Is capitalism dead or just flat-lining?

The world financial crisis shows that a system built on greed cannot work. 

It is 79 years since the Great Depression. Some fear that this week's chaos in the financial world means that the curtains are rising on Great Depression II. I don’t have a crystal ball, but I’m sure the immediate future is grim. At the very least we are in for a long and deep recession and our medicine will be very bitter indeed.

Clearly the style of capitalism which has dominated world markets for the last 20 years or so is flatlining. The question now is whether it is worth resuscitating. The answer must be Yes – but only if we jettison the “greed is good” ideology made famous by the slimy character Gordon Gekko in the 1987 film Wall Street. That was a movie. In real life it was the philosophy of Nobel Prize-winning economist Milton Friedman.

Friedman was probably the greatest economist of the 20th century. He influenced Ronald Reagan in the US, Margaret Thatcher in the UK, Brian Mulroney in Canada, and Paul Keating in Australia and his ideas led to critical economic reform in each of their countries. These economies were made stronger by following much of Friedman’s economic rationalism.

But at the heart of Friedman’s thought was the idea that greed is good, that greed works because it drives people to succeed. The reality, as we can now see, is that greed, in its truest sense, does not work.

A deadly sin

I have no doubt that greed is the cause of the current crisis. It was the greed of those who took easy money to buy houses beyond their means and the greed of bankers who lent to people borrowing beyond their means. The depth of this depravity can be seen in the Wall Street bankers who were collecting salaries over US$100 million per year even as their banks were collapsing.

Right now, even as the dominoes fall, disciples of Friedman are still contending that the culprit is not capitalist greed but excessive government regulation. However, while poor legislation and regulation may have contributed to the subprime mortgage market crisis that sparked the conflagration, it is absurd to suggest that the solution is merely a less regulated market.

Friedmanistas claim that the US subprime mortgage crisis didn't happen in markets like Australia and the EU because their consumers are more sophisticated. Nothing could be further from the truth. Australians and Europeans are not smarter; they were protected by more stringent regulatory frameworks. If foreign banks have been dragged into the American crisis, it was mainly because they had joined the orgy on Wall Street.

Less regulation may be a good thing; but good regulation trumps it any day. How many ordinary Americans have to lose their jobs and homes before the ideology of laissez-faire capitalism is finally debunked?

Greed needs to be kept in check. Governments the world over should take the matter of bank regulation more seriously. The US’s subprime mortgage mess was created by politicians pandering to the not-unreasonable desire of Americans to own their own homes. But Congressmen who are currently skewering greedy Wall Street bankers should have protected ordinary consumers aspiring to home ownership. Their negligence points to a failure of leadership that reaches to the very top of the American political totem pole.

Tough choices

So, should governments be putting together rescue packages like the US Federal Reserve’s US$800 billion one to save the banks? Aren't these rescue packages throwing good money after bad? After all, it was bad, even unethical, business decisions that have sunk the biggest financial institutions. If only that money were available now to help the people who are losing their homes, who face unemployment and who need to feed and educate their children.

But leaving the financial institutions that created the mess to stew in their folly is not a solution.

The viability of the world’s banking system needs to be ensured. If the banking crisis gets worse and more banks go under, it will be harder for businesses, big and small, to expand. Markets -- which ultimately thrive on confidence -- will shrink. That will mean more job losses and more pain. It could bring the world to Great Depression II, complete with soup kitchens and Hoovervilles. Right now, not bailing out the banks and other financial institutions is unthinkable.

Modern day capitalism may well be wanting. But – to paraphrase Winston Churchill’s description of democracy – it is the worst economic system except for all the others. The Great Depression played a part in the rise of communism, socialism, fascism and Nazism in the 1930s. That is, I am sure, not an outcome many would want from this crisis.

Saving the financial institutions that caused this crisis is the only way to keep the world from sliding into worse turmoil. But we have to learn from this calamity. Greed is not good. We need to inoculate our children against idolising Gordon Gekko. And we need to demand that governments regulate the markets more tightly . Capitalism works; but not when it is based on every man for himself. We need to find our way to a capitalism based on values and virtue.

Alistair Nicholas lives in Beijing where he runs a consultancy firm. He has been an economic researcher, political adviser, and Australian diplomat. In his consultancy he advises international corporations on business ethics and communications in China. He is the co-author of a study on the privatisation of welfare in Australia.

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