Medworth.org.uk

If a detailed, factual study were made of all those instances in the history of American industry which have been used by the statists as an indictment of free enterprise and as an argument in favour of a government-controlled economy, it would be found that the actions blamed on businessmen were caused, necessitated, and made possible only by government intervention in business. The evils, popularly ascribed to big industrialists, were not the result of an unregulated industry, but of government power over industry. The villain in the picture was not the businessman, but the legislator, not free enterprise, but government controls.

Businessmen were the victims, yet the victims have taken the blame (and are still taking it), while the guilty parties have used their own guilt as an argument for the extension of their power, for wider and wider opportunities to commit the same crime on a greater and greater scale. Public opinion has been so misinformed about the true facts that we have now reached the stage where, as a cure for the country’s problems, people are asking for more and more of the poison which made them sick in the first place.

– Ayn Rand, “Notes on the History of American Free Enterprise” (1959), reprinted in Capitalism: the Unknown Ideal

Recent events clearly demonstrate that the economic system in which we live has suffered a massive failure. The failures of Bear Stearns and Lehman Brothers (and the near-failures of Merrill Lynch and AIG) in the United States, the failure of Northern Rock (and near-failures of HBOS and Bradford & Bingley) here in the UK, and the panic of the past year in the mortgage and other credit markets, prove this beyond doubt. Two questions now face us: what went wrong, and what to do next.

It is a constant of human nature that when disaster strikes, people revert to their most deeply-held, most fundamental, most certain beliefs, in search of a secure, comforting mental island in an advancing sea of chaos. We hear stories of how, in days gone by, a tragedy like a disease epidemic or a flood would send church attendance soaring, and wild-eyed preachers would roam the streets urging sinners to repent and return to the “old-time religion”.

We like to tell ourselves we now live in more enlightened times, and in many ways this is true. But not only is the reaction to the recent events identical in essential pattern to that which I just described, the moral content of the beliefs to which people are now retreating is fundamentally no different from the faith of the Puritans — and accepted on no greater evidence.

Examples of this in the media are trivial to find. On the day I wrote this, the Guardian said:

A truly compassionate and progressive view of the challenge now facing Britain would start by acknowledging that financial markets failed. They failed not just because of inadequate regulation, but because individual players in the City lost sight of their obligations to the wider economy and to society. They failed on their own professional terms to evaluate risk, and they failed morally, by demanding freedom from restraint and then abusing it. That should not be a matter of dispute between left and right. It is a matter of fact.

On the op-ed page of the same newspaper, Will Hutton complained:

[A]lthough some conservatives in Britain and America continue to make the ideological case against any government action as a response to the recent turmoil – governments necessarily do everything worse than the market – they have no alternative proposal about how to restore trust once it has gone. Trust is a reciprocal relationship, dependent upon a desire to be considered decent and honourable. Even in the dog-eat-dog financial markets, trust and integrity are matters of self-interest. However amoral you may be, it is in your interest to care about your reputation, because if you behave badly you will not do business with me – or others – on favourable terms again.

But the scale of the personal rewards now available in London and Wall Street – £15m-£20m at the top is the norm – along with the greed-is-good doctrine associated with extreme laissez-faire economics, has trashed the need for individuals to worry about integrity. They don’t need to be concerned about their reputations; they just need one deal or one year at the top and they need never work again. The incentive structure has so departed from one of the principal norms of fairness – proportionality between value added and reward – that it has eviscerated trust relationships and integrity.

From the other end of the political spectrum, the Mail (admittedly while attempting a feeble defence of capitalism) stated:

The search for an answer begins with understanding why we got into trouble. The Western world, and in particular Britain and America, has been on a decade-long orgy of debt.

All of us -– government, companies and consumers -– borrowed too much. And when the inevitable downturn came, consumers lost their homes, governments their tax revenue, and banks their shirts.

In the short term, the U.S. decision to bail out these greedy reckless bankers by buying their bad debts may hopefully end the crisis.

