Friday, October 17, 2008

Is capitalism dead?

Recently the world has witnessed the biggest financial meltdown in almost a century in the great superpower, the United States of America (USA). Because of the financial crisis in that country the world is facing a global economic recession and is also on the verge of financial and economic reorganisation. The result for many is that there has been a significant loss of wealth, which in my opinion will never be fully retrieved in the short to medium term.

The global meltdown has raised the question of whether or not capitalism is a sustainable economic system. Even my friend Betty Ann Blaine has written about "The free market farce" in last Tuesday's Observer. The global events that have overrun us will no doubt lead to a vibrant debate on which economic system is best for development. Even in the US presidential debate the question of how much government intervention is appropriate in the markets is a point of discussion. I have heard many people use the recent financial events to even go as far as to suggest that capitalism is dead.

Best economic system
I myself am someone who believes in the power of the market and I still believe that capitalism, as an economic system, is the best ever developed. Despite the 1929 Great Depression, and today the 2009 Great Financial Crisis, capitalism as an economic system has delivered the best results to global economic progress.

Anyone who did economic history will understand how much capitalism has contributed to the development of global economies. Economic systems have included slavery, feudalism, socialism, and communism. In both the cases of slavery and feudalism, it has included a clear ruling class that by virtue of their colour, or class, has controlled the capital of the country. So, in both these cases, capital was not allocated to the person/activity that had the best idea, but rather was distributed according to birthrights. Under socialism and communism, the distribution of wealth and capital undertaken primarily by the state, and disrupts the efficient workings of the market.

We have seen in recent years the fall of communist economic systems such as in Eastern Germany, Russia, China, and closer to Jamaica, Cuba. In fact, China's economy has developed more since it adopted a market economy than any other time in its communist history. This is because the strict allocation of capital by the state will eventually lead to corruption and inefficiency, which will mean that the efficient adjustments in markets will be disrupted, eventually leading to very low productivity levels, uncompetitiveness, and lack of opportunities. This is not dissimilar to the way Jamaica implemented the MOU, which resulted in no incentive for productivity. So instead of helping our productivity, in the long run it has caused further strains on the public purse and kept the government bureaucracy inefficient, resulting in a loss of productivity in general, as I stated would happen when it was first introduced a few years ago.

So even though Jamaica has purported to promote a market economy, the fact is that we have only had an attempt at a market economy, and this is a primary reason why we have failed to grow at internationally comparable levels over the years. In fact Jamaica has never really benefited from globalisation because we have never really opened up the market to competition, as the state has always sought to control most of the resources in the country. This was formalised during the 1990s when the creation of FINSAC formally gave the government control over the private sector.

The challenges in the financial system, first in the US and then globally, are in my view not a good reason to call for the end of the market economy, which is undoubtedly the best economic system available. The market economy works according to the natural laws of nature, in that it will always adjust to equilibrium in the long run. Economists have long accepted, however, that laissez-faire (totally free market workings on which principle capitalism is based) is not a desirable economic system. The reason why laissez-faire would not work is that man rightly understands that he has a responsibility to protect the weak in the society, and if there was no government, then the weak would die as the laws of nature dictate. Even in the animal kingdom the weakest animals, even within the same species, will die. So economists have long recognised that government is necessary to protect the rights of the weak and also to ensure a country's development, because if there was no government we would not necessarily have roads or a security system for all (which we don't have even with government).

So we can all accept that government is necessary if we are to protect the rights of all people. Whether the rights of people are protected or not depends on what political system is in place, of which the most successful has been democracy with a republican-style constitutional arrangement. When government gets too involved in the efficient running of the market, then markets will fail over the long term and long-term growth will be sacrificed. Because a market economy has failures every 100 years or so does not mean that capitalism has failed. Such an emotional reaction is, as we would say, throwing the baby out with the bath water. For if we look at capitalism's long-term contribution, the benefits far outweigh the disadvantages. A true market economy, with government in a support role, is the only way to develop in the long term.

The current global crisis, and even our own 1990s crisis, was not caused because the market failed but because there was too much government intervention. It was because both the US and Jamaican governments intervened too much in the efficient running of the economy that both crises happened. In the case of Jamaica, instead of allowing the markets to adjust by forcing us to be productive, we sought to control inflation and the exchange rate, which is what forces us to adjust our production arrangements, by keeping interest rates too high for too long. This, in effect, killed businesses in Jamaica.

In the case of the US, because the politicians wanted to give people the opportunity to own homes they kept interest rates too low for too long. This resulted in the natural laws of the market going to work and people borrowing at the low rates to make money, eventually leading to a credit bubble that had to burst. A market economy does provide controls on excesses, such as an animal has a limit to its stomach's capacity to prevent it from overeating. But if an intervention is made to surgically extend the size of the stomach, then overeating could cause death.

So in both cases, it was not the excesses of the market that caused the challenges in the market but rather the excesses of politics. It was government intervention that put the spoke in the wheel of capitalism, eventually leading to the collapse of the markets. This is why it is essential that the proper political system accompanies the efficient market economy system, which is the problem our own country has faced over the years. And this is why I have always said that Jamaica does not have an economic problem, what we have is a political problem, as our constitutional arrangement is at the heart of our problems.

So to everyone who wants to question capitalism as an economic system, I say capitalism forever. It is the only system that has delivered the global progress we have seen since the 1980s, and has delivered to us a better standard of living. The problem with capitalism is that it has always had to contend with the excesses of politicians and inefficient political arrangements.


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