Capitalism After the Crisis

This is the title of an essay in a new publication called National Affairs.

It is a new quarterly publication that perhaps is the successor to The Public Interest, which was started in 1965, but is no longer published.

In the essay, author Luigi Zingales examines the state of capitalism in the United States and the way that public attitudes may change with regard to it.

He wonders if the concentration of so much power in a few huge institutions which caused the crisis, and the bailouts of some of them, and of others, might move the US in the direction of European style corporatism and crony capitalism one sees elsewhere.

"Capitalism has long enjoyed exceptionally strong public support in the United States because America's form of capitalism has long been distinct from those found elsewhere in the world — particularly because of its uniquely open and free market system. Capitalism calls not only for freedom of enterprise, but for rules and policies that allow for freedom of entry, that facilitate access to financial resources for newcomers, and that maintain a level playing field among competitors. The United States has generally come closest to this ideal combination — which is no small feat, since economic pressures and incentives do not naturally point to such a balance of policies. While everyone benefits from a free and competitive market, no one in particular makes huge profits from keeping the system competitive and the playing field level."[My bold]

Of course, the true competitive market has no lobby. All the lobbyists are looking for a competitive edge granted to them by the government.[This is what keeps Congressional coffers full of money.]

American capitalism is special, and mainly because support for capitalism by the public is based upon the tenets that hard work, not luck, determines one's success, and is not contingent upon corruption. Many of our current billionaires made their money through hard work in competitive business with no government intervention.

Elsewhere, that is not true. Many billionaires come from countries where their government connections and concessions guaranteed their success, not initiative and enterprise.

"A healthy financial system is crucial to any working market economy. Widespread access to finance is essential to harnessing the best talents and allowing them to prosper and grow. It is crucial for drawing new entrants into the system, and for fostering competition. The system that allocates finance allocates power and rents; if that system is not fair, there is little hope that the rest of the economy can be. And the potential for unfairness or abuse in the financial system is always great."

This is why our Founding Fathers distrusted banks, and Andrew Jackson even created a severe financial crisis when he vetoed the Second National Bank Bill in 1837 because he saw the bank as an instrument of political corruption. This was because it was found to have tried to influence the election of public officials with its money and power.[Try going to http://www.opensecrets.org/ and check out the money given to political campaigns by the big banks. Jackson would be horrified.]

"The finance sector's increasing concentration and growing political muscle have undermined the traditional American understanding of the difference between free markets and big business. This means not only that the interests of finance now dominate the economic understanding of policymakers, but also — and perhaps more important — that the public's perception of the economic system's legitimacy is at risk."

And that is the problem. All the huge banks have so much influence, no matter who holds political power, that is creates a very serious problem. When we see the perpetrators of the financial calamity being placed in charge of curing it, and then granting their former companies huge benefits out of the Federal Treasury, it calls into serious question the integrity of both the Treasury and the large banks.

"We thus stand at a crossroads for American capitalism. One path would channel popular rage into political support for some genuinely pro-market reforms, even if they do not serve the interests of large financial firms. By appealing to the best of the populist tradition, we can introduce limits to the power of the financial industry — or any business, for that matter — and restore those fundamental principles that give an ethical dimension to capitalism: freedom, meritocracy, a direct link between reward and effort, and a sense of responsibility that ensures that those who reap the gains also bear the losses. This would mean abandoning the notion that any firm is too big to fail, and putting rules in place that keep large financial firms from manipulating government connections to the detriment of markets. It would mean adopting a pro-market, rather than pro-business, approach to the economy."

This is the right way to go. The concept of "too big to fail" must be abandoned, and continued bailouts of the worst perpetrators must be stopped.

Does our current government have the guts that Jackson had?

No. And neither does the opposition, the Republicans.

Go read the whole essay here.