Stop Blaming Capitalism for Government Failures
By Yaron Brook and Don Watkins
Speaking of the financial crisis, French president Nicolas Sarkozy recently said, “Laissez-faire is finished. The all-powerful market that always knows best is finished.â€
Sarkozy was echoing the views of many, including president-elect Obama, who assume that the financial crisis was caused by free markets–by “unbridled greed†unleashed by decades of deregulation and a “hands off†approach to the economy. And given this premise, the solution, they say, is obvious. To solve this crisis and prevent another one, we need a heavy dose of Uncle Sam’s elixir: government intervention. Whether it’s more bailouts, stricter regulation, a new round of nationalizations, or some other scheme, the only question since day one has been how, not whether, government is going to intervene.
And the issue is wider than the financial crisis. Millions of Americans don’t have health insurance? Well, says Obama, that’s because we’ve left the health-care system to the free market. The solution: a complete government takeover of medicine. A few companies engaged in accounting fraud? It must be because we didn’t impose enough regulations on businessmen. The solution: rein in corporations with Sarbanes-Oxley.
But while capitalism may be a convenient scapegoat, it did not cause any of these problems. Indeed, whatever one wishes to call the unruly mixture of freedom and government controls that made up our economic and political system during the last three decades, one cannot call it capitalism.
Take a step back. In the lead up to the “Reagan Revolution,†the explosive growth of government during the ’60s and ’70s had left the American economy in disarray. A crushing tax burden, runaway inflation, brutal unemployment, and economic stagnation had Americans looking for an alternative. That’s what Reagan offered, denouncing big government and promising a new “morning in America.â€
Under Reagan, some taxes were reduced, inflation was subdued, a few regulations were relaxed–and the economy roared back to life. But while markets were able to function to a greater degree than in the immediate past, the regulatory and welfare state remained largely untouched, with government spending continuing to increase, as well as some taxes. Later administrations were even worse. Bush Jr., often laughably called a champion of free markets, presided over massive new governmental controls like Sarbanes-Oxley and massive new welfare programs like the prescription drug benefit.
None of this is consistent with capitalism. As the economic system that fully recognizes and protects individual rights, including the right to private property, capitalism means, in Ayn Rand’s words, “the abolition of any and all forms of government intervention in production and trade, the separation of State and Economics, in the same way and for the same reasons as the separation of Church and State.†Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy. The government’s job under capitalism is single but crucial: to protect individual rights from violation by force or fraud.
America came closest to this system in the latter half of the nineteenth century. The result was an unprecedented explosion of wealth creation and consequent rise in the standard of living. Even now, when the fading remnants of capitalism are badly crippled by endless controls, we see that the freest countries–those which retain the most capitalist elements–have the highest standard of living.
Why then should capitalism take the blame today–when capitalism doesn’t even exist? Consider the current crisis. The causes are complex, but the driving force is clearly government intervention: the Fed keeping interest rates below the rate of inflation, thus encouraging people to borrow and providing the impetus for a housing bubble; the Community Reinvestment Act, which forces banks to lend money to low-income and poor-credit households; the creation of Fannie Mae and Freddie Mac with government-guaranteed debt leading to artificially low mortgage rates and the illusion that the financial instruments created by bundling them are low risk; government-licensed rating agencies, which gave AAA ratings to mortgage-backed securities, creating a false sense of confidence; deposit insurance and the “too big to fail†doctrine, whose bailout promises have created huge distortions in incentives and risk-taking throughout the financial system; and so on. In the face of this long list, who can say with a straight face that the housing and financial markets were frontiers of “cowboy capitalismâ€?
This is just the latest example of a pattern that has been going on since the rise of capitalism: capitalism is blamed for the ills of government intervention–and then even more government intervention is proposed as the cure. The Great Depression? Despite massive evidence that the Federal Reserve’s and other government policies were responsible for the crash and the inability of the economy to recover, it was laissez-faire that was blamed. Consequently, in the aftermath, the government’s power over the economy was not curtailed but dramatically expanded. Or what about the energy crisis of the 1970s? Despite compelling evidence that it was brought on by monetary inflation exacerbated by the abandonment of the remnants of the gold standard, and made worse by prices controls, “greedy†oil companies were blamed. The prescribed “solution†was for the government to exert even more control.
It’s time to stop blaming capitalism for the sins of government intervention, and give true laissez-faire a chance. Now that would be a change we could we believe in.
Yaron Brook is the president of the Ayn Rand Center for Individual Rights. Don Watkins is a writer at the Ayn Rand Center. The Ayn Rand Center is a division of the Ayn Rand Institute and promotes the philosophy of Ayn Rand, author of “Atlas Shrugged†and “The Fountainhead.â€
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Stumble It!
November 13th, 2008 at 2:46 pm
Excellent piece, right on the money.
More Government to cure the troubles caused by Government is like bleeding the sick man with leaches to get the “bad” blood out and cure him.
The current financial “cure” is bleeding us to death.
November 14th, 2008 at 5:17 am
[...] Stop Blaming Capitalism for Government Failures As the economic system that fully recognizes and protects individual rights, including the right to private property, capitalism means, in Ayn Rand’s words, “the abolition of any and all forms of government intervention in production and trade, the separation of State and Economics, in the same way and for the same reasons as the separation of Church and State.†Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy. The government’s job under capitalism is single but crucial: to protect individual rights from violation by force or fraud. America came closest to this system in the latter half of the nineteenth century. The result was an unprecedented explosion of wealth creation and consequent rise in the standard of living. Even now, when the fading remnants of capitalism are badly crippled by endless controls, we see that the freest countries–those which retain the most capitalist elements–have the highest standard of living. [...]
