Capitalism didn’t fail but it might as well have done

It is because so many people attribute the global financial crisis and subsequent economic downturn to the failure of capitalism that we are moving resolutely in the opposite direction. I.e. towards socialism. The fact that we didn’t have capitalism, and therefore it can’t have failed, scarcely seems to matter to most people.

Today, there is an ideological battle taking place between socialism and capitalism, and socialism is winning. The reason that socialism is winning is because so many people attribute the global financial crisis and subsequent economic downturn to the failure of capitalism.

The argument we commonly here is that our old industrial-age system of free-market capitalism has utterly failed us. “It has destroyed our communities, our democracy, our economic security, and the planet we live on.” alternet.org

Many of those that took part in last year’s Occupy Wall Street / London protests also see capitalism as the reason for the mess we are in.

Occupy Wall London Banner outside St. Paul’s Cathedral

Occupy Wall London Banner

The problem however, is that we don’t operate under a true free-market capitalist system and we haven’t for a very long time.

Capitalism didn’t cause this crisis

The root cause of the western financial crisis, can be traced back to the early 1960s when banking regulators began to relax, or bypass, the Banking Act of 1933, aka Glass–Steagall.

This allowed commercial banks to begin increasing their leverage and taking on more risk. Then came the Nixon Shock, when US President Richard Nixon ended the US dollar’s convertibility to gold. From then on governments and central banks began expanding the money supply, and this, coupled with low interest rates, created an environment in which it paid banks and other financial firms to take on risk and increase leverage.

The other factor that contributed to the scale of the 2008 financial crisis was the fact that earlier recessions were not allowed to run their course.

Under a system of true free-market capitalism the recession that took place in the early 1990s, following the US savings and loan crisis, and the one that should have taken place following the bursting of the technology bubble in the year 2000, would have been allowed to run their course.

True capitalism is a system of risk and reward, in which successful entrepreneurs get to reap the reward and unsuccessful ones go bankrupt. However the system we have been operating under, is actually a form of crony capitalism, or corporatism. It’s a system in which governments manipulate key economic indicators, such as interest rates, and pick winners and losers by bailing out too big to fail banks. By doing this western governments have socialised risk and burdened the taxpayer.

Predictably a lack of regulation has also been blamed for the bust. The truth however is that the financial sector was the most regulated part of the economy and it still failed. The most effective form of regulation is failure, and that is why rather than blaming it for our current predicament, we need to return to true, laissez-faire, free-market capitalism and not continue down the road towards socialism as we are today.

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