Is America becoming Socialist?

I participate in an Internet discussion with a number of African free market thinkers who participated in the Mont Pelerin Society meetings in Nairobi last year. A number of them have commented on the financial crisis centered in the U.S. and whether the proposed Mortgage Backed Securities bailout was a surrender to Socialism. This morning I contributed the following to that discussion.

Stella, Rejoice, James, Leon and others raise a very important, fundamental, and difficult question about capitalism—what is the best relationship between individuals, enterprises, markets, and governments. Capitalism is not anarchy. Its incredible success in raising the standards of living of so many depends on an ever evolving set of rules and relationships within which we all interact. As James has said, “capitalism is about driving self interest…,” meaning directing self interest into serving the general welfare. Some market infrastructures are better than others, but the winners are generally sorted out Darwinian fashion over time. A critical corner stone in the foundation of capitalism is the efficient establishment and enforcement of property rights under the rule of law. These were not presented to the world on golden tablets but have evolved from experience. Capitalism is and always will be a work in process.

Some of capitalism’s infrastructure of practices, rules, and laws emerged from the private sector and some from government. America has been particularly successful because of the flexibility with which this infrastructure has adapted to new technology and knowledge and to experience. The unavoidable dark side of capitalism’s dynamism is that many fail along the way (the storms of the invisible hand). This may indeed raise moral questions but it certainly raises a practical one. The freest possible private market economy we believe in can not exist without very broad acceptance by our fellow citizens. Thus we offer safety nets to the losers to soften their fall in part to win their support for playing the game. Capitalism is prone to booms and busts and asset price bubbles and as with social safety nets for individuals we need to find that balance of government intervention that maximizes the freedom of the market that the public is prepared to accept.

With that background, yes, the government needs to help restore confidence and liquidity to American financial markets but with due regard for the potential moral hazards of how they do it. Doing so is not socialism. I addressed some of these issues in my blog posted here a few days ago. The FDIC assisted resolution of a very large U.S. bank (Wachovia) provides a good example of what in my view is the right balance. A major bank failed, wiping out its shareholders, with no damage to its depositors nor contagion to other banks. The FDIC’s interference in “pure” market solutions was in the best interest of the insurance fund (reducing the cost of an insurance pay out from bankruptcy) and the market more generally. Considerable (but not total) market discipline was preserved in a way acceptable to the market.

This does not mean that America is becoming socialist (I am not sure that such dichotomous terminology is useful). It means that it is forever searching for the right balance in the partnership between government and individuals in support of capitalism. It does not always get it right by any means but I am of the view that over time we learn from our mistakes more often than not and that we have thus generally enjoyed progress.

About wcoats

Dr. Warren L. Coats specializes in advising central banks on monetary policy, and in the development of their capacity to formulate and implement monetary policy. He is retired from the International Monetary Fund, where, as Assistant Director of the Monetary and Financial Systems Department, he led missions to over twenty countries. Before then, he served as Visiting Economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at the Univ. of Virginia from 1970-75. Most recently he was Senior Monetary Policy Advisor to the Central Bank of Iraq; an IMF consultant to the central banks of Afghanistan, Kenya and Zimbabwe; and a Deloitte/USAID advisor to the Government of South Sudan. He is currently a member of the Editorial Board of the Cayman Financial Review and until the end of 2013 was a member of the IMF program team for Afghanistan. His most recent book is entitled "One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina."
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