Some people are getting rather happy about the crisis. They see it as the final collapse of capitalism, the exposure of the dangers of liberalisation, the vacuity of the American way and the folly of the free market. Many crow that America is now a socialist country having ?nationalised ?its banks. The Left has warned finance minister P Chidambaram to stay away from further reforms.
What has actually emerged from the turmoil of last two weeks is a very different picture. There is a credit crunch and indeed investment banking as a form of financial enterprise has died a sudden death. But if a sector has overexpanded, it should shrink or if a certain form of enterprise no longer meets the market criterion it is quite right that it should vanish. There is no need to prolong its existence by subsidy or regulation etc. The way in which Lehman Brothers was allowed to go bankrupt and Washington Mutual and Wachowa were taken over by other banks was just what a market does when it is doing its job. The AIG takeover was hard on its shareholders and protected the customers.
The Congress has shown real guts in not rolling over before the Paulson-Bernanke onslaught. It refused to sign away $700 billion on the dotted line. Wall Street was reminded of the free market philosophy by some legislators who take such things seriously. They were schooled in Hayek and as libertarians, they believe that in a free market there should be no handouts and no free lunches. Thus, the package which emerges has to be much leaner and much tougher than what Paulson wished for. Depositors will be given a larger guaranteed sum which will be insured and once that is done, banks can go bankrupt as they wish. No need to waste tax payers? money as we do in India with petrol subsidy and power subsidy and debt cancellation, etc. Most such ?socialist? schemes are just regressive redistribution for which securely employed and overpaid public sector employees and their political agents agitate.
Hayek took the stark view that cycles were natural to capitalism and arose from a tendency to resort to cheap money which, in turn, led to mal-investments and then a crisis which had to ?detox? the system . He was against any rescue and any premature reflation. In the 1930s, no one took any notice of Hayek and Keynes with 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.
?The author is a prominent economist and Labour peer