Earlier this year, long before the latest spate of bank failures, the same paper argued:

Horses and stable doors may spring to mind. But Bank of England Governor Mervyn King is 100 per cent correct about the causes of the financial crisis hitting every saver and borrower in the country.

Yes, banks do need to shake up their hubristic, complacent boards and impose discipline on their trading practices.

Yes, they do need to maintain adequate cash reserves to meet their liabilities.

And, yes, it is imperative that they stop offering outrageously excessive bonuses to their employees.

Not only do these obscene payments encourage young and inexperienced traders to take reckless risks, thereby jeopardising the banks’ own long-term interests.

But, as the governor points out, they also lure highly qualified engineers and scientists to the City, when their skills could be put to far better use elsewhere.

Wise words, indeed (though they’ve come years too late).

Is anyone in the Square Mile listening?

Going back to the left-wing media again, the Independent had an editorial on this subject:

There was stupid lending and greed-driven recklessness in London, just as there was in New York. Our banks might not have been involved in the disgraceful business of selling sub-prime mortgages to poor Americans who could not afford them, but they were more than happy to buy up the high-yielding financial instruments that were linked to the value of these bad loans.

Even the Telegraph, perhaps the most reliably pro-liberty newspaper in the country, stated in an editorial:

Whether or not this intervention works, there can be no doubt that governments the world over, particularly Britain’s, must work out how to minimise the chances that the kind of financial disaster we are now experiencing will happen again.

The lesson of the past year is indeed that capitalism needs to be saved from itself – but the temptation, in looking for a cure for its ills, will be to destroy its essence.

One of its most obvious ills is that, under the system we now operate, profits are privatised but losses are nationalised: individuals get to keep the millions they make, because when their decisions lead to losses, they do not pay – the rest of us do. That is not a viable “social contract”. The lack of reciprocity inherent in it is simply not acceptable to any electorate.

What is the alternative? The Left’s mantra of “social control” of the economy could gain a new lease of life, despite being thoroughly discredited by the events of the 20th century.

It is therefore crucial that those who understand free markets and their essential contribution to creating prosperity for everyone make a convincing case for a new and better form of capitalism. (My emphasis)

Nor is this just a media frenzy. Recently, the Church of England Archbishop John Sentamu condemned those who engaged in short-selling of bank stocks as “bank robbers and asset strippers”.

For once, we find Britons from a wide diversity of political and religious viewpoints in essential agreement. Note the words of condemnation being used: “abuse” of “freedom”, “greedy”, “reckless”, “hubristic”, “obscene payments”. The people to blame for this crisis are the greedy, selfish bankers, and the regulators who were supposed to stop them from being so selfish and greedy — and to a lesser extent, the banks’ greedy customers who recklessly took out loans they could not afford for things they selfishly wanted.

Or, as the wild-eyed preacher might have put it (in language which I must say I vastly prefer): all we like sheep have gone astray; we have turned every one to his own way; and the Government hath laid on the taxpayer the iniquity of us all.

Faced with a large economic crisis, people naturally search for reasons and solutions, and equally naturally, they blame those whose activities they have always regarded as morally suspect: bankers and businessmen. It was their immorality, according to the standard line, which got us into this mess; only government intervention can get us through it, and only more and better regulation can stop it from happening again.

I find it interesting to observe the extent to which cycles of various kinds play a role in human affairs. This essay is mainly to be about the economic cycle of boom and bust, but the current climate also provides evidence of a connected “moral cycle”. During the boom times, the voices of condemnation of greed were considerably quieter: this is true both on the left and right of politics, and in the public at large. While everyone is prospering, moral issues tend to fade to the back of people’s minds, only to spring to the forefront again during more difficult times.

I see this as an inevitable consequence of a morality which conflicts with the demands of practical living, a code of ethics which is impossible to practice consistently. Our moral code tells us that self-interest is morally suspect, that greed is bad — but self-interest and greed are the most fundamental engines of prosperity, economic progress, and indeed human survival. As Adam Smith aptly put it in The Wealth of Nations in the 18th century, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Without greed and selfishness — by which I mean action taken in an individual’s own rational long-term self-interest — we would all starve to death very quickly.

