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Capitalism in 2012? - By Kitty Miv, Editor

Kitty Miv, Editor
29 December, 2011

This is when scribes reflect on the past year, telling you everything you already knew, most of which you would really rather forget, and making their forecasts for next year, which will turn out to be wrong, anyway. It's partly because there is very little news at this time of year, so we have to write about something. See, I am doing it too, writing about writing.

OK, let's do the reflection thing. In most of the newspapers and news sites that I read, it is fashionable to speculate on what new economic paradigm will replace capitalism, which is seen to have failed. For such writers, the 'Occupy' movement is a symptom of this failure, a kind of pre-revolutionary upswelling of dissatisfaction by an entire excluded class. Economic statistics showing ever greater disparity between the rewards of corporate fat-cats and the pay of average workers are adduced as evidence of a breakdown of the system.

Needless to say, I don't see it like that. To me, this is all evidence that the system is working very well; the problem is just that it is working too well. Before you look away in disgust, let me emphasize that I want to help the unemployed, the lowly-paid, the disadvantaged as much as you do. But cutting down fruiting trees, strangling golden geese and redistribution is not the way to do it. The problem is caused by human nature, and that is how it will have to be solved.

To begin at the beginning, let's just remind ourselves of how to get a country's economy right, and there are some good examples to be had. First there is Canada, which has adopted an unashamedly pro-market agenda, reducing business taxes, encouraging free trade, and (perhaps as much by luck as by good judgement) avoiding an unhealthy housing boom. Then there is Ireland, which looks set to recover from its self-induced bout of real-estate and banking madness by returning to a focus on export-driven growth, even though it is having to drink a lot of painful medicine in the process.

Countries, like individuals, succeed when they concentrate on encouraging business and trade, and limit their support for good causes and luxuries to what can be afforded. An individual who breaks this rule quickly goes bankrupt; why would it be different for countries? Yet almost every country that has been highly developed for any length of time has comprehensively broken the rule, and is now paying the penalty.

Very broadly speaking, developed countries followed the rules until 1800, or perhaps 1850. They had no choice: competition was fierce, and the state's share of national revenue remained quite small. In 1850 no-one would have said that capitalism was failing; on the contrary, it was wildly successful, although various types of collateral damage were prevalent among the much expanded populations generated by the Industrial Revolution.

The next 100 years saw a gradual erosion of the pure principles of capitalism, driven by the emergence of what can loosely be called socialism, and fuelled by the growing financial power of the State. I don't mean to say that universal welfare is a bad thing; that would be silly. But the gradual takeover of the provision of education, health-care and pensions by the State has removed the mainspring of private social responsibility, causing the ethical desert we now inhabit, and so universally bemoan. Whether the State's behaviour was caused by do-goodery or by political rent-seeking is something we can't investigate here (you can guess what I think).

So it is not capitalism that has failed; it is statism that has failed. There are faint stirrings of recognition of this to be seen for instance in David Cameron's Big Society. Just how faint can be told from the readiness of most commentators to mock such ideas as the Big Society. Even the 'Occupy' activists have a completely different agenda: they want more state and less capitalism. So I am not hopeful that a clear political direction will arise in pursuit of 'less state'. In most countries the state's share of the economy will even continue to rise, if only because of the ballooning cost of debt service and the need to support the temporarily unemployed.

Given the preoccupation of most governments with saving their economies, nothing is going to change in the short term: there will be no grand re-shaping of global economic polity in the foreseeable future. That is a relief, perhaps, since with people in their current sour mood any change would probably be for the worse. The most that can be hoped for in the next few years is that economic rectitude will come to be seen as unavoidable: free trade, low taxes and living within your means. But when I look at the EU, the US Congress and the BRIC's politicians, I don't hope for very much.

Ciao, Kitty


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About the Author


Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

 

 

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