Posted by: Dr Churchill | January 11, 2012

Capitalism vs Free Markets

Capitalism is a bit like Communism and in it’s extreme form is only good on paper, because in real life communism robs you of initiative and capitalism makes the cake crumbles go up instead of down. Both need clear adult democratic supervision and a mixture of each other to be workable. Sort of the compromises we’ve had all along in our political systems. Yet we occasionally need to rebuild the platform we are running our Free Markets on. That is the crux of the matter.

And capitalism is vastly different from the pure Free Markets and far itfrom socialism or communism. And yet contains all of these inside it’s workings in order so it can still work in the 21st century, and perhaps work better than all other systems we’ve come up with. But Capitalism as it now operates needs some serious recalibration and retooling. The system needs a total rebuild and our attitude towards economic policy and ideology needs a real reboot. Because if we are going to say that anything about 15% taxation as a proportion of GDP is “socialism” as many do today in the US, then the USA was socialist during its best years yet. Oddly enough, we’re not running at 15% taxation and 25% spending. This isn’t socialism nor capitalism. It’s a simple fallacy because we are running on empty, and the uncertainty is destroying the confidence of all well informed capitalists and economists. No wonder the economy is still stalling and we are not seeing the green shoots of recovery and growth yet.

Because markets have inherent and well-known inefficiencies we need to compensate for them. One factor is failure to calculate the costs to those who do not participate in transactions. These “externalities” can be huge. That is particularly true for financial institutions.
Their task is to take risks, calculating potential costs for themselves. But they do not take into account the consequences of their losses for the economy as a whole.

Hence the financial market “underprices risk” and is “systematically inefficient,” as John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalization and reviewing the substantial costs already incurred – and also proposing solutions, which have been ignored.

The threat became more severe when the Clinton administration repealed the Glass-Steagall act of 1933, thus freeing financial institutions “to innovate in the new economy,” in Clinton’s words — and also “to self-destruct, taking down with them the general economy and international confidence in the US banking system.

Americans have traditionally been the most enthusiastic champions of capitalism.  Yet a recent American public opinion survey found that just 50 per cent of people had a positive opinion of capitalism while 40 per cent did not.  The disillusionment was particularly marked among young people 18-29, African Americans and Hispanics, those with incomes under $30,000 and self-described Democrats.

Three elections in a row in the U.S. have been bloodbaths by recent standards for incumbents, with the left side doing well in 2006 and 2008 and the right winning comprehensively in 2010.  With the rise of the Tea Party on the right, and the Occupy movement on the left, this suggests far more is up for grabs than usual in this election year.

So how justified is disillusionment with market capitalism?  This depends on the answer to two critical questions. Do today’s problems inhere in today’s form of market capitalism or are they subject to more direct solution? Are there imaginable better alternatives?

The spread of stagnation and abnormal unemployment from Japan to the rest of the industrialized world does raise doubts about capitalism’s efficacy as a promoter of employment and rising living standards for a broad middle class.  This problem is genuine. Few would confidently bet that the U.S. or Europe will see a return to full employment as previously defined within the next 5 years. The economies of both are likely to be constrained by demand for a long time.

But does this reflect an inherent flaw in capitalism or, as Keynes suggested, a “magneto” problem (like the failure of a car alternator) that can be addressed with proper fiscal and monetary policies, and which will not benefit from large scale structural measures? I believe the evidence overwhelmingly supports the latter. Efforts to reform capitalism are more likely to divert from the steps needed to promote demand than to contribute to putting people back to work. I suspect that if and when macroeconomic policies are appropriately adjusted, much of the contemporary concern will fade away.

That said, sharp increases in unemployment beyond the business cycle—one in six American men between 25 and 54 are likely to be out of work even after the U.S. economy recovers—along with dramatic rises in the share of income going to the top 1 and even the top .01 per cent of the population and  declining social mobility do raise serious questions about the fairness of capitalism. The problem is real and profound and seems very unlikely to correct itself untended. Unlike cyclical concerns there is no obvious solution at hand. Indeed the observation that even Chinese manufacturing employment appears well below the level of 15 years ago suggests that the problem’s roots lie deep with the evolution of technology.