This contradiction has many interesting and pernicious consequences for popular attitudes to morality (notably widespread cynicism, and rejection of moral principle in favour of a “moderate balance” between contradictory “extremes”). It is not surprising that when things are going well, people feel that everyone is on a justifiable “holiday from morality” — nor is it surprising that when the downturn arrives, people fall back on that morality as the explanation for their problems. However, since their morality is impractical, using it to solve problems can only create more problems: the solution is to use range-of-the-moment “emergency measures” to get back to a system of normality (though with some extra measures in place to make it more “moral”) and then repeat the cycle. Naturally this is unsustainable, as the more “moral” the system gets, the worse it gets. This really is a vicious bind, and the only solution is to challenge people’s moral premises.

Let us begin, though, with economics. This is a subject I find rather intimidating, so I have recently been trying to brush up on the basics. For a long time, I have had on my bookshelf an unread copy of a book (amazingly available free online in full) entitled Economics for Real People, by Gene Callahan, which describes itself as a layman’s introduction to the economic thought of the free-market “Austrian school”, encompassing thinkers such as Ludwig von Mises and Friedrich Hayek. Given the circumstances, I decided to pick it up: I was glad I did, because it is brilliant. Funny, lucidly written, and building up logically from the fundamentals, it helps the reader understand the principles of human action better than anything else I have ever read. Compared to the vague, confused, non-essentialised, and plain wrong coverage of finance flooding our newspapers, Callahan’s writing is like a breath of fresh air, and is much more relevant and enlightening on recent events, despite having been written back in 2002.

Callahan was writing shortly after the dot-com crash, 9/11, and the fall of Enron, and his coverage of the Austrian view of the business cycle in Chapter 13 is clearly written with these events in mind. This is the first vital fact to remember: the present bust is not the first economic decline we have witnessed, and it is unlikely to be the last. The press today is full of references to America’s Great Depression in the 1930s, with employment and housing statistics being thrown around in an attempt to decide whether our problems today are as bad as those. However, few if any commentators seem to be trying to analyse whether there are any common causes unifying all downturns: the comparisons being drawn are on the most superficial level. This is in keeping with the “pragmatic”, piecemeal approach to problems which is such an ingrained part of our culture now (the influence of bad philosophy yet again).

Callahan uses a number of clever analogies and thought experiments to help the reader understand economics. His single most important point for our purposes is his recognition that economic booms and busts are caused by government interference with interest rates and the money supply. Central banks manipulate interest rates by offering to borrow from and lend to private banks at certain rates, and adjusting the total amount of money in existence to compensate for the resulting demand. If central banks set the interest rate too low, banks will want to borrow enormous amounts of money in order to lend it on to their own borrowers, and to meet that demand, the central bank will have to increase the amount of money in circulation. The opposite effect occurs if the central bank sets rates too high.

Readers familiar with basic economics will recognise this as the exact type of effect which occurs whenever the government tries to manipulate any price. Set it below the market rate, and there will be a huge surge in demand; set it above, and there will be a surge in supply. Interest rates are prices just like any others: they are effectively prices for time. An interest rate is what you have to pay someone to forgo consumption now in favour of consumption in the future. If I place equal value on £100 now and £110 in one year’s time, my interest rate is 10% per year. If the interest rate is set by government fiat at 5%, and I value my time at 10%, I will be unwilling to forgo immediate consumption: I will demand huge amounts of this cheap money and spend it immediately.

(Of course this is a simplified discussion. There isn’t just one interest rate — the interest rate on any particular transaction depends on all kinds of factors, such as the time the loan will be repaid, and the likelihood that the borrower will fail to pay the money back. In addition, there are marginal factors involved: I don’t face a straight choice between immediate consumption and saving for the future, but a choice about how much to do of each, and interest rate manipulations affect where I will draw the line rather than flipping a switch from one to the other.)

