Saturday, June 29, 2013

Is the Economic Crisis an Indictment of Capitalism?

One of the sad narratives of the financial meltdown of 2008 and its aftermath is that it was and remains the result of unbridled capitalism. Too much freedom spoiled the economic broth.

While doing research for a current project I'm working on, I came upon a remarkable essay by Ludwig von Mises. It turns out that Mises considered the question of whether economic crisis is an indictment of laissez-faire capitalism back in 1931 in the wake of the worst global economic downturn of the Twentieth Century.

In an essay, "The Economic Crisis and Capitalism," published in the German Neue Freie Presse (available in English Translation in Selected Writings of Ludwig von Mises, Vol. 2), he explains why the answer to the question is a decided no!
It is almost universally asserted that the severe economic crisis under which the world presently is suffering has provided proof of the impossibility of retaining the capitalist system. Capitalism, it is thought, has failed; and its place must be taken by a better system, which clearly can be none other than socialism.
That the currently dominant system has failed can hardly be contested. But it is another question whether the system that has failed was the capitalist system or whether, in fact, it is not anticapitalist policy--interventionism, and national and municipal socialism--that is to blame for the catastrophe.
The structure of our society resets on the division of labor and on the private ownership of the means of production. In this system the means of production are privately owned and are used either by the owners themselves--capitalists and landowners--for production, or turned over to other entrepreneurs who carry out production partly with their own and partly with others' means of production. In the capitalist system the market functions as the regulator of production. The price structure of the market decides what will be produced, how, and in what quantity. Through the structure of prices, wages, and interest rates the market brings supply and demand into balance and sees to it that each branch of production will be as fully occupied as corresponds to the volume and intensity of the effective demand. Thus capitalist production derives its meaning from the market. Of course, a temporary imbalance between production and demand can occur, but the structure of market prices makes sure that the balance is reestablished in a short time. Only when the mechanism of the market is disturbed by external interventions is the effect of market prices on the regulation of production prevented; they are disturbances that no longer can be remedied by the automatic reactions of the market, disturbance that are not temporary but prolonged.
In a free market rooted in private property, the only way entrepreneurs are able to sustain profits is by serving customers better than anyone else. It is only when they receive special privileges through preferential regulation, subsidies, bailouts and the like that they are able to reap profits for which they have not sowed productive activity.

I was struck by how much of what Mises said about the response of many to the Great Depression applies closely to our current situation. Just like Mises, we must never tire of explaining the fallacies in the thinking of those who think the Great Recession is a clear case of the failure of capitalism. In fact, it is a quintessential example of the failures of interventionism to bring about anything other than economic destruction and relative impoverishment.


  1. Hi Shawn.
    Unfortunately this whole field is driven by a lack of understanding. I am a physicist and am very conscious of the degree to which you have to understand an area (through hard data) before you can have ANY confidence in making statements as if you know what you are talking about. In Economics everybody is coming up with their views (and thats all they are) on what is going on when what we have now a days is an incredibly complicated beast that nobody understands.
    My point, coming to the conslusions you and others have come to, are far to premature considering the shallow level to which we understand the economic systems on this planet.

    1. You highly underestimate the degree of understanding of socio-economic phenomena among Shawn & the "others" you refer to, I think. In fact, if more people would take the time to read & understand the Austrian school economists past & present - a great place to start would be the work of Ludwig von Mises, quoted above - then it would be easier & a faster process to root out the entrenched, rampant fallacies & misconceptions that prevail amongst those who most influence & control economic policy (& to say nothing of public opinion) in the developed world.

      & in any case, even conceding a degree of validity to your statement - that our collective understanding of economic phenomena is "shallow" - then wouldn't that be all the more reason to err on the side of less coercive interventionism in the otherwise mutually-voluntary economic affairs of individuals & firms in society, & not more?