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There have been many deeply mistaken ideas that enjoyed almost universal acceptance until reality overtook the illusion. Take for instance the once unquestioned truth that “Key West real estate never goes down.”
The persistent and widely accepted falsehood I have in mind for today’s essay is that the current U.S. economy could be accurately described as unrestrained “capitalism.” This idea, and it’s even worse corollary, that lack of regulation of that system has brought us to our present state of crisis, muddies the economic water so thoroughly that you’ve got to be pretty thirsty to try a cupful.
Whatever remains of free market capitalism in the U.S. exists mostly at the micro level where small businesspeople earn their living. When someone opens a typical small business, that person is exposed to all the risks attendant to entrepreneurship. President Obama won’t be coming around with a few billion of your neighbor’s money if your barber shop or hot dog stand goes belly up. Small business people are exposed to the full force of the free market, with all its risks, rewards, and responsibilities.
In the larger picture, American capitalism has morphed into something that only faintly resembles free market capitalism. The economy in which the corporate giants dwell would be more accurately termed "state capitalism." An observer less inclined to civility than this one might label it "fascism," but the pejorative connotations of that term have clouded its usefulness in describing what its founder, Benito Mussolini, called "the corporate state."
State capitalism is a system that relieves wealthy capitalists of business risk while allowing politicians to buy votes without visibly raising taxes. It is an alliance between powerful businessmen and powerful politicians. Its purpose is to benefit both at the expense of the taxpayer. The scheme uses government power to shift the consequences of poor business decisions away from those who make them.
State capitalism creates enormous profit, highly concentrated political power, and steadily growing economic hazards. State capitalism privatizes profit and socializes risk. On their own in a free market, corporations would have to risk failure like anyone else. But with the help of politicians they can transfer the risk to taxpayers while leaving the profits in private hands.
The system attempts to manipulate and often to counter the forces of the free market. At its heart is a central bank steadily inflating a paper currency, which, like Peter Pan’s Tinkerbelle, depends fully on a belief in magic. Inflation is legal counterfeiting by central banks. It is a form of theft that serves as an invisible tax on which the corporate state grows.
By suppressing self-regulating market forces the system creates growing imbalances, misallocates resources, sends false pricing signals, and distorts credit markets. Capitalism corrects disequilibrium sooner or later as certainly as gravity guides stock brokers from office windows to sidewalks. The forces of capitalism, like those of gravity, can only be temporarily countered.
A reader of an earlier column I wrote on this subject, a man who I know to be well informed and intelligent, wrote in response that, "Capitalism has a long, notorious, and devastating record of NEVER self-regulating." He offered examples of financial debacles beginning with the Great Depression.
A glance back through America’s history shows that capitalism very efficiently self-regulated until the formation of the Federal Reserve in 1913. What economic crises there were before that were local and brief. It was only after the Fed took control that capitalism’s feedback mechanisms would be suppressed long enough to create system-threatening imbalances.
The Great Depression was capitalism's first attempt to correct the Fed’s efforts to avoid market discipline. Then, as now, government intervention made the depression longer and worse. It took a world war to end it, and the extension of that war for over 60 years to bring us to the ruin we are facing now.
War is the ultimate public works project, a complete waste of resources, but as long as it is fought far away, it produces a convincing illusion of prosperity. The illusions are finally becoming impossible to sustain. We are now entering capitalism's second great correction of political and central bank abuses. As today's sins are orders of magnitude worse than those of the 1930s, so will be the pain involved in correcting them.
The financial upheavals since the founding of the Fed - the Great Depression, the oil crisis, the S&L debacle, the LTGM bailout, and the recent rescues of AIG, Goldman Sachs, and GM - demonstrate not capitalism's failure to discipline the foolish, but politicians' determination to prevent capitalism from doing its work. Without politicians ready to rescue the well-connected at taxpayer expense there would be no "credit crisis." The fools would long ago have been separated from their money and forgotten like yesterday's lotto numbers.
Politicians do not protect taxpayers. They exploit them every bit as thoroughly as any con-artist, pickpocket, or greedy capitalist. To paraphrase P.J. O'Rourke, of course politicians are interested in people, but fleas are interested in dogs, too.
Elected officials carefully cultivate their image as defenders of the taxpayer against greedy capitalists because to reveal the truth of the alliance would precipitate their having to find honest work, or figure out how to get tar and feathers out of their $100 haircuts.
Greed is not a human failing confined to private business people. It is a human constant as prevalent in the political class as anywhere else. We may be seeing what happens when greed overwhelms prudence, but the idea that corporate avarice by itself, without political help, could have caused the problems we have today is at best naive. The notion that politicians can correct those problems is equally myopic. Politicians are full partners in crimes rooted in the irresistible temptations that accompany dishonest money, rent seeking, and power mongering.
The alliance between financiers and politicians against the free market is well camouflaged with propaganda and nationalism. But the scheme is designed to defeat the inconvenient realities of capitalism's self-regulating nature and its tendency to diffuse the power of established institutions through open competition. The fruit of that alliance bears only a superficial resemblance to free market capitalism. That capitalism is taking the blame for the wreckage caused by a fascist partnership is a triumph for the guilty and a tragedy for the rest of us.