To understand the basic cause of the current crisis, one need only look at the economic policy of US Federal Reserve Chairman Alan Greenspan. As the Fed website shows, he set the base rate at the unbelievably low value of 1% for a whole year, from June 25th 2003 to June 30th 2004, and it was still very low both sides of that time. (1% was well below the rate of inflation at the time, which means that in real terms, interest rates were actually negative: by the time the lender got his money back, it was worth less than when he lent it!)

This caused a huge expansion in the money supply: everyone in the economy could get funds cheaply, and they borrowed huge amounts, spending the money on all sorts of things, most notably houses. The prices of these goods therefore increased, and there was a huge spurt of building to meet the demand. Such was the availability of money, that banks were incentivised to lend it out even to people with dubious credit ratings, in order to try to put it to work. (Even a certain proportion of defaults did not pose a problem, since people’s time preferences were so different to the way the government had set rates.) Similar distortions occurred all through the economy.

Of course, since the amount of actual real goods in the economy was not increasing as fast as the money supply, this boom could not last. Forcing interest rates below the market rate incentivises people to consume now rather than produce and save: thus, the necessary longer-term capital investments which are required for sustainable growth were squashed in favour of short-term consumer gratification. As the lack of capital goods kicks in, the crash begins. Callahan puts it as follows:

Many entrepreneurial plans count on complementary capital goods being available sometime in the future. For example, as I launch my e-commerce business, my plan may have a step such as: “Six months after start-up: hire 100 web programmers at $100,000 each annually.” But in the intervening months the boom is proceeding. Other companies are flush with cash from the credit expansion as well. As we all begin to hire our programming staffs, it turns out that web programmers are not available in the quantity and at the price we thought they would be. Any company that can’t afford to put its plan on hold must bid more for those services.

The new credit tends to flow first into the higher-order capital goods—things like business plans, new buildings, new plants, and so on. It is later, when those goods require complementary goods to continue production on their road toward consumer goods, that the transitory nature of the boom becomes apparent. If real saving had occurred, there would have been a much better chance of the complementary goods being available. Take our example of my e-commerce business: If enough people had been setting aside enough time to learn web programming (a form of saving), then perhaps there would have been enough web programmers available for both my plans and those of my competitors to succeed.

(I cannot resist rephrasing the point in other language. Government-coerced low interest rates cause people acting on those price signals to live like the lilies of the field, who neither toil nor spin — because the government has punished toiling and spinning. Of course, this leads to long-term disaster, but take no thought for the morrow: after all, these are moral policies designed to benefit the poor, and we all know you should love thy neighbour. And once we get into trouble, by no means look too deeply into how it happened: sufficient unto the day are the bank failures thereof. Yes, it would be fascinating to do a full analysis of the philosophic roots of the economic policies of the last few decades, and I know a good place to start.)

Back to the point. Who are the winners and losers from the above process? Callahan introduces an extremely enlightening example, which brilliantly addresses today’s situation:

Let us, for simplicity, divide entrepreneurs into classes A and B. (Such a sharp division is not crucial to our analysis, as you’ll see; it is merely a device to simplify our picture.) Class A entrepreneurs are those who are currently profitable, i.e., those most able to interpret the current market conditions and predict their future. Class Bs are struggling, money-losing, or, indeed, unfunded “want-to-be” entrepreneurs, less capable at anticipating the future conditions of the market.

Now, let us go to the start of the boom. It is 1996, and the Fed begins to expand credit. To where does this new supply flow? The As are not necessarily in need of much credit. If they wish to expand, they have available their cash flow. In the state of the market prior to the expansion, they were the ones most able to secure loans. They quite possibly have been through several booms, and, adept at interpreting the state of the market, suspect that they are witnessing the start of another one. They are cautious about expansion under such conditions.

The situation for the Bs is quite different, however. Their businesses are marginal, or perhaps nonexistent. They have previously been turned down for funding. Even if they could tell that they are witnessing an artificial boom, it might make sense for them to “take a flier” anyway. As it is, they are either not capitalized, or on the verge of failing. If they ride the boom, they will have a couple of years of the high life. And who knows, their business just might make it through! Or, perhaps, they will build a sufficient customer base to be purchased, maybe even enough to retire on. In that case, it might not matter to them if their company ultimately fails.

