Monday, January 12, 2009

Why the market economy won't go away

1. What is at stake is not “capitalism” (a term invented, inappropriately, by the socialists writers at the end of the XIXth century), but an economic system in which there are many markets, and that consequently is coordinated and “driven” or “oriented” in its production and allocation of resources mainly by markets and the price system. A “market economy” in other words.

All modern economies indeed have opted for “capitalism”, which means an intensive use of all sorts of capital, material and thus financial. This has been the case, obviously, of “socialist” or “soviet style” economies under Staline and others. Their main aim was to accumulate capital faster than markets economies had done before. And for a time (from the 1930s to the 1960s, a half century) they succeeded, reaching even higher growth rates than their market competitors. It was also the case, of course, of communist China. If anything, the collapse of communist regimes led to a decreased degree of “capitalism” in both Russia and China, with a diminished emphasis being put on capital intensive production processes.

2. Now the market economy is not going to vanish for two reasons:

First the current crisis will, at some time in the near future, come to an end. While it naturally stimulates criticism of the existing regime, it is not sufficient to make good the case for another type of organization. It proved indeed that the market economy is not immune to mismanagement and corruption. And why should it be? An increased rhythm of accumulation of riches always and everywhere is bound to attract crooks and extortionists, because greed is universal and the increased benefit/punishment ratio of theft, resulting from the acceleration of wealth creation inevitably determines more delinquency. Times of plenty are tempting for embezzlers.

3. That being said, the fundamentals of comparative advantages of decentralized and centralized organizational systems have not changed. Ours is still a world where the cost of gathering and processing information has been decisively lowered, compared to the cost of producing goods and other services, since the information and communication revolution of the 1970s. This gives an efficiency advantage to the decentralized production processes (The second XXth century, Hoover Press, 2006).

Second, moreover, the compared private cost of capital is still lower, and decreasing, compared to the public cost of capital because savings are abundant worldwide (in part due to the new savings of emerging economies), while the social cost of taxes is still quite high in most countries because the tax rates are higher than ever. This gives an advantage to private investors over governments in bidding for firms’ ownership (“Nationalization, privatization, and the allocation of financial property rights”, Public Choice, 1993).

It follows that the recent nationalization or quasi-nationalization of some banks will be reverted when stock markets will return to an upward trend. And it is doubtful, to say the least, that government authority will be significantly extended over market economies worldwide.

What has been learnt is that times of prosperity (and the last few decades have seen at the world level an increase in general prosperity unknown before) are dangerous times indeed for savers and for firms. When celebrating their triumph, Roman generals had a sidekick muttering to their ear: “don’t forget that you are mortal”. When prosperity returns, someone has to repeatedly warn our governments: “don’t forget that you have to remove the punch bowl before the party is over”. In economic jargon: the monetary policy has to aim at stabilizing not only the price level but the asset prices too.

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