Why capitalism fails...

I bit on this article in the Globe today expecting it to be a statist diatribe to go with its headline. But it was actually a well-written article from the standpoint of economic history. It tells the story of the work of Hyman Minsky, who blamed capitalism for "instability" - which is like blaming the population of San Quentin prison for "breathing." You can probably check in on the alternatives to find out how stable they turn out over the course of decades. Say Soviet Union 1991 or Rwanda 1994.

This instability is caused by the ever-loosening concept of risk in the economy during good times, which leads to a "euphoric economy." When the crash comes, as it always does, investors pucker up and we get the death spiral we have all heard about. This is all true, of course, but the alternative is worse. The idea Minsky advocated was to have a Central Bank as lender of last resort, or the government as employer of last resort, in a financial crisis. The problem is, "crisis" is a highly subjective and politicized term. Was the 2002 recession a crisis? Whether it was or not, Minsky's "solution" was imposed to level out the stock market's fall. The Fed became the lender who pumped money into the economy. And it worked! The stock market recovered. It also blew up the dollar bubble, which led to the housing bubble, which led to the credit bubble.

Both Minsky and Keynes, and now people like Krugman and Tom Friedman, found fault with laissez-faire capitalism. Both devoted their career to understanding it, and offering solutions. Laudable by any standard. Unfortunately, both also commited the fatal flaw of socialism: in the absence of any rational solution, they made one up and called it government. It is there in Minsky's work just as it is in Keynes'. Keynes said government can bolster employment, and Minsky said government can bolster lending, but what they really meant was "some fairy tale figment of my imagination can bolster _______." They just went with "government" because you can fool more of the readers into believing it is real.

Problem #1: government is not above the rules. The Fed making loans to prop up bad bank debt on the expectation that the economy will keep growing and bail the country out is exactly the same thing, writ large, as the bankers taking on bad loans in the first place on the expectation that the price of housing (or stocks or a currency etc.) will keep going up. Same with the government of Keynes, as the provider of emergincy jobs. It is the same as a business going out and hiring for no good reason out of the kindness of its heart. It leads inevitably to deficits and massive debt, and there is nothing special about government debt. It's a transfer from the profit/loss account to the balance sheet, and it eats away future growth just as surely as interest payments from the bad times eat away at profit in the good times for a business.

Problem #2: government is below the rules. Keynesian stimulus works, if you can pump lots of jobs up almost immediately - say, with a program that is always around where people can just show up and work for a minimum wage if they don't have a job (makes a good case for replacing unionized government employees, at least) - then you can ease the lows (and the highs) somewhat. But as we've seen with this stimulus, that never happens. The money is fought over for months until after it is needed, then it gets passed into the hands of cronies and usually recycled into the election coffers of the people who voted for it. But this is not due to some imperfection in his math or some bad apples in government - this is the fatal flaw of every statist who imbues the government with a higher economic nobility than the market. In real life it turns out to be quite the opposite. Same thing with the Fed bowing to congressional or presidential pressures to ease the money supply during election years. The government is made up of people, and the are no better than the people who make up the market, but they have the power to make unilateral decisions, unlike the people in the market. And the only reason they have that power is because they have the guns.

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