The “Failure” of Capitalism

During the recent financial crisis, politicians on both sides of the aisle barraged us with claims that if Washington did not act quickly and decisively, the nation would face one of the most serious economic crises in its history. Politicians and pundits have chastised Wall Street for its greed, and claimed that the free market, i.e., capitalism, has failed. We have been told that greater oversight—which means, more regulation—is required.

Congressmen and Senators were deluged with phone calls and emails. Reportedly citizens were overwhelmingly opposed to the bailout plan passed by Congress. Yet, Congress ignored this opposition and passed the legislation by a wide margin.

The claims regarding capitalism and the actions of our political leaders are not new, nor are they limited to the recent turmoil in the financial markets. The same underlying ideas can be seen in regard to other issues, such as airport zoning, the Texas Open Beaches Act, and other infringements of property rights. Indeed, the same underlying ideas are present in every government intervention into the economy.

Sen. Dianne Feinstein captured the essence of Washington’s attitude. During the debate over the bailout bill, she stated that she had received 91,000 calls or emails regarding the bill, and 85,000 were opposed. Despite 93% of her constituents opposing the bill, she voted for it. She stated that “there is a great deal of confusion out there” and her constituents “don’t understand” the situation.

(Voting contrary to constituent’s wishes is not inherently wrong. Voting to protect individual freedom against the wishes of constituents is a good thing. The bailout bill however, violates individual rights on a massive scale.)

We could dismiss Feinstein’s remarks as those of an arrogant, career politician. While this is true, those remarks reveal the fundamental ideas that guide Feinstein and her intellectual brethren.

The essence of capitalism is the intransigent recognition and protection of individual rights, including property rights. A right pertains to action—it is a sanction to act without interference from others, so long as one respects the mutual rights of others. Rights do not guarantee that one’s actions will be successful, nor are they a claim to the products of other’s actions.

In a capitalist society, government is limited to the protection of individual rights. In such a society, an individual may not use force against others, just as others may not use force against him. In a capitalist society, every interaction between individuals is based on the voluntary consent of all involved.

This is not, and has not been, the case with our financial markets for a very long time. For decades, our financial markets have been heavily regulated and controlled by the government. The Federal Reserve, the Securities and Exchange Commission, the Justice Department, and a myriad other departments and agencies exert tremendous control over the financial markets. For example, the Justice Department under the Clinton Administration threatened mortgage companies with litigation if they did not begin extending loans to a greater number of applicants. The result was an explosion of sub-prime, i.e., risky, loans. Where the market deemed these loans as imprudent, the government forced businesses to extend them anyway, or face law suits.

The large number of defaults on these loans—which the private businesses had predicted, and thus, did not voluntarily make—caused banks and mortgage companies to face huge losses.

In other words, government mandates forced businesses to act contrary to their own judgment. Government compelled businesses to make risky loans under the threat of prosecution. This is not capitalism. When the recipients of those loans defaulted, the government stepped in. This is not capitalism.

That our financial markets are heavily regulated has not stopped politicians from decrying the failure of capitalism. This is not surprising, because to acknowledge government’s role would require intellectual honesty and undermine the ambitions of most politicians.

The premise underlying government regulations is that individuals must be protected from unscrupulous businesses. Left to their own devices, businesses would abuse consumers. Left to their own devices, consumers cannot understand the complexities of the market. Or, as Sen. Feinstein put it, “there is a great deal of confusion out there” and consumers “don’t understand”.

In other words, individuals are incapable of making decisions for themselves. Consequently, government must intercede, or as Jim Blackburn, an environmental attorney and coastal expert based in Houston said in a Houston Chronicle article: "We have to protect people from themselves and certainly from developers." And therefore, the government may properly restrict and control the actions of individuals.

But if individuals cannot make rational decisions, how will those individuals in government make rational decisions? Depending on the situation, those who put forth this argument offer two different justifications.

The most popular is to develop a consensus. In this scenario, opinions are solicited and some “common ground” is developed. Policies are then drafted that will appeal to a broad spectrum of people. If enough people agree, this view implies, then reality will somehow conform.

The second is rarely stated explicitly, but was implied by Sen. Feinstein. If constituents are “confused”, then our leaders must make decisions for us. They are privy to an understanding that escapes most people, and like Plato’s Philosopher Kings, they can properly relieve of us the need to think for ourself.

Regardless of the justification, interventions into the economy are aimed at controlling individuals. Through prescription and proscription such interventions prevent individuals from acting on their own judgment, and compel them to act in a manner dictated by law.

This true of zoning—individuals may not use their property as they choose, but only as permitted by zoning officials. This is true of occupational licensing—individuals may not offer or contract for services without government approval. This is true of minimum wage laws—individuals cannot offer or accept wages less than the government mandate. It is true of every government intervention into the economy.

Invariably, government mandates have unintended consequences. The recent problems in the mortgage markets are one example. In response, the government seeks more controls in an attempt to fix the problems previous controls created. And each time, they blame capitalism—i.e., the voluntary choices of individuals—as the culprit. However, only some individuals get the blame, while others get a free pass.

The problems in the sub-prime mortgage market are a case in point. The greed of individuals on Wall Street is blamed, and the individuals who took out loans that they could not afford are held blameless. Ignoring the fact that such transactions had two voluntary parties, the borrower is considered innocent. And the lender, who was forced into the transaction, is cast as a manipulative demon who must be shackled with further controls.

Absolving the borrowers of any culpability is consistent with the belief that individuals cannot make decisions for themselves. If individuals are incapable of rational decision making, then they cannot be held responsible for any decisions they happen to make. In short, individuals cannot choose for themselves, and when they are allowed to, we cannot hold them accountable. Unless of course, those individuals happen to be on Wall Street.

Those who attack the free market are attacking freedom. They are attacking the right of each individual to think and act for himself. They are attacking your right to life, liberty, and the pursuit of happiness. Disenchanted with the choices that individuals sometimes make, power lusting politicians and their supporters seek to eliminate individual choice. They believe that they have a right to impose their values upon you. And so long as you allow it, they will continue to do so.