The Triangle

Issue date: 10/3/08 Section: Ed-Op

Media Credit: Chuck Kennedy MCT

In the mid-1990s - I don't recall the exact year, but my dad was still living - he and I were together for New Year's, just the two of us and a brew or two. "Well," he said to me, "Now that communism is gone, when capitalism crashes, where do we go from here?" His question seems very relevant this week. After the nationalization of Fannie Mae and Freddie Mac and the "rescue" of AIG a couple of weeks ago, a television talking head said, "We are all socialists now." This was on CNBC, the financial channel, where free-market conservatism goes without saying. But the House of Representatives gave its answer Monday: no, we are not all socialists, not yet. Nevertheless, as my dad asked, where do we go from here?

The talking head had a point when he said, "We are all socialists now." After September, the idea that large corporations are simply a form of private property no longer seems clearly true. Corporate shares are private property if it is convenient for public policy that they remain so; if not, not. And as we have learned in Iraq, you can't unscramble eggs.

There are some things capitalism is not very good at. One, as we have seen, is maintaining a stable financial system. Even the great free-market economic philosopher Milton Friedman held that the stability of the monetary system must be a government responsibility. Another is attaining a high target for saving and investment. That's crucial for the future of the country. Since 2000, our social saving (private saving minus the government deficit) has been increasingly negative. According to official figures, even private saving has moved into the negative range - though I would be cautious about those numbers. As a country, we have to be more frugal. And, as Keynesian economics (and bitter experience) have taught us, there can be a "paradox of saving." When everybody tries to save, cutting back on consumption spending, the result is not an increase in saving but a recession or depression. And that is a real danger in the next few years, as almost everybody understands.

But there also are things that socialism is not very good at. One of them is eliminating failed enterprises. When an enterprise continually loses money, because it is not producing anything anyone wants or is very inefficient, but it provides people with jobs they are accustomed to, it can be very difficult to get rid of. In a capitalist system, an enterprise like that would be liquidated. The employees would have to work at other, more productive jobs, whether they like it or not, and the former owners might recover a few cents per dollar of their original investments. This is sometimes called "creative destruction." But socialism isn't very good at creative destruction. (One thing the September crisis showed is that our system, call it what you will, combines some of the worst points of both capitalism and socialism.)

Continued...

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