The headlines everywhere, over dramatic as usual herald the end of an era. Perhaps this is the end of an era. But the era of what ? What was so different here from the few times it has happened before ? Like the Great Depression ? or Black Monday (or was it Tuesday ?). I am not sure I get it all, and I do believe no one does. But lets hear voices and lets find a way to lead this into a healthy debate, so we all can hope to make some sense of the free fall that is taking place in the financial systems of the world.
First, what is Capitalism and what are it’s assumptions ? At it’s most simplistic level It assumes a free market economy where individual (even though selfish) actions ultimately pan out for the good of the larger collective or economy. So that s one rule flouted in any case ! We all accept that individual actions bordering on greed have in fact sucked enough wealth out of the system to completely dis-balance it,
Second, Capitalism assumes an equality of market information. It assumes that everyone has the same information and understanding of the market situation, based on which they will make decisions beneficial for themselves. That is patently not true anymore, with financial instruments so complex that individual decisions are heavily reliant on advice and more so, advertising that provokes dreams and fantasies to people. Capitalism will never take into account that people can be encouraged to create debt through a multiplicity of credit card transactions, or over-leveraging through re-mortgages of equity in home values. The over creation of debt fuels the artificial creation of money supply that is NOT backed by an increase in productivity, because a large chunk of this increased mney supply is being sucked out of the system by few very wealth individuals and organizations.
.. third, capitalism assumes a smooth flow of goods and services, of financial transactions and eschews laws and practices that great huge bumps and dams in such a flow. Yet that is almost utopian, as it never has and never will happen.
So all we can hope for is a Capitalism that is micro-managed to keep the engines of Capitalism well oiled – with money supply, individual decisions, exchange of goods and services, all moving in somewhat of an even flow, keeping the engines of the economy humming along smoothly and recording reasonable growth and wealth creation.
That idea of micromanaging has completely failed. Instead a system has developed and been encouraged by which a certain section of the community have been able to subvert the checks and balances completely in their own favour, largely through the creation of an artificial economy not based (as I said earlier) on an increase in productivity, but artificial increases in values of homes, and of financial instruments. In the case f the US, therefore it has created the massive external debt that everyone hoped would just become the norm.
So what we have seen is not the problems of Capitalism, but a complete abuse of the base ideas behind Capitalism. So the debate really is – Is Capitalism possible at all – or is it a micro managed free market economy that we shuld look forward to, and what are the checks and balances we can implement to not let such a spiral happen again,
is such a spiral just part of a cyclical correction ?