Capitalism is the economic system in which the assets used to produce goods and services are privately owned, and the owners determine the price at which to sell those goods and services. Private markets, because they organize and direct production and consumption, are the basic institutions of a capitalist system. Government regulation of markets is (in capitalist theory) limited to correcting situations in which externalities (positive or negative) distort output and therefore reduce value. Sometimes correction of the failings of free markets requires governmental proprietary rather than merely regulatory activities (the standard example is national defense), and government levies taxes to finance those activities. Taxes can also be regulatory devices (taxes on emissions of pollutants, for example) or redistributive; if they are made redistributive in order to correct an externality (for example, underinvestment in human capital of poor children), they are also consistent with the aims of a capitalist organization of the economy.
There are libertarians who believe that the only true capitalism is a system in which there is no government at all; this is “anarcho-capitalism”; a prominent spokesman is the economist David Friedman, who teaches at Santa Clara University. Most defenders of capitalism stop well short of anarcho-capitalism, and admit a substantial regulatory and proprietary role for government. The Scandinavian nations admit the largest such role; yet they are still capitalist countries—and more prosperous than most even more capitalistic countries.
I agree with Becker that there was a journalistic overreaction to the latest economic crisis, as to previous ones. Journalism thrives on exaggeration and fear-mongering. But capitalism has survived intact a long, long history of economic crises, including the Great Depression of the 1930s. The major modern challenges to capitalism came not from that or any other depression, but from the two world wars of the twentieth century, without which it is hard to believe that the European nations would have lost their colonies, experienced a great depression (in the 1930s), or (in central and eastern Europe) become communist. Without World War I, it is very doubtful that Russia would have become communist; and without the Soviet conquests in eastern and central Europe in World War II, neither would Poland, Rumania, etc. have become communist.
The recent (actually current, though diminishing) depression kicked off by the worldwide financial crisis of September 2008 has not created any new communist or socialist countries. What it has done is give rise in almost all countries to a demand for more stringent regulation of banks and other financial institutions, and of some of their financial instruments, and to large public deficits; but neither of these developments is a harbinger of socialism. It’s no longer even clear what “socialism” means, or who has a coherent program of socialist administration of a modern economy.
One reason that capitalism has easily survived the economic crisis that began in 2008 is the collapse of communism in the Soviet Union, its satellites, and China, in or around 1990, and the continuing dreadful performance of the communist economies of countries like Cuba and Vietnam, and of socialist economies of countries like Venezuela and until recently India. The issue today is not communism or socialism versus capitalism; it's how much regulation of capitalism is optimal. Clearly, financial regulation was too lax in the late 1990s and early 2000s (pursuant to Alan Greenspan‘s mistaken dictum that banks and other financial institutions are “self-regulating,” to the “Greenspan put,” to the incompetence of the SEC, and to not a little outright fraud), and this laxity played a significant role in the 2008 collapse and ensuing depression (as I regard it). So we'll have—we need—more regulation. If we get it, that won’t be communism or socialism.
In the last half century the United States has experienced substantial deregulation and privatization movements, coupled with lower taxes, but at the same time has experienced increased regulation in areas such as employment discrimination, job safety, welfare benefits, and environmental protection, and increased economic inequality. Whether on balance the country is more capitalist or less capitalist than it was in 1953 is unclear, but I think it is more capitalist—notwithstanding the post-2008 movement for tighter regulation of financial markets.
I agree with everything that is said in this and Becker's post but am dismayed at the triumphalist tone, especially in Beckers piece.
I am reminded of hubris evident in the photo of George W Bush on the aircraft carrier "Mission Accomplished" when I read this stuff. It was hubris like this about capitalism and markets that was fundamentally responsible for the crisis.
Yes capitalism survived and will survive but surviving (and in the US and Western Europe it can be put no higher than that) hardly merits the congratulatory "high 5s" of this piece. Also capitalism has little to do with the survival of big US banks.
Given the position that the authors hold as well informed economics commentators, a more critical stance towards the failings revealed by the crisis might be of more value.