They use the easy credit to expand or start their business. We should notice that the As are much less susceptible to such a motivation—they expect to be “living the high life” anyway, since their businesses are already doing well.

So from the very start of the boom, it is the weaker, less productive businesses who are the beneficiaries. But wait, it gets worse:

Although the most skilled entrepreneurs suspect that the expansion is artificial, most can’t afford to shut down their business for the duration of the boom. But if they can’t, they must increasingly compete with Bs for access to the factors of production. Take, for instance, the A company Sensible Software, Inc., and the B company, Dotty Dotcom. Dotty Dotcom, flush with venture capital and an “insanely great business plan,” is luring top Java engineers with salaries matching Sensible’s while throwing in stock options that could be worth millions after the IPO. (That is an investment in higher-order capital goods, as top engineers are needed chiefly for more complex projects, which typically can take several years to complete.) Sensible simply cannot afford to lose all of its best programmers to Dotty. It must bid competitively for them.

However, in order to do so, Sensible must take advantage of the same easy credit that Dotty is using to back its bids. At the market rate of interest existing at the start of the boom, Sensible was already bidding as much as it deemed marginally profitable for producer goods. So the A entrepreneurs, willy-nilly, are forced to participate in the boom as well. Their hope is that, in the downturn, the basic soundness of their business and the fact that they have expanded less enthusiastically than the Bs will see them through, perhaps with only a few layoffs.

Or, take the case of a class A mutual fund manager who suspects that stock prices are artificially high. If he simply puts his funds in cash and attempts to sit on the sidelines, he’s sunk. All of his customers will leave, and he’ll never survive to see the bust that proves he was right. In order to stay in business, he will continue to invest in stocks, perhaps keep a bit more money in cash than usual, and watch carefully for signs of the turn.

Our analysis of the banks proceeds in the same fashion. It is precisely the marginal lenders, those with the least ability to evaluate credit risks, that have the least to lose and the most to gain from an enthusiastic participation in the boom. They will tend to have the strongest motivation to expand credit. The more prudent lenders are eventually sucked in, in order to compete. The problem is compounded by the tendency of the International Monetary Fund, central banks, and other government bodies to jump in and bail out large investors when they get in trouble. The Mexican bailout of 1994 and 1995, and the bailout put together, at the Fed’s urging, after the collapse of Long Term Capital Management a few years later, are two prominent, recent examples of the creation of moral hazard. If you are promised all of the upside of making a risky loan, should the borrower being funded succeed, but are protected on the downside by the likelihood of a bailout, you are much more likely to make the loan! [Bold emphasis mine.]

Does any of this sound at all familiar? To my mind, current events are a huge, huge vindication of Austrian economics. We have had an enormous credit boom, and we are now experiencing the bust, with poor loans and bad business plans being brutally exposed.

Note the key moral issue at stake in the above. We hear a great deal about how “greedy” bankers made all kinds of stupid loans to people who couldn’t afford to pay them back; Callahan’s analysis shows that government policy rewarded short-sighted foolish lending, and punished sound practices and competent money managers. The latter were forced to participate in the bad practices in order to stay competitive. But of course, no-one points a finger at Alan Greenspan for his crucial role in our current problems: after all, he was a “well-intentioned” government official concerned only with “the public good”. He couldn’t possibly deserve any moral condemnation, could he — not when compared to these greedy bankers?

As a matter of fact, Greenspan is one of the guiltiest men in America. He had the mind to know better: he understood economic principles well, and wrote many excellent essays in his early career (several of which were included in Capitalism: the Unknown Ideal, the Ayn Rand essay collection I quoted from earlier). However, he then went on to “take Wesley Mouch’s job” (Wesley Mouch was the economic dictator in Ayn Rand’s novel Atlas Shrugged). No greater guilt could be imagined. “Still, what can you do when you deal with people?” Principles go out of the window, and narrow pragmatism rules the day. You can see the results around you.

