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Does the global economic recession was caused by the failures of the capitalists and/or capitalism?

asked Sep 26 '11 at 08:28

retrofretz's gravatar image

retrofretz
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edited Sep 26 '11 at 13:12

Greg%20Perkins's gravatar image

Greg Perkins ♦♦
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From what I can discern, the recession was caused by the rampant disregard of capitalism in favor of massive government programs. The most significant program in this recession was the deliberate provision of cheap money, low-interest rates and lax lending standards in order to provide housing for poorer people. This led to moral hazard (lending to poorer people became largely "risk-free") and massive fraud on the part of companies. If you are interested in this topic, do watch John Allison who has a great explanation: http://www.youtube.com/watch?v=-OCzqi3oGmg

(Sep 26 '11 at 08:36) Danneskjold_repo Danneskjold_repo's gravatar image

You may want to see some of the answers posted to this question: http://objectivistanswers.com/questions/19/has-capitalism-failed

(Sep 27 '11 at 02:47) Raman ♦ Raman's gravatar image

And this article over at TOS isn't that bad either:

http://www.theobjectivestandard.com/issues/2009-spring/altruism-financial-crisis.asp

(Sep 27 '11 at 10:12) JK Gregg ♦ JK%20Gregg's gravatar image
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In addition to the links posted in some of the comments, the following talks by Yaron Brook (president of the Ayn Rand Institute) and John Alison (former CEO of BB&T and a prominent objectivist) might be helpful:

Capitalism, who needs it?

The financial crisis causes and possible cures

In defense of finance

While they do a better job than I can at answering your question, I will provide a brief answer for anyone who is not willing to invest 266 min listening to the talks.

  1. The system we have is a “mixed economy” not capitalism. A mixed economy has a mixture of economic freedom and economic controls. Capitalism is a system of total economic freedom. Thus, the system we (and the rest of the world) live under is not capitalism. The upshot of this is that we cannot blame capitalism for failing, because capitalism has not had a fair trial. Instead, the mixed economy has failed.
  2. The government-control portion of the mixture is the dominant cause of the crisis. Out of the mixture of freedom and controls, the controls deserve the lion’s-share of the blame for the crisis. The controls caused the crisis in at least two ways: first, the controls create economic problems; second, the controls exacerbate existing economic problems.

a. Controls cause economic problems. Government controls over the economy inevitably cause economic problems because they destroy wealth, distort behavior, and cut the link between actions and consequences.

i. Wealth destruction. Production is the creation of wealth; force destroys wealth. Government is an agency of force, not production. Anything that the government does will entail force and will therefore waste wealth. Consider the following (non-exclusive) list of ways that government intervention in the economy destroys wealth:

  1. Regulations stop productive people from producing at their maximum capacity, e.g., a regulation tells you that you cannot do X, when X would be an efficient, productive activity. The wealth you could have gained by doing X is aborted.
  2. Compliance with regulations creates dead weight costs. It costs time and money to comply with regulations. Simply refraining from doing whatever is outlawed is often not good enough for the regulators—there is also paperwork to file. You also will need to hire accountants and lawyers to make sure you can traverse the labyrinth that is the CFR. These costs are wealth destroying—they do not go into producing anything of value; you might as well be burning cash.
  3. Government interventions often take the form of a redistribution of wealth from wealthy people to poorer people. However the wealthy are generally the most productive people in society (that’s how they became wealthy), and the poor are generally the least productive people in society (that’s why they remain poor). Therefore, we have taken money from those who would have used it efficiently to produce values and given it to those who will use it less efficiently to produce less (or more likely produce nothing and merely consume). The loss of the value that could have been produced by the productive-rich if they could have used the money that was expropriated from them is a destruction of wealth that is not compensated for by any comparable creation of values by the less-productive-poor.
  4. It costs money to regulate. We have to pay the bureaucrats, enforcement personnel, and ALJs. Those person’s are not producing anything of actual value; therefore, all the wealth that we spend on their jobs is a waste—we are pouring wealth down a bottomless pit. (I am not saying they are not competent or that they do not work hard. They could be the best workers on Earth and it would not change anything, because the work they are doing does not create value. It is like digging a hole and then filling it in with dirt over and over. You are doing work, but it is a waste.)

ii. Behavior Distortions. The government tries to incentivize and disincentivize all sorts of activities through its regulations. The incentivized activities will always be inefficient (i.e. wealth destroying); if they were efficient, then people in the free market would have done them without needing the incentive. The converse is true for the disincentivised activities—people want to do them because they are efficient, and only the disincentive stops them, thereby stopping an otherwise efficient activity. These behavior distortions are the root cause of bubbles, which, as bubbles are want to do, end up bursting. Consider the “housing crisis.” The government engaged in myriad behavior distorting activities that resulted in many people buying houses when it was not economically advisable for them to do so. For example, interest rates (regulated by the Federal Reserve) were kept extremely low and federal housing policy demanded that more “sub-prime” (i.e. high-risk) mortgages be handed out so that poorer people could become home owners. The result? A housing bubble.

iii. Cutting the link between actions and consequences. If people know that they will not suffer the consequences of their mistakes, they have no incentive to avoid the mistakes. Government intervention often shields some foolish actor from the consequences of their foolishness (at the expense of the rest of us). Thus it should be no surprise that these fools continue to make the same mistakes. Consider the bail out of the “too big to fail” banks. What message does this send to the banks? Screw up in the future?—no problem—we will bail you out. Should we be surprised, then, when these same banks screw up in the future? In the long run, the government’s attempts to avert a short-term hardship (e.g., some banks failing), will only produce more economic problems (e.g., even more banks failing in the future).

b. Controls exacerbate existing problems. Government regulations are akin to putting all one’s eggs in one basket. Capitalism is the opposite; in a capitalist (i.e., free) system, everyone is free to go their own way and try out their own ideas. As a result, there is great diversity; for every person doing one thing, there is another doing something else. Therefore, successes tend to cancel out failures. But this is not all—if someone’s ideas work, then others can learn from them, and if someone’s ideas fail, then others can learn from that. As a result of this learning, successes tend to not only cancel out failures, they overshadow the failures. Under government regulations, however, one central authority is telling people what they can and cannot do. Instead of a multitude of successes and failures canceling each other out, all will succeed or fail based on whether the regulator got his regulation “right.” If he was right, then great; we have successes—at least for the time being. But if he was wrong, then the losses are catastrophic, because we are all losing together at the same time. Furthermore, we lose much of the benefit of learning from other’s mistakes, because we are all forced to do it one way, right or wrong. As an example, consider the interest rates set by the Federal Reserve. By keeping the rate too low for too long, the Fed pumped way too much money into the housing sector, resulting in a bubble that has now burst and caused havoc. This would not have happened if each bank set its own interest rates. If one bank was setting them too low, then it would go out of business while the smarter banks thrived.

I am not an economist, and this answer is not exhaustive. But it should give you an idea about some of the causes of the financial crisis.

answered Sep 28 '11 at 19:23

ericmaughan43's gravatar image

ericmaughan43 ♦
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edited Sep 28 '11 at 19:38

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Asked: Sep 26 '11 at 08:28

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Last updated: Sep 28 '11 at 19:38