Posted by: Gordon Longhouse | 09/17/2013 at 02:28 AM
Agreed. The financial crisis was one of the most amazing debacles in capitalism and all you have to do is look at the fact that Larry Summers had to withdraw from the Fed Chief running. If Too Big Too Fail doesn't make you think that our country is run by a bunch of buffoons, I don't know what will. They didn't understand the reprecussions of letting Lehman fail - come on?
Posted by: kevin | 09/17/2013 at 08:55 AM
"Capitalism is the economic system in which the assets used to produce goods and services are privately owned,..." Is anybody seriously arguing that we should / can / will change that??
One working definition of fascism is an economic system in which the assets used to produce goods and services are privately owned, but controlled by the government. What we are really considering here is the appropriate degree of fascism with which we should regulate our underlying capitalism.
As I have opined previously, 2008 was not a failure of capitalism; it was a failure of law. There was a massive conspiracy of fraud, and everybody was in on it, even millions of the same tax payers who are now collectively confronted with the costs. (Note that those who cheated still came out ahead, because they are now sharing the costs with those who did not.)
I continue to think generally that a more capitalist system is to be preferred over a less capitalist system, because the government is just not very good at these kinds of things and its interference creates perverse incentives from which inevitably flow unintended consequences, which are, far more often than not, negative.
Posted by: Terry Bennett | 09/27/2013 at 05:59 AM
Capitalism, as a whole, has no remaining challengers. Cuba cannot export its communism; no one wants to be North Korea, and China has generally embraced capitalist ideals.
The current conflict is between capitalism and democracy. Capitalism, at its base, relies on the power of money. A person positioned right, with ownership and either innovative new products or rents, will accumulate wealth, and with money being fungible, can purchase practically anything. With no regulations, they can also increase wealth through seizure of free externalities (pollution, etc.). Without a regulation of labor, they can also impose significant arbitrary burdens on workers - such as long shifts, no breaks, company stores, sexual favors.
These impositions are generally seen as affronts to human dignity, while the externalities harm those who don't reap the benefits of production. In the second half of the century, the democratic west has responded by significantly regulating these issues. With the greater potential to damage the commons, government regulation becomes even more important.
But in general, we are only tinkering with the machine: regulations here and there to correct market distortions or power imbalances that lead to unacceptable affronts to human dignity.
Even the increase in the welfare state, in the US, comes cloaked in market solutions and private business (i.e. Obamacare), rather than more direct intervention of single payer or the actual socialism of the British national healthcare system. There will likely be additional taxes in the future as well, especially on higher earners, to both pay for the welfare state and curb the accumulation of power and privilege among the economic .1%, so that they will direct their income streams towards investment and R&D, rather than personal accumulation in order to fund idle heirs.
Posted by: Ryan K | 09/27/2013 at 06:34 PM
Which is more dangerous: the post 2008 call for regulation or the pre-2008 government behavior of Fannie Mae and Freddie Mac to create a "homeownership society" ?
Posted by: Stephengbuck | 10/06/2013 at 10:15 PM
Capitalism may of survived but it is wounded and we again see its flaws when poorly administered. Over the last several decades we have created entitlement societies on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. They were built on the assumption that those advantages would continue in both Europe and US, and that ever greater prosperity and entitlements would be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about ever more growth. Now reality has begun to come into focus and it is becoming apparent that this is unsustainable.
The entitlements and promises that have piled up have become overwhelming. The populations of the worlds most advanced nations were led to believe the good times would never end, but suddenly their core advantages in technology, capital, and productivity have started to erode. Now they find they are lagging behind several emerging countries. Manufacturing jobs have steadily gone elsewhere, replaced by low skilled service jobs, this has removed the supports from our debt fueled prosperity showing it to be unsustainable and flawed. We are facing harsh adjustments ahead, more below,
http://brucewilds.blogspot.com/2013/11/the-crux-of-our-economic-woes.html
Posted by: B Wilds | 12/08/2013 at 12:32 PM