The Return of Capitalism
Over the past six months, politicians, business executives and pundits have been convinced that we are in a crisis of capitalism that will require a massive transformation and years of pain to fix. "Another ideological god has failed," wrote the dean of financial commentators, Martin Wolf. Companies will "fundamentally reset" the way they work, said General Electric CEO Jeffrey Immelt. "Capitalism will be different," said Treasury Secretary Timothy Geithner.
Yet recently, even though we've nationalized no banks and undergone no grand reinvention of capitalism, the sense of panic seems to be easing. Perhaps this is a mirage -- or perhaps the measures taken by the U.S. government and other countries have restored normality. Over time we might see that faced with underreacting or overreacting, most governments wisely chose the latter -- and appear to have averted a systemic breakdown.
Many experts are convinced that the situation cannot improve yet because their own far-reaching sweeping solutions have not been implemented. Most of us want to see more punishment inflicted, particularly on America's bankers. In fact, there has been much pain, especially in the financial industry, where tens of thousands of jobs have been lost , at all levels. Fundamentally, though, markets are not about morality. They are large, complex systems, and if things get stable enough, they move on.
Consider our track record over the past 20 years, starting with the stock market crash of 1987, when on Oct. 19 the Dow Jones industrial average fell 23 percent, the largest one-day loss in its history. The legendary economist John Kenneth Galbraith wrote that he just hoped the coming recession wouldn't prove as painful as the Great Depression. It turned out to be a blip on the way to an even bigger, longer boom. Then came the 1997 East Asian crisis, during the depths of which Paul Krugman wrote, "Never in the course of economic events -- not even in the early years of the Depression -- has so large a part of the world economy experienced so devastating a fall from grace." He argued that if Asian countries did not adopt his radical strategy -- currency controls -- "we could be looking at ... the kind of slump that 60 years ago devastated societies, destabilized governments, and eventually led to war." Only one Asian country instituted (partial) currency controls. All rebounded within two years.
Each crisis convinced observers that it signaled the end of some new, dangerous feature of the economic landscape. But often that novelty accelerated in the years that followed. The 1987 crash was said to be the product of computerized trading, which has since, of course, expanded dramatically. The East Asian crisis was to end the happy talk about "emerging markets," which are now at the center of world growth. The 1998 collapse of Long-Term Capital Management -- which then-Treasury Secretary Robert Rubin called "the worst financial crisis in 50 years" -- was to be the end of hedge funds. The technology bubble's bursting in 2000 was supposed to eliminate the dreams of oddball Internet start-ups. Now we hear that this crisis is the end of derivatives. Let's see. Robert Shiller, one of the few who predicted this crash almost exactly -- and the dot-com bust as well -- argues that we in fact need more derivatives to make markets more stable.
In a few years we might actually find that we are hungry for more capitalism, not less. An economic crisis slows growth, and when countries need growth, they turn to markets. After the Mexican and East Asian currency crises -- which were far more painful in those countries than the current downturn has been here -- the pace of market-oriented reform speeded up. If, in the years ahead, the American consumer remains reluctant to spend, if federal and state governments groan under their debt loads, if government-owned companies remain expensive burdens, then private-sector activity will become the only path to creating jobs. With all its flaws, capitalism remains the most productive economic engine we have yet invented. Like Churchill's line about democracy, it is the worst of all economic systems, except for the others. Its chief vindication today has come halfway across the world, in countries such as China and India, which have been able to grow and pull hundreds of millions out of poverty by supporting markets and free trade. Last month India held elections during the worst of this crisis. Its powerful left-wing parties campaigned against liberalization and got their worst drubbing at the polls in 40 years.
American capitalism is being rebalanced, reregulated and restored. There is still a long road ahead. There will be many more bankruptcies. Banks will have to slowly earn their way out of their problems or die. Consumers will save more before they start spending again. Mountains of debt will have to be reduced. Finally, we will have to face long-neglected problems. Otherwise, this will prove to be not a recovery but a brief reprieve.