Economics for Everyone

"Under capitalism, man exploits man. Under communism, it's just the opposite." -John Kenneth Galbraith (1908-2006), Canadian-American Economist

The headline of a recent article posted on Al Jazeera's Web site reads, "Is this the end of U.S. capitalism?" An October article from WashingtonPost.com basically asks the same question.

The cover of the Oct. 18 edition of The Economist features a wounded beast and the title, "Capitalism at Bay." During that same week, the conservative magazine National Review featured a drawing of a weeping Adam Smith (the "father" of free-market capitalism) and the words, "Adam Smith's Lament."

A couple weeks ago, Business Week had on its cover photos of United States Treasury Secretary Henry Paulson and Fed chief Ben Bernanke with "The Future of Kapitalism" (yes, with a "K") printed diagonally across the cover.

And this month's Harper's featured a forum that included Economics Nobelist Joseph Stiglitz and "progressive" economist James K. Galbraith, among others, addressing the issue of "How to Save Capitalism" or "Fundamental Fixes for a Collapsing System."

The list could go on and on, and so do you notice just a bit of a recurring theme here? And it should be noted that that the graphics on the covers of the aforementioned editions of Business Week and Harper's were reminiscent of the propaganda posters one used to see plastered up in countries with command economies or centrally-planned economic systems.

"Le laissez-faire c'est fini." -French President Nicolas Sarkozy-Bruni.

Is the pronouncement by former supermodel and current chanteuse Carla Bruni's husband true? Has Cowboy Capitalism met its match with the current global economic crisis that began with the implosion of the U.S. housing market? And if so, what will the future bring? Little Red Books and Stalinomania? Or somewhere somewhere in between? Let's explore ...

But first, let's get a few things straight: for one, pure free-market capitalism (henceforth simply "capitalism") has never existed; not here in the U.S. or anywhere else. A pure capitalist economy would have little role for government beyond much like that of a referee - to enforce the established "rules of the economic game."

Perhaps the closest example of pure capitalism we have ever seen was Industrial Revolution Era England. And it may come to a surprise to many of you that the U.S. is not the freest economy on the planet ¬- and by freest, I mean the least government intervention in the economy (according to the Heritage Foundation, Hong Kong currently holds that distinction as it has for the last 14 years).

Among its other features, the capitalist system is characterized by "markets" (do we really need to define those again?). In a pure capitalist economy, the questions pertaining to how and what goods and services get produced and who receives those goods and services is answered - or any problems that may arise are solved - in the market place, and with no government involvement.

But most reasonable persons (including economists - a bit of a stretch, I know) realize that this, for various reasons, is unfeasible. The result is varying degrees of impure capitalism throughout most of the world [economies], with the U.S. probably best described as a mixed-capitalist economy - markets do most of the "heavy lifting," with the various levels of government accounting for about one-third of all economic activity. And given current events, that ratio - at least for a time - is sure to grow.

By comparison, there is the command, or centrally planned, economic system, where it isn't the markets that answer the what, how and for whom questions, but a central planning committee. It is here that prices are established as well.

An economic system is defined by its characteristics. It is the characteristics of capitalism that give it its strengths, but also its flaws. Over time, it has been shown that capitalism's flaws can be corrected for, and hence is - in its various forms - the dominant economic system on earth.

As countries have come to embrace free market principles, hundreds of millions of people have been lifted out of poverty. Command systems (often referred to as socialism or communism) are also defined by their characteristics. Its flaws are not so easily remedied, which probably explains why the few countries that still adhere to its theories remain mired in poverty.

Second, this is not the first "crisis of capitalism." Most of you have probably heard of a little nearly-worldwide economic catastrophe called the Great Depression. Marxists gleefully celebrated the demise of capitalism, only a bit prematurely.

After a couple of false starts, it was not FDR and his new deal that would eventually pull the economy out of the Depression, but the massive military build up necessary to lead the fight on both sides of the globe.

Nevertheless, with the New Deal came the laws, government agencies and programs which set up the U.S. economy for the post-war era, often referred to as the "Great Moderation," when the U.S. experienced solid economic growth with an occasional recession, but accompanied by a consistent increase in overall standard of living. It was also at this point when most of the populace accepted that there would henceforth be a larger and positive role for government in our economy.

So, where are we most likely headed today? Well, the "middle ground" that was established after World War II began to see a pronounced shift in the early 1980's during the Reagan Administration, when it was proclaimed that government wasn't the solution to our problems, but the source.

And as time went on, and the U.S. economy kept zooming upward - with a couple of minor dips - the pendulum continued to swing more and more toward unfettered markets and less government intervention. With the current crises, we will certainly - at least until the next boom comes around - see a swing back toward a more pronounced role for government once again, in particular an increase in the regulation of our financial services sector.