November 14th, 2008 at 11:44 am
Government is definitely the blame for the Fannie May and Freddie Mac debacle. Blame barney Frank and Chris Dodd. There are others in Congress as well. I noticed that they are still holding onto their power and may get more.
You can blame the government for not watching the hen house concerning credit swaps, mortgage backed securities and derivatives but Wall Street new that these would blow up. It does not take a genius. The Wall Street power brokers are baby boomers with the common baby boomer mindset: “I’m gettin’ mine while I can and f**k everyone else and f**k the future”. Today, banks do not trust the asset valuations of each other because of the mark-to-market valuations and derivatives. When the credit swap mess hits home too we are going to see more and more economic stress down the road. Wall Street sold out America…and yea…the government failed to understand….or understood but was bought off by lobbyists. Or too stupid. All of the above.
Sarbanes-Oxley was a government response to Enron and others who took advantage of loopholes.
Guess what, you CANNOT plug every friggin’ loophole or even conceive of doing that. The government has to do a balancing act to ensure limited rules that create market fairness for investors (you and me) while not hindering business excessively. Some responsibility falls on business to not game the system. By being honest and fair the government can keep the regulations loose enough and still ensure fairness for the investors and allow enough oxygen for business to flourish. Business has broken that trust-SEVERELY. Government is now seen as wholely incompetent and corrupt. Damn both their houses.
November 14th, 2008 at 11:56 am
I want to re-state the following for clarity:
By BUSINESS behaving honestly and fairly, the government can then keep the regulations loose enough and still ensure fairness for the investors and allow enough oxygen for business to flourish. Business has broken that trust-SEVERELY. Government is now seen as wholely incompetent and corrupt. Damn both their houses.
November 15th, 2008 at 12:32 am
[...] Stop Blaming Capitalism for Government Failures As the economic system that fully recognizes and protects individual rights, including the right to private property, capitalism means, in Ayn Rand’s words, “the abolition of any and all forms of government intervention in production and trade, the separation of State and Economics, in the same way and for the same reasons as the separation of Church and State.†Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy. The government’s job under capitalism is single but crucial: to protect individual rights from violation by force or fraud. America came closest to this system in the latter half of the nineteenth century. The result was an unprecedented explosion of wealth creation and consequent rise in the standard of living. Even now, when the fading remnants of capitalism are badly crippled by endless controls, we see that the freest countries–those which retain the most capitalist elements–have the highest standard of living. [...]
November 15th, 2008 at 10:15 am
I’d like to comment on the allegations of the death of capitalism discussed in the article. But I find myself in charge of correcting people who decide to mention Ronald Reagan. Brook claims that under Reagan, the “welfare state remained largely untouched.” Should I laugh or pound my fist on the table?
Reagan initiated the most intrusive government attack on family the country has ever seen, wrapped rhetorically in socially and fiscally conservative myth. Clinton’s “end welfare as we know it” was implementation of Reagan initiatives. It took both Reagan’s terms to get things in place, and was ready for Clinton’s efforts to take credit for it.
Family policy is no longer limited by civil rights. Now, planted solidly in social policy – marriage and family are government programs – with arbitrary manipulation constitutionally allowed. Not only did it result in sky-rocketing costs in the welfare program, but it changed the relationship between government and the people in a fundamental way.
Individual lives are now virtually completely manipulatable by political will – with no constitutional constraint. Collectively, the people haven’t noticed the increase in their payments to the state for additional pork in the welfare system. They protest not. The effects individually however, for those who’ve experienced arbitrary treatment is much greater and they have complained and protested and complained and joined groups and …
Now this is a tricky subject I know. Welfare …. just in case there is someone left that doesn’t realize it yet … it’s not just for poor people anymore. Reagan broke through the “means-tested” barrier – so when I say marriage and family are government programs – I don’t mean just some financial aspects for welfare recipients. The transformation only became obvious to the vast majority I think, when some courts ruled that bans on same-sex marriage are not constitutionally allowed. They were when marriage and family were private institutions. They are not now because excluding same-sex couples from a government program was found to be unconstitutional.
So I’d have to say that under Reagan, the welfare state did not at all remain largely untouched. It was touched very largely.
November 15th, 2008 at 2:02 pm
[...] Stop Blaming Capitalism for Government Failures As the economic system that fully recognizes and protects individual rights, including the right to private property, capitalism means, in Ayn Rand’s words, “the abolition of any and all forms of government intervention in production and trade, the separation of State and Economics, in the same way and for the same reasons as the separation of Church and State.†Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy. The government’s job under capitalism is single but crucial: to protect individual rights from violation by force or fraud. America came closest to this system in the latter half of the nineteenth century. The result was an unprecedented explosion of wealth creation and consequent rise in the standard of living. Even now, when the fading remnants of capitalism are badly crippled by endless controls, we see that the freest countries–those which retain the most capitalist elements–have the highest standard of living. [...]
November 17th, 2008 at 11:00 pm
[...] Stop Blaming Capitalism for Government Failures As the economic system that fully recognizes and protects individual rights, including the right to private property, capitalism means, in Ayn Rand’s words, “the abolition of any and all forms of government intervention in production and trade, the separation of State and Economics, in the same way and for the same reasons as the separation of Church and State.†Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy. The government’s job under capitalism is single but crucial: to protect individual rights from violation by force or fraud. [...]