The agricultural economy gave way to the industrial economy because progress enabled demands for food to be met by only a small fraction of the population, freeing large numbers of people to work outside agriculture. The same process is underway today with respect to manufacturing and a substantial range of services reducing employment prospects for most citizens.  At the same time, just as in the early days of the industrial era, the combination of substantial dislocations and greater ability to produce at scale is enabling a lucky few to acquire great fortunes.

The nature of the transformation is highlighted by the 50-fold change in the relative price of a television set of a constant quality and a day in a hospital over the last generation.  While it is often observed that wages for median workers have stagnated, this obscures an important aspect of what is occurring. Measured via items  such as appliances or clothing or telephone service where productivity growth has been rapid, wages have actually risen rapidly over the last generation.  The problem is that they have stagnated or fallen measured relative to the price of housing, health care, food and energy or education. As fewer and fewer people are needed to meet the population’s demand for goods like appliances and clothing, it is natural that more and more people work in producing goods like health care and education where outcomes are manifestly unsatisfactory.  Indeed as the economist Michael Spence has documented, a process of this kind is underway; essentially all employment growth in the U.S. over the last generation has come in non-traded goods.

The difficulty is that in many of these areas the traditional case for market capitalism is weaker. It is surely not an accident that in almost every society the production of health care and education is much more involved with the public sector than the production of manufactured goods.  There is an imperative to move workers from activities like producing steel to activities like taking care of the aged.  At the same time there is the imperative of shrinking or least slowing the growth of the public sector.

This brings us to the charge that the governments of industrial market capitalist societies are bankrupt. Even as market outcomes seem increasingly unsatisfactory, budget  pressures have constrained the ability of the public sector to respond.  How and when–and not whether–basic programs of social protection will be cut back, is now back on the table.  The basic solvency of too many capitalist states seems in question.

Again the problems are very real.  While I believe more than most that the U.S. government will be able to borrow on very attractive terms for a long time, if as I fear private borrowing remains depressed, there is no denying that the current path of planned spending and planned revenue collection are inconsistent.  And Europe is teaching us that markets can take significant fiscal problems and make them catastrophic  by becoming too alarmed too rapidly.

At one level the answer here is simply to insist on more political will and courage.  But at a deeper level, citizens of the industrial world who believe that they live in progressive societies are right to wonder why increasingly affluent societies need to roll back levels of social protection. Paradoxically, the answer lies in the very success of capitalism which has made the opportunity-cost of an individual teaching or nursing or administering that much more expensive.

When outcomes are unsatisfactory, as they surely are at present, there is always a debate between those who believe that the current course needs to be pursued with increased vigor and those who argue for a radical change in direction. That debate  is somewhat beside the point in the case of market capitalism. Where it has been applied it has been an enormous success.  The challenge for the next generation is that while that success will increasingly be taken for granted and indeed will become an increasing source of frustration in these pinched times, its success cannot be matched outside the market’s natural domain.  It is not so much the most capitalist parts of the contemporary economy but the least—those concerned with health, education and social protection–that are in most need of reinvention.

The unprecedented intervention of the Fed may be justified or not in narrow terms, but it reveals, once again, the profoundly undemocratic character of state capitalist institutions, designed in large measure to socialise cost and risk and privatize profit, without a public voice.

That is, of course, not limited to financial markets. The advanced economy as a whole relies heavily on the dynamic state sector, with much the same consequences with regard to risk, cost, profit, and decisions, crucial features of the economy and political system.” some balance to the debate…

Capitalism, by its nature, requires the free market pricing mechanism to function properly. It is disingenuous to criticize capitalism as flawed due to the problems the United States is experiencing when this depression is arguably the result of the LACK of a free market.

