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Don’t say capitalism is wrong

Don’t say capitalism is wrong
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First Published: Tue, Jan 13 2009. 01 07 AM IST

Illustration by Jayachandran / Mint
Illustration by Jayachandran / Mint
Updated: Tue, Jan 13 2009. 10 17 AM IST
Capitalism has turned out to be the most popular punching bag for politicians, policymakers, economists and laymen alike each time a financial crisis drags the global economy into a nasty recession. This time, too, is no exception. More than anything, unfettered capitalism has been blamed for the current crumbling condition of the global economy. Critics claim that if only there were some more regulations in place, the present crisis could have been avoided or at least its adverse effect minimized. They say the meltdown of the global financial system and the consequent global recession are both the result of market failure.
However, the truth of the matter is that the current situation is not the outcome of the operation of unregulated free-market forces. It is, on the contrary, the result of ill-advised government interference with market forces.
Illustration by Jayachandran / Mint
Consider this: One curious phenomenon that precedes every recession is that almost all entrepreneurs suffer sudden big losses at the same time. In a genuine unhampered free market, there can never be a “sudden general cluster of business errors”. Why? Because, given the different price and interest rate signals in the market, each entrepreneur will try to forecast to the best of his ability the demand for his produce and the profits he can earn by producing them. Those entrepreneurs who are more accurate in forecasting consumer or producer demands will make profits while the poor forecasters will be forced to close their businesses after some time. But it is next to impossible to imagine that all the intelligent entrepreneurs of a nation operating under a pure free market will be unable to forecast accurately the demand for their produce and end up with big losses simultaneously.
This phenomenon can only happen when the market signals have been distorted by government’s interventionist policies. When interest rates are brought down artificially through bank credit inflation, rather than due to the virtuous outcome of increased savings, when different price control mechanisms camouflage the true level of inflation, etc., entrepreneurs are misled by distorted market signals into making forecasts that ultimately turn out to be grievous errors, turning the artificial boom cycle into an inevitable bust.
History has shown time and again that all the previous business cycles or “general cluster of business errors” were the outcome of either the manipulation of interest rates, price levels, exchange rate, fiscal balances or a combination of all of these by government institutions. In short, financial crises and recessions were the outcome of government failure and not market failure. This time too, when the dust settles down, the verdict will be the same.
If capitalism is not to be blamed for the present crisis, how do we ensure the preservation of its virtues in a world that is increasingly restless and suspicious about free enterprise? To answer that question, one must first realize that we have to choose between capitalism and socialism as two alternative economic systems. There is no third system. Interventionism or middle of the road policy (taking the virtues of both capitalism and socialism) can never be a sustainable economic system. It is just a method for the transformation of capitalism into socialism by a series of successive steps. Leaders such as Barack Obama, Ben Bernanke and Henry Paulson etc., who champion the virtues of capitalism and rightly credit it for making America one of the most powerful nations of the world, will of course abhor the idea of turning the US into a socialist state. But they fail to realize that their interventionist policies are pushing the US more and more in that direction. Major financial institutions, including banks and mortgage companies, have already been nationalized in America and all over the developed world. If this trend continues, various other industries, such as automobiles, insurance, airlines etc., will also be nationalized soon.
So if the US does not want socialism as an economic system, it has to move away from interventionism rather than towards it, as it is doing today. The root cause behind the present economic crisis has been the result of manipulation of interest rates by the Federal Reserve under the aegis of Alan Greenspan and Ben Bernanke. The artificial boom created by the easy-money policies of the Fed has inevitably resulted in a bust that is now pushing the entire global economy into the abyss of a recession. Therefore, giving more powers to the Fed, the creator of the problem in the first place, will clearly not solve the problem. All it will lead to is a repeat boom-bust cycle, the next time even worse, as the Fed would have exercised its increased powers over the entire financial system.
Capitalists should also appreciate the fact that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich. Privatizing profits and socializing losses is clearly not what capitalism stands for. The only way to get out of the current mess is to let free market forces operate without any intervention, something that will lead to a speedier recovery than all the interventionist programmes such as the huge fiscal stimuli that have been planned. Such interventionist policies will not only delay the recovery process but will slowly turn the US and other economies towards socialism. Saving capitalism from capitalists is therefore unambiguously the need of the hour.
Kaushik Das is an economist with Kotak Mahindra Bank. These are his personal views. Comment at theirview@livemint.com
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First Published: Tue, Jan 13 2009. 01 07 AM IST