1/20/12

The Financial Times is running a series of articles about capitalism. The premise seems to be that the financial crisis has damaged capitalism, and we must find ways to refurbish the idea.

The most recent article (by Philip Stephens) strikes me as being not so much about capitalism as it is about the crisis that government faces in the developed nations (Leaders Who Generate Diminishing Returns). Stephens says governments are too weak to deal with the forces of global capitalism. Leaders cannot give voters what they want because market forces are too powerful. Stephens writes:

“The danger is that what started out as a crisis of financial capitalism will give way to a new age of nationalisms–a backlash against globalization and a return to zero-sum politics.”

Capitalism is the best system because it rewards both consumers and producers. Consumers have a wide range of choice and producers are rewarded for their efforts. The side-effects are inequality and instability.. The most talented get rewarded most and those who cannot compete are punished. Competition is an essential requirement, and the price mechanism acts to direct resources to the areas where they are most needed.

Democracy is the best idea for organizing society because in its regulated form (constitutional) it prevents power from becoming concentrated and it can adapt to changing circumstances. Its biggest challenge is to deal with the desire of voters for both freedom and security. Problems occur when there is lack of balance between these demands.

Stephens says capitalism works well in Asia and the sense of political powerlessness is “a western rather than a global phenomenon.” Most Asians feel good about their situation today and look to the future with optimism. Americans and Europeans have discovered that capitalism no longer belongs to the west.

So, Europeans should take pride that capitalism and democracy are universal ideals that were discovered in Europe and are now spreading throughout the world. What the developed nations must do is restore their ability to compete with the emerging nations. That means becoming more efficient, and the best way to do that is to reduce the size of government. We need more entrepreneurs and fewer bureaucrats.

The biggest obstacle to overcome has to do with the tendency to deny reality. Those who would like to have government become even bigger pretend to believe that the financial crisis has something to do with capitalism, when in reality it was based on the belief that everyone is entitled to own a home. When the entitlement mentality takes hold in China America could become competitive again. Some day in the future Chinese capitalists might want build factories in America to take advantage of our low labor costs.