At its core, a free market requires price discovery. The marketplace must be allowed to clear all prices. However, the most important price in the market… the price of money… has been manipulated for decades by central banks. This distortion generates ripple effects throughout every decision-making process… every industry… which can only result in misappropriated resources, which then must inevitably result in depression.

The 3 basic issues with the health of capitalism in the US, the EU  and around the world are the following three:Overuse of Leverage, Tax Structure that favors Speculation, and Subsidized Industries such as oil, gas, banks, real estate, big agrobusiness etc.

1) Overuse of leverage is the main culprit of the 2008 Great Recession, as it has been in any great collapse. Any investor knows the dangers of a margin call, and we have just seen a major margin call worldwide. Summers also ignores how the huge growth of derivatives since 1980s (an extension of credit and leverage) have turned investment markets into speculators’ roulette wheel.

2) The US Tax Structure since the 1980s has reduced short term capital gains and derivative income/gains by more than 70% while at the same time tripled the payroll tax on middle income AMericans. The “carried interest” use by hedge funds and private equity, plus off-shore tax havens have allowed speculators to pay extremely low tax rates, thus pushing out the traditional long term investor which is vital to capitalism. Summers can take direct credit for this trend.

3) Finally, the US government subsidizes through low tax rates, outright cash grants and extremely low regulations the very industries that have not provided any growth to the US labor force for over 30 years: oil/gas, agriculture and real estate. Depletion allowance, 1031 exchanges, crop subsidies, etc. all distort the market economy and shift resources away from viable industries. Of course, this policy is only in place because of the huge dollars political campaigns receive from these industries, but that is another matter altogether.

There’s a difference between capitalism and the free market. The US is definitely capitalist but it’s markets are not free. With a handful of telco’s and a half dozen nation-wide banks, the natural course of capitalism is to grow, dominate, and create as much of a monopoly as possible. Smaller companies are bought by larger as the larger grows larger until competition, a necessary element of the free market is choked by the success of capitalism.

Of course the Government gets in the way of the free market too, but usually at the request of some capitalist looking to benefit from it.

But there is a fundamental problem with advocates of a purely free market and it isn’t an economic one, it’s political. It just won’t ever happen. Those who argue for modest reforms will never let the radicals have a clear go at it.

For a huge impact, one must take a conglomeration of moderate proposals and bundle them together. Unfortunately that has not been done very well.

Capitalism would work if we control speculation, promote a fair tax policy and do not subsidize healthy industries.

In essence mix and match political ideologies for a common cause future without ideological barriers, mental burdens and false hopes.




Crises happen always. Whatever goes up must come down. The weather changes and the seasons are repeating themselves endlessly. Why you think that the markets are immune to change?

Change is everything and the only constant we have…

Yet our current reaction unfortunately, has been of the ostrich variety and it only more of the same old system reactions…

Because we use central planning sparingly and not strongly applied when the medicine is bitter as it should be… Instead of attracting new ideas and establishing new standards to try to avoid the failures and the ill symptoms of central planning, we forget the failures of past and plunge head first into the quagmire. Because by restoring full free market capitalism and by giving it a chance to work it’s kinks and it’s inefficiencies fully as it’s cyclical nature demands, we need to allow time to digest the effects before dismissing the concept.

Capitalism in the US is disliked because capitalism worldwide is on steroids and life support. It has been and is still actively promoted by policies, people and entities disinterested in the broader welfare of society vs the health of The Investor. The basic premise is that The Investor reigns supreme over the legislator and his standing management instructions to the state are incorporated in the Washington Consensus.

Legislators are lobbied with boatloads of dollars to maintain pliant, docile attitude to the big business. Big banks are lauded, courted and worshipped as the pinnacle of big business no matter how badly they behave. Corporate taxation is considered a patent sin and must be rolled back at any costs and income inequality is seen as a positive sign of the success of the individual in a multifarious society regardless of real worth and true merit.

Am afraid that if we maintain this attitude long enough, history will inevitably ensure that it will produce its own backlash. Alienate enough people for a sufficiently long time and they will one day start the pendulum swinging back against all-out capitalism.

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