Column : The Marx-Hayek solution

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: his much softer approach to capitalism won the day. But Keynesian demand management ran into its own crisis after 25 years of full employment—the Golden Age of Keynesianism lasted from 1945 to 1970.

What killed it was a classic Marxian ‘falling rate of profit’ crisis. Full employment and trade unions squeezed profitability and inflation was the result of the class struggle which was centre-stage. The attempts to keep it going with cheap money failed. Then Reagan and Thatcher and Kohl took control and shook up the system and made it profitable again. Marx saw that crises, far from being a problem, were the way capitalism cured its problems. In this he was very similar to Hayek; they both saw capitalism as a system prone to cycles but capable of self-regeneration.

Lenin was not as good an economist and his followers were worse. They preached that crises would get bigger and bigger till finally the system would collapse. So, every time there is a crisis, the Left gets happy since they expect the millennium to arrive soon.

But the real paradox is that the Soviet system could not deal with its own crisis of low surplus generation and collapsed because it could not self-regenerate. Capitalism was able to throw up leaders from within who helped solve the problem. Of course, the cure was tough but if you try to be soft you only prolong the agony.

This is the lesson the American Congressmen know and are passing on to Paulson and his Wall Street friends. If you seriously believe in free markets, then you let it take its course and rely on the system to correct itself. Don’t feed the fever; starve it. Don’t insulate the system from shocks; expose it so it will become more robust. That would be the Marx-Hayek message. Some may find that surprising; but then Marx was not a Marxist.

The optimists think capitalism is on its way out. The pessimists think the mess will go on for much longer. I am a pessimist.