Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Monday, October 13, 2008

No, capitalism is not ending

Posted by Simon Halliday | Monday, October 13, 2008 | Category: |

Several people have, of late, said to me, "Well, this must be the end of American-style capitalism." I don't really know what they mean - 'the end of capitalism?' I don't think so. To me, capitalism is about having markets with individuals interacting in the markets which allow market mechanisms to allocate scarce resources to people who want them the most, be these resources cigarettes, plants, pencils, white collar labour, blue collar labour, what have you. That the financial system is in jeopardy because of poor regulation, poor management or risk and general irrationality does not imply that markets qua capitalism is 'failing'. That's just wrong-headed - it conflates financial institutions, many of which have been atrociously managed, and by extension the financial market with all markets. Not a good idea. If these people, by American-style Capitalism mean a system of private property with which we use markets, then I would still contest that, but the failure or death of markets in general. No.

So a couple of questions, if 'capitalism is failing' why do you still see groceries in your grocery store or supermarket? Why do you still see people in coffee shops being supplied with coffee in all its caffeinated (or not) glory? Why are people still selling and buying cothes at department stores and flea markets, going to movies, worrying about methods by which they can use the market and the mechanisms by which the market operates - i.e. those other agents in the market who we expect to go about allocating their resources to satisfy their wants - to make sure that we can satisfy our own wants. How is it that if you want something (and you have the money to buy it) you can go out and get it? The answer: a functioning market system.

This is not to say that I am overly optimistic about what is going to happen in the world economy over the next while. Do I expect that unemployment will increase as a consequence of the financial crisis? Yes. Do I think that it will be more difficult to get a loan and therefore for the market to operate as fluidly and responsively as before. Yes (which is a strong reason for injecting liquidity and recapitalizing the financial system). Do I think people will have to cut back in their spending? Yes. Do I think there may be issues with inflation and devaluation of capital? Yes. Do I think we should suddenly jump ship and decide to implement a communist regime of centralized government planning for all goods and service? No. No. No.

Mark Thoma puts it well:
As we are seeing now, sometimes markets can fail catastrophically, but that doesn't mean that all markets fail, or that we should lose faith in the ability of markets to allocate goods and services... Every day... the needs of hundreds of millions of people are met through our market system. For the most part, when you go to the marketplace, you can find what you want -- somehow, the market anticipates your needs and has the goods and services ready and waiting when you walk through the door of a store. You won't always find what you are looking for, stores can stock out, oversupply, not have what you want, and so on, but most of the time you do find what you are looking for, or don't have to wait long to get it. When you think about it, it's actually pretty amazing that we are able to coordinate so many diverse actions of so many individuals into an economic system that does a pretty good job of providing for our needs, responding to changes in our tastes, providing incentives for technological advancement, and so on. So I don't think the lesson of this crisis is that markets don't work. I think the lesson is that markets don't always work, that we need to be vigilant in our oversight of markets to make sure they really do satisfy, as much as possible, the competitive ideals that are necessary for markets to perform well.

This is fantastically sensible in my mind. Thoma was lauded for his prescience of the way in which the financial crisis would turn out and I recommend his blog Economist's View. I just want to make sure that people don't incorrectly interpret the current crisis as something that it is not - it is not a call for the dismemberment of markets, it is a call for oversight and recognition that legislation needs to keep up with the technology and pace of the financial system. It has not done so. We are feeling the consequences of both market failure and government failure now.

And now for a video of Charlie Rose interviewing Paul Volcker:

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