Is Capitalism Dying?

For your edification, I present a few remarks by famed economic historian Niall Ferguson. Interviewed for an audio documentary on the health of capitalism, Ferguson addressed a number of important issues in political economy. The link will take you to the video itself. For our purposes, I quote the transcript. I take full responsibility for the questions: they may be slightly different from the interviewer's, but they provide some narrative connective tissue.

Question 1: Was the Trump election a rejection of capitalism?

Ferguson:

In recent elections we didn’t see a rejection of capitalism. The victory of Donald Trump, in particular, was the election of a capitalist to the highest office in US politics. Trump’s critique wasn’t of capitalism but of globalisation and its various manifestations – notably free trade as it has been constituted and immigration, and out-sourcing. The backlash we have seen from within certain advanced democracies has largely been against a globalisation that occurred too quickly, and without adequate checks and balances – rather than a reaction against the economic system that overcame socialism in the 1980s.

Capitalism is one thing. Free trade and globalization are others. It’s one thing to be against free trade and quite another to be against the way certain trade deals were negotiated.

Question 2: Why has unionization declined?

Ferguson:

  

The decline of unionisation doesn’t explain falling wages at bottom end – it’s simply a reflection of declining demand for unskilled labour, especially in developed countries. Most deserving of blame are the education systems in developed countries – the US & UK in particular – where, despite more and more taxpayers’ money being spent, rates of literacy and numeracy are actually going backwards for large numbers of children. National governments are simply failing to prepare their citizens for the new economy and research by Raj Chetty, a colleague at Stanford, shows the significant contribution of bad schools and bad teachers to widening inequality in US.

Our educational systems have failed to produce workers who are capable of doing the more technical jobs that are now being offered. America has a bad schools and bad teacher problem. We are not, he suggests, going to fix it by increasing the power of unions. Certainly, not by empowering the teachers' unions.

Question 3: What’s wrong with western economies?

Ferguson:

As I argued in The Great Degeneration, the current weakness of much of the western world isn’t rooted in capitalism but in fundamental weaknesses of the State – including its structural fiscal deficits, complex and burdensome regulation, and world-trailing public services, where even some gains in public health are being reversed. State failure is not capitalism’s fault – but the fault of inadequate politicians, ineffective public administrators and and public sector unions that are too powerful.

Then again, if you work for the government or if you believe that we need government to control greedy predatory capitalists you will never find fault with government. Ferguson retorts that the problem lies with the state and with the public sector unions that control the bureaucracy.

Question 4: What lessons did we learn from the market crash in 2008?

Ferguson:

We’re learning precisely the wrong lessons from the crash by embracing the “silly” but easily understood argument that we need more regulation. The crash of ten years ago began in the part of the financial sector – the banks – where regulations existed “in profusion”. The crash didn’t come from the largely-unregulated hedge funs, who worried regulators before the events of 2007 and 2008. Because the regulations were so complex the banks gamed them. 

And also:

The real explanation for the crash lies in the cosy relationship with the State that the complex regulations brought about. Banks were able to behave as recklessly as they did because they calculated (correctly in all cases but Lehmans) that they were too big for the State to let them fail. Although friends of capitalism have this more accurate explanation for the crash – of excessive closeness between regulators, politicians and the banks on Wall Street and in the City of London, the “fairy story” put about by the likes of Paul Krugman, that it was all about deregulated markets has gained credibility because it’s simple. The result is, since the crash, we’ve learnt precisely the wrong lesson and enacted enormous amounts of extra regulation – which is, at best, “besides the point” and, at worst, damaging and encouraging of moral hazard.

We understand that politicians like Elizabeth Warren and Bernie Sanders are making a very good living by promoting more regulation of banks and markets. Ferguson makes the salient point, namely that the crash and great recession arose in the hyper-regulated banks, not in the far less regulated hedge fund industry. He adds that the multitude of regulations caused the banks to game the system. Twas always thus. As Confucius said, over-regulation dulls the moral sense.

Question 5: Is capitalism in crisis?

Ferguson:

The big problem is not that capitalism is in crisis (because it’s not). The big problem is that socialism is making a comeback. Fed by the post-crash narrative, younger voters, who have no memory of the economic troubles of 1970s and the turnaround of the 1980s, are ready to embrace Jeremy Corbyn and his promises of jam tomorrow, jam the day after and regulations to stop anything and everything they don’t like. You only need to spend a day studying economic history, or the current economic breakdown in Venezuela to realise the danger he represents

One recalls the old song: When will they ever learn? When will Western progressives get over their love affair with socialism? Communism failed and failed miserably. Cuba has failed. Venezuela is in a death spiral. Yet, Jeremy Corbyn and Bernie Sanders want to give us more socialism.

They are addressing themselves to an economically illiterate millennial generation, a generation that knows nothing of history but that believes itself entitled to a living without working too much or too hard.

Good luck with that.