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Capitalism, or Something Unlike It?

Friday 6th November, 2009

This is my response to an article in Forbes by Sramana Mitra, entitled “Capitalism’s Fundamental Flaw”.

It’s interesting that the author chooses the banking crisis as an example of the ‘fundamental flaw of capitalism’. No other industry on Earth is subject to as much tacit government intervention and taxation, through the government monopoly on the issue of currency, the institutionalized fraud of the fractional reserve system, and inflation.

A (probably false) anecdote is brought to mind by this, actually. The bank robber Willie Sutton, when asked by a reporter why he robbed banks, reputedly replied “because that’s where the money is.” False or not, it seems fitting that governments would adopt a similar policy. And most importantly, with Willie as it is with governments, it’s not the bank’s money they take. It’s yours.

It’s very easy for a government with a monopoly on a currency to begin an inflationary death spiral. The methods are many: fractional reserve banking (in any form), actual money printing, ‘quantitative easing’ or lowering of reserve requirements are all ways to ‘increase the money supply’. Once the inflation is set into motion, it is impossible to stop without incurring a catastrophic economic recession. Since politicians are elected in the short-term, they decide to continue with the short-term benefits (but long-term damages) of inflation. A quote from Macbeth seems unnervingly relevant: ”I am in blood stepp’d in so far that should I wade no more, Returning were as tedious as go o’er.” In his documentary series ‘Free to Choose’, Milton Friedman notes that inflation is comparable to alcoholism; to paraphrase, it’s fun in the beginning, bad later on, and increasingly difficult to give up ‘cold turkey’ the longer you continue.

Many people I speak to today still don’t understand how currencies go into hyperinflation. The recent case of Zimbabwe illustrates this perfectly. It seems insane that a government could allow such rampant inflation to occur, doesn’t it? And yet the situation still continued to descend rapidly into chaos, until people gave up on Zimbabwe dollars and started using gold instead. Of course, this is the nature of inflation. The easy credit made available through governmental economic policies in the U.S.A. and Europe have created a similar environment, albeit a boiling frog if ever there was one.

So how does this relate to the article I was originally responding to? Well, the author’s main gripe is that the majority of capital in our so-called ‘free market economy’ (which, incidentally, hasn’t been free since December 23, 1913) seems to gravitate towards the speculators and market players rather than the innovators and creators of value.

I can’t find much fault with her assessment, but I think the finger is being pointed in the wrong direction. Where do you think speculators get their initial investment capital from? It’s all credit. Speculators earn large amounts of money through leverage (i.e. borrowing large amounts of money to turn a good investment into a great one), and this leverage is provided by banks with a license to print money, thanks in no small part to the fractional reserve system. And of course, with the government monopoly on currency through legal tender laws, this basically has everyone except the banks and government bent over a financial barrel.

The gist of my argument is that the speculator problem is completely a consequence of the government-controlled economy. The first instinct most people have is to blame capitalism for the recent economic issues, but a closer, rational inspection exposes who is really at fault here.

Further Reading

If you’re interested in further exploring some of the views I’ve shared in this post, see the following Wikipedia articles for more information:

Individual Economists

Economic Theory