Posted by: Bevan | January 20, 2012

What Do We Replace Capitalism With?

The Telegraph (UK) really has a strong financial section – I’m pleased I recently discovered it.  Today they published a thought provoking article entitled Capitalism: The Sequel which argues that capitalism has failed with the global financial crisis, and looks at whether there are any viable alternatives.

I don’t think the events of the past few years show that liberal capitalism has failed.  What has failed is when debt rather than productivity and innovation is used to drive growth, when a non-productive financial sector is left to grow unfettered and unregulated.  The moral hazard caused by the bailouts, both to banks and countries means that the risk of worse problems still exist.  Banks and countries like Greece will not transform themselves if they are given a big wad of cash and a wag of the finger any more than an alcoholic in the same situation.  The other issue is one of political economy – the most powerful economy and nation in history, the US, is crippled by crony capitalism where democracy has been severely damaged by excessive influence from the financial sector.

A return to liberal capitalism will be painful, but will allow rebalancing of the distortions and debt addiction that has led to these problems.  Zombie banks run by the same individuals that caused our problems need to be replaced by smaller institutions that go back to playing their commercial function in the economy of providing credit to producers. Currency unions where wealthy nations benefit from low exchange rates while uncompetitive nations avoid reality by basking in cheap money aren’t viable, especially with the cultural and historical differences between them.  The Euro has to be split up (perhaps into factions rather than nation states) to allow the Mediterranean states to regain competitiveness and solvency under their own steam.  Solutions dictated by others will always lose legitimacy and lead to political instability in the long run.

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