All the components of this crisis — bar none — would have been impossible without Alan Greenspan’s interest rate policies following the dot-com crash. The housing bubble was fuelled by this cheap credit: low interest rates cause an increase in the money supply which causes (in fact, which is) price inflation. The large bonuses paid for incredibly short-sighted lending and derivatives trading strategies are all a function of the short-range viewpoint which coercively-imposed low interest rates force people to take.

However, government interest rate manipulations do not fully explain why the crisis has taken the particular form it is now taking (with a housing crash, widespread mortgage defaults, banks refusing to lend to each other due to illiquid and impossible-to-value assets on their balance sheets, et cetera). After all, not all booms and busts have played out this way. To understand this, we have to know much more about the specifics of the current economic situation: the actions of Fannie Mae and Freddie Mac in creating, packaging and “guaranteeing” (with taxpayer support) dubious mortgages, the Community Reinvestment Act which forced banks (contrary to the Independent’s disgraceful statement) to abandon all the key criteria of responsible lending, the dreadful performance of the ratings agencies (which have government-granted monopolies), the tax advantages of investment in housing, government deposit insurance where sensible savers are forced to subsidise those who take more risk, and so on.

But for our purposes, we need not dig too deeply into this: government coercion is behind every single one of these factors. Many of them were set up with the explicit goal of denying crucial facts of reality: they made banks act as if certain people were credit-worthy when they weren’t, that people’s time preferences were ridiculously long when they weren’t, et cetera. It should be no surprise that reality refused to fall into line with the fantasies of our government officials and the quasi-fascist corporate entities they spawned. If judging laissez-faire capitalism is our goal, we need spend no more time on this.

I repeat: there has been a widespread failure to recognise the above facts, because of moral philosophy. As they dig into the causes of this crisis, the moment journalists hear about an act of selfishness they stop looking: their moral premises tell them they have found the answers. When they see, for example, banks’ profit-seeking dealings in derivatives, they demand greater regulation of these markets, without ever thinking to ask where the flood of cash that has been sunk into these derivatives came from, or what government interventions (such as the mortgage guarantees made by Fannie Mae and Freddie Mac) might have skewed these companies’ perception of risk to make them pursue the actions they did. Popular accounts of the current crisis are dominated by this moral blindness.

While it is true that genuine injustices are rife in the present situation, with innocent people suffering and irrational people escaping punishment, the identity of the innocent and the irrational in the popular account is badly warped — and it is warped because of moral philosophy.

(In addition, there is a metaphysical point to be made here. An amazing number of people seem to believe that all this is merely a “crisis of confidence”, that nothing material is wrong with the economy, and that if we all believed hard enough that everything is fine, it would become true. I call this the Tinkerbell theory of economics: just wish hard enough, and dead banks will become healthy and bad loans will become sound. More philosophically inclined readers will recognise this as the primacy of consciousness, the view that reality is subject to the mind and will obey its demands. And note again that religion is a key carrier of this premise in modern culture: they just call the wishing “prayer”.)

So what is the solution to our current woes? As I have argued, we have to begin at the deepest philosophical roots of the intellectual causes of this crisis. We must recognise the crucial necessity of egoism to human survival: we must welcome self-interest rather than condemning it, and study the principles of how individuals can successfully pursue it. We must also recognise the role of free, unregulated, uncoerced markets in rewarding rational, sustainable wealth creation and facilitating good-willed voluntary exchange to mutual benefit among people — and correspondingly, how government intervention has set this mechanism against itself and against us all.

How would that translate into concrete policy? To address the most fundamental issue here, we must remove the government’s ability to interfere with the markets, especially the money supply and interest rates. We must adopt a currency which cannot be inflated at whim, which keeps the economy mercilessly tied to reality, which is immune from the influence of our political masters.

