In Defense of Capitalism

In a recent opinion piece in the Washington Post columnist E.J. Dionne lays the economy’s woes at the feet of capitalism. From the article I believe Dionne is saying that a more governmental redistribution program would alleviate our suffering from this most recent credit crisis. I was most shocked to find that most Washington Post readers agreed with his critique of the system of capitalism. Many readers agreed with Dionne that the New Deal had gotten us out of the Great Depression, and a more active governmental role in today’s economy would make us better off. This shows a flawed understanding of the capitalist system. Although I don’t have many readers, I would feel amiss if I didn’t defend this system against such misunderstood attacks.

Dionne could not be more wrong. He claims repealing of the Glass Steagall Act caused this crisis. I believe irresponsible investment did. Those who made those investments are now paying with their shirts. What many don’t understand about capitalism is its constant system of feedback. Are various companies’ loss of billions of dollars not enough to advise against future malinvestment? It usually is, increased regulation will not teach that lesson. It’s already been learned. Companies are adjusting their investment strategies and the system is fixing itself. Regulating bank’s investments will only hinder the movement of capital through the system.

Dionne argues:

This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early ’80s undermined New Deal ideas and called forth a rebirth of radical free-market notions. What’s becoming the Panic of 2008 will mean an end to the latest Capital Rules era.

What taken-for-granted economic ideas would those be? Radical laissez-faire doctrines of the Coolidge era? Let’s take this at face value and look at the history. Shortly after World War I, the highest tax rate in America was around 77 percent. That is, for every dollar that person earned, they kept 23 cents. In tax rate adjustments in 1921, 1924 and 1926, the tax rate was slashed precipitously. This may be what Dionne calls “radical laissez-faire” doctrine. If tax receipts would have fallen, I might have agreed with him. But, they did not. With those tax cuts, tax revenues for the US government rose dramatically. It was not Coolidge who began the Great Depression, it was the Smoot-Hawley Tariff in 1930, which cut our exports in half overnight and began a bitter trade war that resulted in the Great Depression; a Depression that the New Deal made far worse.

The FDR era ushered in unprecendented growth in the Federal government. He was elected in 1932, and the Great Depression did not end until 1945. Price controls and misguided acts excerbated the Depression, let’s not credit the New Deal with too much. It was price controls again that stagnated growth in the 1970’s. Does anyone remember gas lines? This didn’t undermine the New Deal, it tried to replicate it, with the same disastrous effects. As I read this article, I find myself astounded at the real lack of historic accuracy that laced its way through this article. It was massive deregualtion in the 1980’s that opened up competition in airlines and other industries that began America’s emergence from stagflation of the 70’s and early 80’s. It was capitalism that cured the disease, it was government interference that was the cause.

We must remember that capitalism sits on the idea of trade. Two traders must agree to trade and cannot be coerced. This assention leads to more trade and feedback leads to accurate pricing. Government policies sit on the ideas of coercion and control. This usually constrains trade and fixes prices to the detriment of both demand and supply. A free market society will always fix it’s own problems. Government interference into the market, even with the noblest of intentions, will always make us worse off in the long-run. The New Deal extended the Depression and Nixon’s block-headed price controls exacerbated stagflation of the 1970’s. The system is too complex for a government to control. That is why any regulation quickly becomes obsolete and dangerous, and that’s why any attempt to “fix” the system today will be just as disasterous as it was 70 years ago. We cannot afford to forget those lessons of history, or as a wise man once said we are bound to repeat it.