In mid-November, with the US presidential election settled, congressional Democrats tried to push their advantage. They proposed massive government intervention to bail out the ailing American auto industry. Senate Republicans and outgoing President George W. Bush said no, the proposal was shelved. However, come January, Democrats will control both houses of Congress, allowing them to again table what is arguably the most burning global issue today: Is the global capitalist system working, or are we entering a period when massive government interference in the markets is inevitable?
The financial crisis, which is segueing into a global recession, has provoked heated discussion over the free market. As powerful financial institutions began to totter, defenders of state intervention said massive injections of government funds alone could halt the meltdown of the world’s financial order. They provided as evidence the panic that overcame stock markets when Lehman Brothers was allowed to go under, and argued that only more regulation could avert further disaster. This may have been a far cry from socialism; however, as the US administration and other governments embraced that logic, suddenly quite a few states found themselves with stakes in very sick companies.
Conversely, free market ideologs, most prominently libertarians, said governments were doing exactly the opposite of what they should do. The problem was not the free market, they posited, it was not the need for more regulation; the problem was that governments were not permitting markets to correct themselves by allowing poorly run financial institutions to collapse. Defending capitalism, they underlined, did not mean defending bad management of capitalist enterprises. In fact the opposite was true.
Andrew Davis, of the US Libertarian Party, forcefully made that argument: “Businessmen are bad for capitalism when they use the government as life support for failing ventures. Instead of letting other companies absorb these failing businesses, CEOs and government bailouts have distorted the natural forces of capitalism and prevented the necessary — and effective — economic turnaround that only comes through an unfettered free market.”
In theory the libertarians were right: It made no sense to blame free markets when governments were doing everything possible to prevent the markets from filtering bad companies. Where the libertarians came up short, however, was in failing to recognize that the crisis was essentially a political one. No government, and that included the supposedly free-market Bush administration, could allow major companies to fall like houses of cards, since the public’s response to this could have been cataclysmic.
And that’s not mentioning that self-correcting mechanisms in the market would have probably taken years to be effective and bring about some kind of new equilibrium. In the meantime, unemployment would have gone up dramatically, undermining economic confidence.
But where politics intervenes, sound policy becomes a luxury. That’s why the interventionists are wrong in seeing more government writ as an economic solution. It’s also why the way the debate is taking place today is worrisome. We should not be trying to determine whether capitalism is worth defending. As Matt Welch, the editor of the American libertarian magazine Reason, recently wrote: “After the collapse of communism and the attendant discrediting of Marxian economic models, the industrialized world more or less settled on democratic capitalism as the best available option for countries to grow and prosper. Old Europe slashed government involvement in industry, New Europe rode mass privatization to massive growth, East Asian countries went from emerging market ‘tigers’ to full-fledged market economies, and China used markets to yank hundreds of millions up from poverty. One could perhaps be forgiven for thinking the 20th century’s great economic argument had been settled.”
The discussion shouldn’t be whether capitalism works (of course it does), but how it can be made to work most efficiently, thus most freely, without pushing governments into situations where they need to spend hundreds of billions of taxpayers’ dollars to bail out companies. Should that mean more regulation? Perhaps some regulation is necessary, but the more governments regulate, the more inefficient economies become and the greater the costs to societies. The short-term panic should not in any way represent a blank check to stifle markets down the road.
Unfortunately, that seems to be precisely the direction in which governments, particularly the US government, are heading. When states intervene to save one economic sector, they cannot very well abandon others. Then political calculations kick in to muddy the waters further. That’s why the discussion of the free market’s merits is a red herring. The real issue is how consistently free-market ways can be applied so that the very notion of a ‘free market’ actually retains some meaning.