It seems that everywhere I turn nowadays there is some variation of the theme that Government must rescue the world from the excesses of the failed experiment known as ‘hands-off capitalism’: I hear this from the shores of Canberra to Washington to London etc. And yet few have asked if this assertion is true; still less have challenged the statement. In this blog, I propose to change that.
What is capitalism? It is the only form of government where the rights of the individual are sovereign. And what are individual rights? They are moral principles sanctioning and delimiting Man’s freedom of action in a social context (Ayn Rand, Man’s Rights in Capitalism: The Unknown Ideal). Note that individual rights stem from Man’s nature, and that its chief characteristic is the fact that it is right to an action not to an object e.g. we have a right to look for a job, not a right to a job. For a fuller explanation, read the link above.
The only economic system that gives a voice to this concept is a laissez-faire system. And, the only model of economics that reflect this foundation (at least the only one I know of) is Austrian Economics. Many have argued that with the invalidation of the efficient market theory, the foundations of capitalism have been invalidated. In fact, Austrian Economics laid the efficient market idea to rest from the time Ludwig Von Mises wrote ‘Human Action’. For a free pdf copy go to: http://mises.org/resources/3250.
The premise of Austrian Economics is Human’s Act. Consequently any mathematical model MUST fail simple because humans are not totally rational. Von Mises wrote his magnum opus in 1940, 62 years before D’Amasio validated Von Mises’ idea of human nature. (For a great summary of D’Amasio’s contribution see http://traderpsychology.blogspot.com/2007/05/emotions-part-4.html).
One of the major tenets of Austrian economics is that inflation (bubbles) occur when the money supply is increased beyond productivity. The result is malinvestment. In a modern setting, the only power capable of inflating the money supply is government. In short, Greenspan created the stock market, real estate and credit bubbles, and Bernanke perpetuated them.
And it gets worse: Austrian Economics holds that once the self-correcting process begins (i.e with the collapse of the bubbles), any attempt by Government to prevent the pain of the self-correcting process, only prolongs it. Witness that shortly after the Bear Stern’s rescue (March 2008) , Bernanke & Paulson declared that the world had been saved from a recession. Well, 12 months later, its sure looks and feels like a recession.
So, we have a situation where Government creates a problem, then steps in claiming to solve the problem and at the same time pointing to the ‘other guy’ and saying (like when we were kids): “Not me Dad, it was him!”.
As a student of history, I know that periods of freedom are followed by periods of governmental control (to a greater or lesser extent); this is true from Greece to the Renaissance to the modern era. So now we’ll be faced with retracement - hopefully the retracement will hold above the previous low so that man can continue the up trend of progress.
Refer this blog post to a friend or colleague…
