In Defense of Capitalism in the Long Run

My co-author has pointed out that we've become a little too focused on the global financial turmoil of recent months. But before we go back to covering our more diverse range of topics, I want to give some overall impressions.

In short, I think we're in danger of overreacting to dangers facing our economic system. It is now common to hear from our political leadership and media reps that we're facing the greatest financial crisis since the Great Depression. This, in turn, has opened up a lot of space for commentary to the effect that we've let capitalism run away from us, or that our financial system is run by corrupt, greedy, modern-day robber barons that are going to drive our country into the Third World. The gods of the free market have failed and capitalism is in convulsion, declare the pundits.

It is important to recognize that the rhetoric from politicians and mainstream media commentators is as much a reflection of popular opinion as it is an influence upon it. As Bryan Caplan has argued, the general population has an anti-market bias and this crisis has brought it comfortably out into the open.

Two points need to made here. First, this crisis is as much a failure of regulation as of market forces. Second, capitalism has a proven track record of raising our living standards and material well-being, consistently, for the past two centuries. This, often in spite of government failures and broader public sentiment. This is often difficult to see in times of crisis or personal misfortune. Here is Joseph Schumpeter:

Rational recognition of the economic performance of capitalism and of the hopes it holds out for the future would require an almost impossible moral feat by the have-not. That performance stands out only if we take a long-run view; any pro-capitalism argument must rest on long-run considerations.

Well, here is the long run perspective on real income per capita in the US since 1820 (via Chris Blattman):
Except for a blip in the 1930s, there has been steady, consistent growth. Even the Great Depression was not enough to throw off the overall trend. Elsewhere, Caplan has pointed out that in 1800 it took 95 out of 100 Americans to feed the country. Now it takes 3. The success of the market system is undeniable.

Of course, this is being insensitive to the trauma of the 1930s and is no consolation to those who are currently unable to sell their homes or secure a loan for their business. It also fails to recognize the impact of increasingly interconnected global economies that makes unhealthy economies more contagious. So public fury with Wall St. is understandable, but risks being overstated.

The most astute political economists since Adam Smith have recognized the need for government to accommodate for the excesses of the market. Our regulators failed to do this in the mortgage market, and steps need to be taken to remedy this to prevent future crises. But we need not throw the proverbial capitalist baby out with the bathwater.

Luckily, I think our political leaders understand this. As Simon Jenkins has convincingly argued:

The banks have not been "nationalised", just deluged with money. They remain pluralist and competitive institutions, with independent boards. Their workers are not civil servants. Investors retain their shares. The bonus culture will revive. The impresarios of greed have been punished, or at least a few of them. But this is not socialism in our time, just public money hurled at the face of capitalism.

My prediction is that in 12-18 months, the rhetoric of financial armageddon will be a distant memory and people will return to their regular concerns of providing for themselves and their families. That is what the market does best.