Fortunately, we already have a perfect candidate: gold. We should work to re-monetise gold immediately: it should be legal to use gold for anything we currently use money for. Contracts in which the participants agree to pay in gold should be enforced. The government should accept taxes in gold, and should charge taxes on gold income in exactly the same way as it does on our current money. Interest rates should be established freely between lenders and borrowers, with no government interference, and the money supply should fluctuate with supply and demand. All regulations preventing banks from taking gold deposits or controlling how they run their businesses should be repealed, as should any state deposit insurance legislation: if bank customers want their deposits insured, they should pay the insurance premiums themselves according to the amount of risk they have taken. The government must commit never to bail out a bank again: bad banks must be left to go bust in order to ensure capital flows to the most rational and productive users of it. Laws which prevent banks from merging or taking each other over should be repealed, so that if a bank does run into trouble, it can be swiftly exposed and taken over before a panic occurs. Making short-selling and insider trading legal (subject to contractual agreement of course) would further help the market process to bring about economic justice.

These are long-term policies, however. For the time being, we are in a real mess. I am not completely sure I am against the current round of bank bailouts, because the fractional reserve system means that if they failed, we would see a massive contraction in the money supply, with disastrous consequences in the economy generally, as well as with individual savers. (Full disclosure: I work for an institution which will benefit from these bailouts.) I must confess I am at something of a loss as to what policies should be followed in the near term, especially given the incredible speed at which events are unfolding. There are many rules and regulations (such as Sarbanes-Oxley and the Community Reinvestment Act) which could profitably be repealed immediately, and we could provide tax relief on certain things to get markets moving again — but I have no idea how much good this would do over short time scales.

The malinvestments caused by this credit bubble must be unwound and our economic system must be replaced by a sound one, but it is far from clear to me how that could be done on the schedule needed to avoid disaster. Sometimes a doctor must give heroin to a drug addict to prevent a heart attack, despite the fact that in the long term, she wants to get him off heroin: I fear that the magnitude of the crisis may now be such that it is difficult to see how general principles of sound economics can best be applied. Ideally, we need a way to unwind the malinvestments and return to a moral policy steadily, to allow people to adjust and to protect the innocent. I am not an economist, and others may be able to see a good way to do this more clearly than I can.

The moral and economic points to be made here, however, are clear. Capitalism has not failed: our governments’ attempts to erase the facts of reality have failed, and failed disastrously. The cause of this crisis is not greed or selfishness, which are in fact virtues vital for our survival, but government coercion undertaken for “the public good”. If the short-term solutions are not obvious, the long-term solutions are.

I will leave you with a final apt quotation from Ayn Rand.

No politico-economic system in history has ever proved its value so eloquently or has benefited mankind so greatly as capitalism — and none has ever been attacked so savagely, viciously and blindly. The flood of misinformation, misrepresentation, distortion, and outright falsehood about capitalism is such that the young people of today have no idea (and virtually no way of discovering any idea) of its actual nature. While archaeologists are rummaging through the ruins of millennia for scraps of pottery and bits of bones, from which to reconstruct some information about prehistorical existence — the events of less than a century ago are hidden under a mound more impenetrable than the geological debris of winds, floods and earthquakes: a mound of silence.

To obliterate the truth on such a large scale, to hide an open secret from the world, to hide — without any power of censorship, yet without any significant sound of protest — the fact that an ideal social system had once been almost within men’s reach, cannot be done by any conspiracy of evildoers; it cannot be done except with the tacit compliance of those who know better.

By their silence — by their evasion of the clash between capitalism and altruism — it is capitalism’s alleged champions who are responsible for the fact that capitalism is being destroyed without a hearing, without a trial, without any public knowledge of its principles, its nature, its history, or its moral meaning. It is being destroyed in the manner of a nightmare lynching — as if a blind, despair-crazed mob were burning a straw man, not knowing that the grotesquely deformed bundle of straw is hiding the living body of the ideal.

–Ayn Rand, in Capitalism: the Unknown Ideal (1966)

Further reading

The Government Did It, by Yaron Brook

The Real Lesson of the Great Depression, by Yaron Brook

In Defence of Speculators and Short-Sellers, by Amit Ghate

Update (11/10/2008): Minor edits.

You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.