March 12, 2009

March 12, 2009 | Commentary on Political Thought

Capitalism Now: Down And Out, But Not Dead

Do we still live in a capitalist country?

Capitalism is down. It may even be out. But it's far from dead.

Capitalism is extremely resilient. Why? Because here, as in every democratic-industrial country around the world, it has always had to struggle to survive against encroachments -- both benign and malevolent -- of the state.

At the moment, capitalism is losing ground most everywhere. But when the economic crisis passes, capitalism and the freedoms it engenders will recover again, if only because freedom beats its lack.

It is said that the trouble with socialism is socialism; the trouble with capitalism is capitalists. The socialist economic system, inherently contrary to individual liberties, tends to minimize prosperity because it inevitably allocates national resources inefficiently. On the other hand, a truly capitalist system engaged in an unfettered pursuit of prosperity is prone to occasional and often painful excesses, bubbles and downturns like the one we are now experiencing globally.

When capitalism slips, governments step in with regulations and buffers to try to moderate the excesses and minimize the broader consequences of individual errors. Sometimes these policies are enduringly helpful. Severe economic downturns inflict collateral damage on families and businesses otherwise innocent of material foolishness. Not only are the sufferings of these innocents harmful to society, but they are also downright expensive. A little wise government buffering can go a long way. The trick, of course, is the wisdom part.

A good example of a wise government buffer is deposit insurance at commercial banks. Without it, depositors would have withdrawn their funds en masse, leading to a rapid collapse of the banking system. It happened in years gone by. But today, deposits have flowed into the banking system in search of safety, helping banks staunch their many severe wounds.

Yet for every example of helpful government intervention, there are many more that do more harm than good. Fannie Mae and Freddie Mac leap to mind. These congressional creatures helped create, then inflate the subprime market. When that balloon popped, it triggered a global economic meltdown.

The current financial crisis clearly has capitalism on its back foot. Government ownership of the largest insurance company, the major banks, and Fan and Fred are awesome incursions into private markets. But, as President Obama has underscored, these incursions are only temporary. In time, these institutions -- even Fan and Fred -- will be broken up and sold in parts. It will leave government agents with stories to tell their grandkids, and taxpayers stuck with the losses. But the power of the state will again recede, and another new age of freedom and capitalism will arrive and thrive... until we repeat the cycle again sometime down the road.

J.D. Foster, is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy for the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

J.D. Foster, Ph.D. Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Political Thought

First appeared in the NPR.org