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October 13, 2008

Capitalism in the credit crunch and the market meltdown: still lovely

Posted by Richard D. North

Richard D. North - author of Rich is Beautiful: A Very Personal Defence of Mass Affluence - on why capitalism remains a thing of great beauty.

Today, major British banks have been "nationalised". International capitalism, as Alex Thomson of Channel 4 News wrote in its daily email, "continues to eat itself". This certainly doesn't seem to be a good time for free market ideologues. We celebrate private wealth, the freedom to make deals and keep profit, and we cast a sceptical eye over regulation. It looks like we lost.

Nonsense. Capitalism is what happens when people can own property, keep profits and use money to make exchanges. We'll know the crisis has passed when it gets back to something like normal. And then we can wait for the next crisis which will have to be partly fixed by government and will partly have been caused by it.

Capitalism has always been prone to panic, and is always wholly dependent on good government, and not merely to enforce legal contracts. Capitalism is a creature of regulation. For a start, it deals in money whose value is crucially influenced by government views and controls on national debt, currency, inflation and interest rates. And of course, the state takes a view on who should be taxed and how much.

In particular, the core of the capitalist machine, banks, have always been controlled by the state, which has always had to operate as the lender (even the owner) of last resort.

Capitalism is inherently unruly in parts. It is always so modern that its current behaviour is never wholly understood. Its practitioners always get ahead of themselves.

It is inevitable that capitalism is prone to sudden catastrophic failure. This is because this very beautiful and deeply human animal is one enormous edifice of confidence. I don't mean that it depends on trust (it does and it doesn't) but that the system depends on everyone believing that it is safe to do business. But it is never safe, so this is always a fiction. At any one time capitalists lend far more money than they hold in reserve. A run on the bank is always possible.

In good times, people's natural greed makes them turn a blind eye to these fragilities. In bad times, fear makes them see only the fragility in the system.

Let's get one thing straight. It is never greed which does capitalism's harm, any more than good can come out of harking only to fear. We can do nothing about people's propensity to greed and fear. As they bounce off each other, capitalism naturally lurches from irrational exuberance to irrational timidity. The pity of the present crisis is not how greedy people were, but how incautious they became.

It really does fall to governments amongst many other players to try to get just enough caution into the system. This is where "moral hazard" comes in. Arguably, capitalism is far more prone to events such as the present crunch when capitalists are led to believe that in the end, they won't be allowed to fail. Governments may do best when they do least - or when capitalists believe governments won't bail them out. But governments in the end always do have to bail the system out.

So governments face a deep conundrum. They can never interfere in just the right way. Capitalists also face a conundrum. They are building institutions which have to balance the need for vitality against the need for survival.

Anyway, it certainly seems to be the case that recently there has been too little capitalist caution, and now there is too much. There may have been too little government intervention toward caution in the recent past, now there is likely to be too much, at least for a while.

Free market ideologues must bear their share of the blame for this crisis. We share it with financiers, regulators, politicians, shareholders and journalists. We can let ordinary punters off: up to a point they have to be protected from their natural daftness.

Once the capitalist engine starts running more normally again, it will be tweaked a little differently. Just differently enough, one hopes.

Richard D. North is the author of Rich is Beautiful: A Very Personal Defence of Mass Affluence and Scrap the BBC!: Ten Years to Set Broadcasters Free.


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Yep, fear and greed. Greed doesn't cause crashes though, fear does. A little fear tempers markets, a lack of fear causes bubbles. Ah well, it was fun while it lasted. So long as you managed to cash in some.

Posted by: Guido Fawkes at October 26, 2008 10:06 PM
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