The Romance of Dissident Economists

I think mine is a better title for yesterday’s Boston Globe article, “Why Capitalism Fails.” Of course I had to read it so I, too, could understand what exactly the author meant, not only by capitalism, but also by its failure. Although it was a five page article (as the web crow flies), I didn’t have to look too far to find the second answer. The author reveals that capitalism’s failure is in its inherent instability. While the article carried an awfully big stick with its title, it did not explain what capitalism is. Perhaps this is because it is a seemingly self-evident, oft- spoken term. But it is clear throughout the article that the author uses “capitalism” as a synonym for our “mixed economy”. It is not.

With its Potemkin village of a title, the article is not about the failure of capitalism, but about the recently rediscovered brilliance of the late economist Hyman Minsky by some currently popular economists. Minsky, a lesser-known economist who shared educational experiences and tutelage with some Nobel Prize-winning economists, has unwittingly lent his name to those whose insights have led them to blame the current financial crisis on the failure of capitalism.

The “Minsky moment” as it has been called by some of these later acolytes occurs because “not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability that would set the stage for monumental crises.” According to the article, Minsky’s solution to an unstable economy was a “Big Bank” and a “bubble-up” approach. The author gives an account of Minsky’s idea:

Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”

As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

The author actually seems to believe that the above is an example of free-market capitalism, rather than seeing this behavior as the result of the past and currently expanding governmental practices in attempting to even out the playing field, to lessen inequality, to forgive, thereby remove personal and corporate responsibility, and to provide stability. He twice refers to capitalism as “freewheeling” thereby exposing his lack of understanding of the issue. Any amount of freewheeling could occur in capitalism, but it is precisely the voluntary nature of capitalism that guarantees that the foolish freewheelers are the ones who suffer the consequences. When the government becomes involved, it invariably forces some to pay the price of others’ foolishness. Temporary success may foster a disregard of the possibility of failure, but such success cannot be held long. Only the government can give birth to and nurture such a strong and destructive monster on a nationwide scale.

The real interest of the article lies in how the author waxes poetic over Minsky’s isolation and dismissal by the economic orthodoxy during his lifetime. I haven’t read anything by Hyman Minsky, so I can’t say that he’s as bad as this author expresses as good. I do know, however, that Karl Marx is also considered by some to be a brilliant economist.

In case you’re still wondering what capitalism is, here is a section of Ayn Rand’s essay “What is Capitalism?” in Capitalism: The Unknown Ideal:

Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.

The recognition of individual rights entails the banishment of physical force from human relationships: basically, rights can be violated only by means of force. In a capitalist society, no man or group may initiate the use of physical force against others. The only function of the government, in such a society, is the task of protecting man’s rights, i.e., the task of protecting him from physical force; the government acts as the agent of man’s right of self-defense, and may use force only in retaliation and only against those who initiate its use; thus the government is the means of placing the retaliatory use of force under objective control.

While the most successful elements of America can be directly attributed to capitalism, it is, unfortunately, only a poorly understood and frighteningly shrinking part of our social system.