Published on September 23, 2008
(Links to follow)
I place the phrase in quotes, because it is an idea I do not subscribe to. It is an idea, however, that is fast becoming conventional wisdom. Perhaps we should spend some time exposing it for what it is: thoroughly conventional, less than wise.
Last week’s tumultuous events on Wall Street have pushed economists and non-economists alike to wonder about “capitalism’s new course,” as a headline in Monday’s The Wall Street Journal phrased it. (The subhead was less coy: “US bailout plan marks decisive turn in government’s role.”) On the BBC News website, a roundup of commentary ponders nothing less than the future of capitalism: “Where now for capitalism?” (I found the page through colleague Carlos Conde’s blog on gmanews.tv.) Indeed, the newspaper Conde writes for, the International Herald Tribune, carried a New York Times article Monday on the unlikely partnership of US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke with, on the “jump” or continuation page, the full and helpfully explicit headline: “Odd couple buries dogma in drafting Wall Street bailout.”
There shouldn’t be any doubt that something momentous happened last week. The collapse of Lehman Brothers and the sale of another investment bank, Merrill Lynch; the rescue of American International Group, the largest insurance operation in the United States; and then the proposed “mother of all bailouts,” which Paulson and Bernanke presented to a stunned audience of congressional leaders—the turmoil reflected the damage wrought by the bursting of the housing bubble, but the government interventions, first case-to-case, and then, suddenly, inevitably, system-wide, signaled that government’s role had truly reached “a decisive turn” under a Republican administration.
In fact, even without the $700-billion master plan, the US government has already committed a major chunk of loose change to help resolve the crisis: about $30 billion to encourage JPMorgan Chase to buy Bear Stearns; $85 billion for American International Group (in exchange for about four-fifths of the insurance company’s equity); some $200 billion to effectively nationalize Fannie Mae and Freddie Mac, the mortgage giants.
To conclude, however, that reaching the decisive turn means we can see, looming just around the corner, the end of capitalism as we know it is plain bunkum.
The “end of capitalism” advocates misunderstand the role that government, or the state, necessarily plays in relation to the market. It is true that (in terms of the “distilled frenzy” of theory) the present generation of American capitalists are Hayek’s heirs, rather than Keynes’ children. It is true that (in terms of political provenance) the American economy today (or at least as of last week) is more Reaganesque than Rooseveltian. (It remains so in non-financial sectors.) But capitalism has never reached a pure state; it was never either all-market or all-state.
The United States’ amazing successes in information technology, for example, owe much to the entrepreneurial derring-do of garage inventors and Harvard dropouts—but the Internet (or the Internets, as James Fallows prefers to put it) could not have come into existence without substantial US government investments in defense research. The proposed $700-billion bailout is a breathtaking piece of seat-of-the-pants policymaking (Paulson and Bernanke asked Congress for the money essentially by writing a three-page take-it-or-leave-it memorandum)—but it has its precedents, in the active interventions of Franklin Roosevelt’s New Deal. Granted, in terms of sheer scale it boggles the mind—and it might not even work. Economist Paul Krugman has suggested that “the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.” (Emphasis in the original.)
But the ambitious plan and the rapturous reception it initially received also mean the time may have come for a new New Deal. The pendulum is swinging back.
In other words, capitalism as we know it has always been about striking a balance between market and state, between the invisible hand of market forces and the necessarily visible safety nets required of politically mature societies.
I have heard at least two Asia-based analysts refer to last week’s convulsion as the last gasp of Ronald Reagan’s revolution. I think I know what they mean; they have benchmarked the 1980s as the era of smaller government. But (a truly Reaganesque legacy) the image is actually more powerful than reality. Reagan left behind a bigger bureaucracy and a staggering deficit. If, despite these unhelpful facts, we still persist in mistaking Reagan’s imagery for achievement, then we should at least give due credit to Bill Clinton: In terms of a government fiscal conservatives can approve of, Clinton’s can be said to be Reagan’s true monument.
But I must chide my friend Caloy for indulging Joma Sison’s anti-capitalist tracts, his denouements-in-search-of-plots. The most telling criticism of capitalism has always come from within. It is a far from perfect system; indeed, as Schumpeter reminds us, creative destruction is its very nature. (One of the most startling statistics in Alan Greenspan’s “Age of Turbulence” is the number of Americans who lose their job each week.) But (if you cannot live without your cell phone or your computer, you ought to know this, at least on some gut level), the true secret of capitalism has always been its capacity for self-improvement, for regeneration. It was a secret Marx was never privy to.