess, Summers’ forays into the real world have been less successful. His cash management strategies for the Harvard endowment have been disastrous, costing the university more than $1.8 billion. Had Summers been running his own hedge fund, he’d have been out of business. Yet, Summers is the driving force behind the current U.S. economic policy. Meanwhile, those with plenty of successful real-world experience — like former Fed Chief Paul Volcker — are quietly shunted aside.
The Failure of Capitalism: The "Tragedy" of Self Interest
The currently fashionable criticism against capitalism is misdirected. Yes, it would be great if we all could join hands, feel each others’ pain, and live in perfect harmony. Too bad that has nothing to do with reality. Last week, I had lunch on a kibbutz in Israel, which started off as a self-sufficient utopian community in the 1930s. Today, it survives by serving meals to busloads of tourists making a pilgrimage to the Sea of Galilee. I bet that’s not what their utopian founders had in mind.
As Milton Friedman pointed out in this classic video, all human interaction is governed by self interest or, less flatteringly, "greed." Of course, I’m not greedy. And I know you aren’t either. And I am certain that neither of us would ever become greedy if we ever got into positions of power. But where and when have politicians ever created an economic and social utopia through their systematic planning and selfless decisions? Israel didn’t become a global technological force by following the principles of the kibbutz. China’s economic rise is due to harnessing the profit motive and greed — and not to the collectivist, idealistic Maoist principles that held it back for 40 years. No amount of tinkering by the current generation of the "best and the brightest" in Washington will ever change that.
The Failure of Capitalism: The Worst Form of Economics…
But here’s another perspective. Perhaps financial bubbles — and the financial crises that inevitably follow them — are actually evidence of capitalism’s invisible hand at work. As a necessary correction, the collapse of financial bubbles may be, ironically, capitalism’s greatest strength. Yes, it would be nice if financial bubbles didn’t happen. But that’s not the way things work out on this particular planet in the Milky Way. And in contrast to government, in the true free market, actions have consequences. When Enron fudges its numbers, it blows up, and its executives go to jail. But when was the last time a member of Congress served time alongside an Enron executive for lying with numbers?
I once saw Nobel Prize-winning economist Joseph Stiglitz dismiss the economists at the International Monetary Fund (IMF) as "third-rate economists from first rate universities." So, now that we have "first-rate" economists like Larry Summers and Ben Bernanke at the helm of U.S. economic policy, are we better off? Just who are those omniscient "philosopher king" economists that Stiglitz would replace them with — since the former president of Harvard and the chairman of the economics department at Princeton don’t quite cut the mustard.
To paraphrase Winston Churchill’s comment on democracy, "Capitalism is the worst form of economics — except for all the others that have been tried."
The Failure of Capitalism: Or the Failure of Government
The prospect of "they" — the government — doing more and more is unsettling. Last night, I saw a talk given by Dr. Douglas Holtz-Eakin at London’s Henry Jackson Society.
As former director of domestic and economic policy for the McCain campaign in 2008, you expect Holtz-Eakin to give a rousing partisan pitch. But his analysis was disarmingly rational and measured. His first-hand insights into the shenanigans played by Washington politicos, whether it was the Bush administration’s fudging the costs of the war in Iraq, the Obama administration’s (mis)estimates of the cost of health-care reform, and, yes, even the populist tax cuts of the McCain campaign itself — were disheartening. By way of example, he estimates that the cost of Obama healthcare is $2.5 trillion over the next 10 years — compared with the Obama administration’s headline figure of only $900 billion.
When pressed for a pragmatic answer on the way out, Holtz-Eakin said that the only thing that would spur Congress into action is a genuine, full-blown, international economic crisis. Only then would politicians be willing to come across the partisan aisles and implement real and painful spending cuts. In that way, the economic crisis caused by China making good on its threat to stop buying U.S. Treasuries would be a blessing in disguise.
After I left the Houses of Westminster yesterday, I comforted myself with Churchill’s observation that "The Americans will always do the right thing… after they’ve exhausted all the alternatives."
Let’s hope that abandoning "the failure of capitalism" isn’t one of them.
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