Jan
10
Capitalism In Crisis? Not Really – The System Works, It Rewards Efficient Producers – They Happen To be Asian – Western Nations Lost It
By Paolo von Schirach
January 10, 2011
WASHINGTON – The Financial Times recently invited various luminaries to offer their thoughts on “Capitalism in Crisis“. And so, in the course of several days, many pieces containing various suggestions/pontifications about how bad things are in the US and in Europe and what should be done to remedy these problems. All well and good. But I believe that both the question and the answers miss the point. Capitalism is not in crisis. The issue is that many Western countries that used to be the best manifestations of capitalism are in crisis. So the question has a “Western centric” bias. Since we invented capitalism and now it is not doing so well in Western Europe and in the US, it means that the system is flawed. It no longer works.
Capitalism works, if you follow the rules
Well, not so. Capitalism works –elsewhere. Asia is growing rather nicely and so is Brazil, Australia, Peru and Colombia. Things are looking very bad in parts of Europe and to a lesser extent in the US because we are no longer practicing good capitalism. In other words, the problem is us, not the system.
Not so good, self-described capitalists have gamed the system. They have managed to create rent positions for themselves. They have tried to and often succeded to avoid real competition. In Washington, their armies of paid lobbyists managed to buy protection. Case in point is ethanol. Is the US corn-based ethanol sector an example of capitalistic enterprises? Not really. This is a parasitic industry that adds almost no value and that exists only because of farm sector political pressures that created phony mandates that guarantee a captive market to enterprises that would not last a day in a real free market system.
And for decades, while the writing was on the wall, Detroit did not try to innovate and reinvent itself. No, with the labor unions in tow, it only wanted more protection against foreign competitors. And we saw how that movie ended.
Overextended financial sector
On top of that, in the last decade or so we saw the disproportionate growth of the financial sector, while the productive sectors stagnated. The essence of capitalism is about production, not about financial manipulation. The idea that you grow an economy just by managing money is rather silly. Who is going to make the stuff? Sure enough some people and players became fabulously wealthy. But we saw how it all ended up: a speculative binge that destroyed everything. Financial sector dominance has little to do with venture capital and various forms of credit that are essential to the vitality of capitalism.
Europe: welfare capitalism, bad governance
In parts of Europe it is worse, because there is a deadly combination between welfare capitalism and overextended welfare states that suck all the resources and them some, as the deep sovereign debt crisis illustrates. Again this is not capitalism. Some kind of safety net is alright. But not an entire society assuming that it can live off fake public jobs, baby pensions, fraudulent disabilities and tax evasion. Add to this overall poor governance and lace it with Banana Republic levels of corruption. Yes, I am talking about Greece and Italy.
Capitalism: level playing field
Look, capitalism is about creating and respecting the rules of a reasonably decent eco-system that allows enterprises to flourish by guaranteeing that smart people can start a business and reap the rewards of their creativity and risk taking in an environment that has equitable laws, within a state that is not owned by predatory elites that harass their opponents or competitors. The West used to have all this eco-system. Now we have a combination of welfare capitalism, cronyism, bloated public sectors that sap energies and over extended entitlement programs that sap even more resources. Is this capitalism? I do not think so.
Rediscover the rules
I am not suggesting here that the new Asian members of the capitalist family are flawless. They are not. But they have the advantage of energy, dynamism, belief in themselves and lower costs. This is how they grow faster. The West is not without options. It should simply reinvent itself by rediscovering the rules that Western capitalism created, long ago: the most efficient producer wins, and that includes the most innovative producer.
Detroit came back
Look, after their collapse, leaner, smaller and more innovative General Motors and Chrysler are back; and they will soon be able to repay the US government heavy investments that prevented their certain and inglorious demise. If and when the two Detroit corporations will stand on their own, this will prove that even the most flawed enterprises can spring back to life, if they rediscover and embrace the rules of the game.
Our flawed model failed, not capitalism
If our brand of capitalism is all about subsidized renewable energy and rent seeking, risk averse corporations, and some more “too big too fail” players, whereby we keep profits private, while we socialize the losses, than the West is doomed. And it is doomed not because capitalism failed; but because this not capitalism. The Western ruling elites forgot what capitalism is about. In other countries it works.
Print This Post