Is a Purer Capitalism the Way Forward?

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With the global financial crisis in its fourth year, student fees increases, record unemployment and a double dip recession; it is a prime time to evaluate which side of the Keynesian/monetarist coin we wish to land on. It is without question that the staggeringly high budget deficits that haunt national treasuries around the world need to be addressed; the question is whether or not the austerity packages that national governments, including Britain, have rolled out are working. It would betray simple logic to deny that reducing spending would, in turn, reduce the deficit, and there are positive things to show from the cuts. From an international perspective, the coalition’s austerity policies have left Britain with a relatively clean image and allowed her to (tentatively) retain her AAA credit status – a luxury that has not been afforded to the USA. The British government’s policies, while not widely popular, have been deemed as necessary by some, and hailed as a great way to reduce the size of government, after thirteen years of public sector growth under Labour, by others.

But how far, the angel perched on the other shoulder asks, will we allow these monetarist ideals to go? With unemployment hitting an all time high in the UK and across the Eurozone in March, perhaps we should adjust our priorities. We had narrowly escaped recession only to get dragged back, and the coalition’s policies are partly to blame; it has been said over and over again, mostly by Labour politicians, that the worst time to cut spending is in a recession, a notion which has been shown to be nothing short of the truth. The coalition’s political lenses are focused solely on reducing the national debt, arguing that it is better to go through difficulty now and live within our means rather than cutting less and allowing the economy to properly recover; either that, or they didn’t bother to read the chapter on Keynesian economics in their copy of ‘Economics for Dummies.’ Keynesian thought, which advocates a mixed economy and argues that the invisible hand of the free market isn’t always efficient, has made a substantial resurgence since the global financial crisis began, with good reason. Government expenditure is a necessary tool for a stable and flourishing economy, anyone who argues the counter is wrong; Keynesian economics is a lot like the Theory of Evolution in this sense, denying it is something best left to rich men with ulterior motives, and Americans. But even America seem to have grasped the concept, President Obama’s stimulus policies have reduced unemployment significantly and allowed the US to enjoy constant growth for over two years; their suboptimal AA+ rating doesn’t look so bad now. On this side of the Atlantic, Prime Minister Cameron has hinted at privatisation of the road system, a system even Adam Smith declared should be the responsibility of the state. The coalition argues that it would not be right to hand a massive deficit to the next generation but entirely fair to hand them an overpriced education system and a dismantled NHS.

Now that I have successfully converted you into communists, I will now endeavour to reverse that process. From the early stages of the global economic meltdown, people have been quick to blame the banks and the unregulated financial system for the world economy’s rapid descent in to chaos. Though, as always, the truth resists simplicity and this view exposes a certain economic myopia. Governments are unique in their ability to thoroughly screw everything up, whether it’s rapidly depleting the Earth’s finite amount of helium, jumping into unnecessary wars or mis-regulating the financial sector. As Ronald Reagan famously put it, “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.'” Before the crisis, world governments, in the US especially, had meddled within the financial sector by requiring banks to offer loans to people who could not afford to repay them through policies such as the 1977 Community Reinvestment Act [1] and its subsequent regulatory amendments from 1989 to 2008. This sort of movement, along with record low interest rates in an attempt to stimulate the economy after 9/11, and banks being pressured to increase lending to sub-prime customers led to spiralling house prices and eventually, the swelling and inevitable burst of the housing bubble [2, 3]. Similarly today, many of Britain’s banks which are majority or part owned by the government, are being pressured to lend more (especially to small businesses) at low interest rates, while simultaneously reducing the amount of risky loans they make. This puts the banks in a bit of a pickle, especially since credit is lacking in availability or is simply too expensive for such loans to be commercially viable. On the other hand, more regulation, as opposed to less, could have been the answer. Were there measures in place to outlaw exploitative short selling of loans and mortgages, along with other methods to profit off the inherent instability within the financial sector, the credit crisis, or parts of it, could have been avoided. It is easy to blame the government, it is equally easy to blame big business, but we have to remember that hindsight is a wonderful thing.

The British economy is a complicated beast, the global economy even more so. Throw international organisations such as the World Trade Organisation and the European Union into the equation and it becomes even more complex. In this respect, it is easy to see why most politicians lack the understanding necessary to make such important decisions on regulation. In the end, the underlying catalyst and exacerbator of the global financial crisis wasn’t too much regulation, nor too little, it was an absence of smart regulation written by people with the foresight to determine the drawbacks and the humility to accept that mistakes were made. Politicians don’t tend to have either foresight or humility, and the same can be said for profiteers in the private sector; we need Plato’s selfless, ascetic Philosopher Kings pulling the strings of the economy if humanity is ever going to get anything right. Assuming 4th century BC thought experiments cannot be applied to reality, some well placed (and well paid) quangos and independent institutions should do the trick. Overall, no – a purer form of capitalism is certainly not the way forward considering the selfish and manipulative aptitude of the human race; regulation is absolutely necessary. However, the equally manipulative and selfish men and women who deck the halls of Westminster should not be the ones to write it.

By Alexander Titcomb

Edited by George Richards

 

Further reading:

[1] The Community Reinvestment Act
http://en.wikipedia.org/wiki/Community_Reinvestment_Act

[2] Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labour http://www.reuters.com/article/2008/10/16/columns-us-column-capitalism-idUSTRE49F9C420081016

[3] John Carney, writer at Business Insider
http://articles.businessinsider.com/2009-06-27/wall_street/30009234_1_mortgage-standards-lending-standards-mortgage-rates