Why Capitalism Trumps Socialism

02 Feb, 2009 by John Hawkins

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Australia’s socialist prime minister is, like many of his liberal brethren here in the States, rubbing his hands together with glee at the prospect of using the fiscal crisis we’re in right now to empower government at the expense of the market.

KEVIN RUDD has denounced the unfettered capitalism of the past three decades and called for a new era of “social capitalism” in which government intervention and regulation feature heavily.

In an essay to be published next week, the Prime Minister is scathing of the neo-liberals who began refashioning the market system in the 1970s, and ultimately brought about the global financial crisis.

“The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes,” he writes of those who placed their faith in the corrective powers of the market.

“Neo-liberalism and the free-market fundamentalism it has produced has been revealed as little more than personal greed dressed up as an economic philosophy. And, ironically, it now falls to social democracy to prevent liberal capitalism from cannibalising itself.”

Mr Rudd writes in The Monthly that just as Franklin Roosevelt rebuilt US capitalism after the Great Depression, modern-day “social democrats” such as himself and the US President, Barack Obama, must do the same again. But he argues that “minor tweakings of long-established orthodoxies will not do” and advocates a new system that reaches beyond the 70-year-old interventionist principles of John Maynard Keynes.

“A system of open markets, unambiguously regulated by an activist state, and one in which the state intervenes to reduce the greater inequalities that competitive markets will inevitably generate,” he writes.

He urges “a new contract for the future that eschews the extremism of both the left and right”.

He mocks neo-liberals “who now find themselves tied in ideological knots in being forced to rely on the state they fundamentally despise to save financial markets from collapse”.

First off, like every major fiscal crisis we have faced here in the US over the last seventy years, the current disaster now engulfing us was almost entirely created by the federal government of the United States. Although there are numerous factors that played into the mess, low interest rates, poorly regulated derivatives, Chinese currency manipulation, etc., etc., etc., at the root of the problem was the federal government forcing Fannie Mae and Freddie Mac to give risky loans to people who shouldn’t have qualified in the first place and who would have never gotten loans if Freddie and Fannie knew ultimately that they, not the government, would be on the hook to pay it all back if things went tragically wrong.

That’s what happens when you substitute the “wisdom” — and I use that word very loosely — of people like Kevin Rudd, Barack Obama, Barney Frank, & Chris Dodd for that of the market.

The free market tends to be self-correcting because screw-ups like Barney Frank and Chris Dodd go out of business — but, that’s not true for government. With government, the screw-ups shift the blame and end up gaining more power for themselves in order to fix the crisis that they helped create in the first place. Look at our federal government and show me one person who helped generate the housing debacle who has lost his job? There isn’t anyone — moreover, what’s the proposed solution? Trillions of dollars of new spending and hundreds of thousands of new government jobs. With the Democratic Party, it’s always a “heads, we win; tails, the free market loses” proposition.

I also want to go back to a couple of other things Rudd said.

“A system of open markets, unambiguously regulated by an activist state, and one in which the state intervenes to reduce the greater inequalities that competitive markets will inevitably generate,” he writes.

…

He mocks neo-liberals “who now find themselves tied in ideological knots in being forced to rely on the state they fundamentally despise to save financial markets from collapse”

It is indeed true that a socialist state will provide less inequalities and less of a “roller-coaster” effect on the economy. However, the reason why that is the case is that the more socialist a state becomes, the less wealth it produces while the more capitalist a state is, the more wealth it produces.

It’s always easy to look at the “down side” of the roller coaster and cry out for socialism, but what people miss is that they are still far better off than they would have been had they been under a more socialist system all along. Put another way, the more you take away the freedom to fail, the more burdens you inevitably put in the way of those who are trying to rise.

Then there’s “income inequality.” Yes, there are less Bill Gates types under a socialist system, but there is also considerably less wealth from top-to-bottom than there would have been under a more capitalist system. Again, it’s very easy to complain that some people have so much when times are hard, but what’s missed is how much more everyone made in the good times than they would have under a socialist system.

Here’s a good way think of it: the more capitalist the system is, the higher the rate of economic growth will be, the more wealth that will be created, the lower the jobless rate will be, the less taxes you’ll pay, and the more people have to rely on themselves. The more socialist our system becomes, the lower our rate of growth will be, the higher the jobless rate will be, the less wealth will be created, the more taxes you’ll pay, and the more we’ll have to rely on government. On the other hand, there will be more ups and downs in a captitalistic system while we’ll have a long, slow, steady slide into economic mediocrity under socialism.

Which of those options sounds more attractive? If you’re a conservative, a logical person, or for that matter, one of our Founding Fathers who may be reading from beyond-the-grave, you’ll pick the capitalistic system. If you’re a liberal, ne’er-do-well who just likes leaching off of other people, or a power hungry government worker, you’ll pick the socialist system.