Is Capitalism in Crisis?
1. I would like to thank Paul Glenn for hosting this event and Fred Smith and his Competitive Enterprise Institute for making it happen.
2. This is not my first speech in Santa Barbara today. This morning I tried to convince the “green” participants of the Wall Street Journal Conference that environmentalism is a bigger threat to mankind than any, in the visible future imaginable global warming.
3. I don’t know who suggested the title of my today’s introductory comments here but I accepted it. Is capitalism in crisis?
4. We can probably say that capitalism is not in crisis but that capitalism, or better to say current economic system, which can hopefully still be called capitalism, has a crisis.
5. The question which is raised everyday is whether the current financial and economic crisis has been caused by capitalism, perhaps by too much capitalism, or – on the contrary – whether it was caused by lack of capitalism, by suppressing its normal functioning, by introduction of policies that are not compatible with capitalism, of policies that undermine it. My answer is simple and clear. We witness a government failure, not a market failure as some politicians try to tell us.
6. The second question is why such a huge government failure happened, why we go through it? As I understand it, the reason lies not in economics, but in politics. The current economic crisis is a “just” price for the playing with the market by the politicians.
7. The crisis originated here, in the U.S. It was a joint product of two factors – of the large-scale, massive granting of mortgages to unpromising, unreliable borrowers, and of the over-expansionary monetary policy. Those who are responsible for it are the federal government and the central bank, the Fed. Everything else is secondary and belongs to the supportive background (environment) and is part of the transmission mechanism.
8. Why did it happen? I would not look for explanations in the narrowly defined economic policies, rules and institutions, but in a broader political and social framework and in the whole cultural setting.
9. I am not in favor of anarchy or elimination of the state. But, for most of my life – till twenty years ago, I lived in a system where political, social and all other non-economic arguments and claims dictated the economy, not the other way round. This sequencing is crucial. The horse must always be in front of the carriage, not behind it.
The wrong sequence was the defining feature of the communist system, and the whole idea of our transformation from communism to freedom and market economy was to change this. Our aim was to let the market function, and to supplement market economy with rational social, and now also environmentalist policies. I stress supplement, which means to add ex-post, not to impose ex-ante. I am sorry to say that the current European, originally German, now also more and more American social and ecological market economy is a different model. I guess that with the new President this circle will be completed even here.
10. There are several crucial characteristics of the new system some people call the third way, but I know there are only two ways and this is the second one:
– ever-expanding welfare state’s paternalism,
– environmentalism, and especially its extreme form, global warming alarmism,
– nationalized health-care system,
– all kinds of politically correct “standards” (social, environmental, labor,
health, etc.),
– protectionism, due to the disbelief in free trade,
– positive discrimination,
– living on debt, etc.
11. It is not necessary to play with words. We can say that all of that is exogenous to capitalism (therefore, capitalism itself is not in crisis), or that all of that created a modified capitalism (such a system is inevitably condemned to a recurring crisis).
12. Crisis and the Czech Republic
13. What to do?
Václav Klaus, Santa Barbara, California, USA, March 6, 2009
(notes for the speech held during the dinner organized by the Glenn Foundation for Medical Research)