Laissez-faire is not fini

Posted on October 31, 2008 in Debates, Governance Debates – Commentary – Laissez-faire is not fini
October 31, 2008 at 2:18 AM EDT. MARCUS GEE

Critics call capitalism an inhuman system. In fact, it is the most human of all, reflecting the best and worst of human nature. Like humans, it can reach heavenly heights and abysmal lows. Like humans, it is prone to giddy exuberance followed by wild panic. And like humans, it always bounces back.

This crisis, the worst since the Great Depression, is only the latest on the long roller coaster ride of global capitalism. As a student in the film The History Boys puts it, history is just “one [blinking] thing after another.” You could say the same about the history of capitalism. In the past couple of decades alone, we have had the Japanese asset collapse, the Mexican peso crisis, the Asian financial crisis, the Russian ruble crisis and the Argentine debt default, not to mention the bursting of the tech-stock bubble.

At such moments, people display some of their worst tendencies: selfishness, irrationality, a herd mentality. Smelling smoke in a crowded theatre, a more levelheaded species – Mr. Spock’s Vulcans, say – would form an orderly line and move swiftly for the exits. Humans invariably stampede, trampling each other in the process. Such a stampede is under way right now, and we are all being stomped on.

But when the herd turns – and it always does – what a sight it is to behold. Despite all the panics, recessions and depressions that marked the 20th century – to say nothing of two world wars – the globe recorded the fastest, most sustained advance in prosperity in human history.

On its good days, capitalism has the power to release what is best in people: ingenuity, optimism, courage, capacity for hard work. Just look at what is happening in China and India, where a dab of economic freedom has set off the greatest burst of progress since the Industrial Revolution, freeing hundreds of millions from the bondage of poverty.

John Maynard Keynes, the great British economist, wondered at how pure “animal spirits” can lead pioneering entrepreneurs to put aside the fear of loss “as a healthy man puts aside the expectation of death.” Bill Emmott, former editor of the Economist, notes capitalism depends on a sort of “financial chutzpah”: the willingness of banks and other institutions to lend or invest money they do not physically possess in the hope this “sleight of hand” will not be challenged – or at least that, when it is, they will have made enough money to come out ahead.

Capitalism’s biggest problem is its inherent instability. The very qualities that make it such a prodigious creator of wealth – risk-taking, confidence, hope for a better future – sow the seeds for its crises. Overconfidence leads investors to make foolish bets on risky propositions and banks to lend money to dubious customers. British essayist Walter Bagehot remarked as long ago as the 1800s that when “a great deal of stupid people have a great deal of stupid money,” the result is always speculation, collapse and panic.

And as Warren Buffett says, people aren’t getting any smarter. When stocks, property and other assets are rising, no one wants to be left out of the party. “It’s a lot like Cinderella at the ball,” the world’s richest man told interviewer Charlie Rose. “I mean, you know at midnight everything is going to turn to pumpkins and mice, right? But if the evening goes along, I mean, you know, the guys look better all the time, the music sounds better, it’s more and more fun, you think, ‘Why the hell should I leave at quarter of 12. I’ll leave at two minutes to 12.’ But the trouble is, there are no clocks on the wall. And everybody thinks they’re going to leave at two minutes to 12.”

Now that midnight has arrived and the crowd is rushing to the exits, critics of capitalism want to prohibit such entertainments, or at least hire a stricter chaperone. The air resounds with calls for tighter control of markets, lending and trade. “Laissez-faire is finished,” says French President Nicolas Sarkozy.

But clamping down on economic freedom now would strangle hopes for a recovery. Clearly, governments have to step in – and have done, massively – to support banks and bank deposits. The U.S. government helped bring on the Depression when it raised interest rates and reduced federal lending in its zeal to purge the financial system.

It is equally clear that a dose of stimulus – lower interest rates, extra government spending – is needed. Defenders of capitalism have never said that governments should have no role, only that they should avoid trying to run the show.

But the intervention should be as brief and as light as possible. Capitalism may be a tippy vessel, but it has a built-in self-righting mechanism: human optimism. When the panic is at its height, shrewd investors like Mr. Buffett see an opportunity and start to invest again. Hope begins to stir again, fear to subside. Human beings may be flighty creatures, but they’re resilient, too. They always bounce back. So will that most human of inventions, capitalism.

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