Stop the tin­ker­ing and let cap­i­tal­ism get on with it

The Daily Telegraph - Business - - Business Comment - RAINER ZITELMANN Dr Rainer Zitelmann is a Ger­man his­to­rian and so­ci­ol­o­gist. His lat­est book is “The Power of Cap­i­tal­ism”

Over the past three decades, cap­i­tal­ism has re­asserted its strength. Never be­fore in the his­tory of mankind has global poverty been in such rapid or sharp de­cline. In China, where 45m peo­ple starved to death at the end of the Fifties as vic­tims of Mao’s so­cial­ist ex­per­i­ment (the Great Leap For­ward), hun­dreds of mil­lions have risen from poverty to the mid­dle-class, ben­e­fi­cia­ries of freemar­ket eco­nomic re­form.

Although the state-run econ­omy re­mains a ma­jor force in China, it has been pro­gres­sively pushed back. With ev­ery new free­dom that has al­lowed mar­kets and pri­vate en­ter­prise to flour­ish, hunger and poverty have de­creased. Ac­cord­ing to the World Bank, the per­cent­age of Chi­nese cit­i­zens liv­ing in ex­treme poverty fell from 88pc in 1981 to about 1pc to­day.

Venezuela chose a dif­fer­ent path. Hugo Chavez’s at­tempt to es­tab­lish “so­cial­ism for the 21st cen­tury” was as cat­a­strophic as any so­cial­ist ex­per­i­ment of the past 100 years, all of which failed – with­out ex­cep­tion. This to­tal fail­ure was not lim­ited to com­mu­nism; the same is true of the “demo­cratic so­cial­ism” im­ple­mented in Bri­tain and Swe­den in the Seven­ties.

With the col­lapse of com­mu­nism at the end of the Eight­ies, peo­ple all over the world recog­nised the su­pe­ri­or­ity of cap­i­tal­ism. Nev­er­the­less, an­t­i­cap­i­tal­ist re­sent­ment not only per­sists, it has ac­tu­ally in­ten­si­fied since the out­break of the fi­nan­cial cri­sis in 2008. In their re­sponses, politi­cians, the me­dia and in­tel­lec­tu­als are in al­most unan­i­mous agree­ment: the mar­ket has failed. We need more, not less, gov­ern­ment in­ter­ven­tion.

In fact, the fi­nan­cial cri­sis is not, as is of­ten claimed, the re­sult of dereg­u­la­tion and mar­ket fail­ure, but of gov­ern­ment in­ter­ven­tion. Af­ter the stock mar­ket bub­ble burst in 2000, the Fed im­ple­mented rad­i­cal in­ter­e­strate cuts, caus­ing a new bub­ble, this time on the prop­erty mar­kets. How­ever, mas­sive cen­tral-bank in­ter­ven­tion is by no means proof of the fail­ure of cap­i­tal­ism.

An­other fac­tor that led to the US hous­ing bub­ble and ul­ti­mately to the fi­nan­cial cri­sis was that banks granted sub­prime loans to home­buy­ers who should never have qual­i­fied for loans be­cause of their poor credit rat­ings. This lend­ing was en­cour­aged by politi­cians, foisted on banks by leg­is­la­tors and se­cured by semi-sta­te­owned banks, Fred­die Mac and Fan­nie Mae. US banks were afraid of racial dis­crim­i­na­tion law­suits if they could not prove they sat­is­fied gov­ern­mentim­posed quo­tas on loans to mi­nori­ties. It was not un­bri­dled mar­kets, but gov­ern­ment reg­u­la­tions and the cen­tral bank’s in­ter­ven­tions that cre­ated the con­di­tions for the cri­sis.

Hav­ing mis­di­ag­nosed the causes of the fi­nan­cial cri­sis, the “medicines” pre­scribed to treat it are also wrong. The cri­sis was caused by ex­tremely low in­ter­est rates, po­lit­i­cally mo­ti­vated gov­ern­ment mar­ket in­ter­ven­tion and ex­ces­sive debt ac­cu­mu­la­tion. And yet, all over the world, political lead­ers are fight­ing back with even lower in­ter­est rates, even greater state in­ter­ven­tion and more debt. The un­der­ly­ing prob­lems have not been solved, they have sim­ply been kicked into the long grass. If the fi­nan­cial cri­sis flares up again, the blame will no doubt, er­ro­neously, be laid at the door of cap­i­tal­ism.

The great­est threat to cap­i­tal­ism is not that Western gov­ern­ments will em­bark on large-scale, overtly so­cial­ist na­tion­al­i­sa­tion pro­grammes, it is that they are in­creas­ingly clip­ping cap­i­tal­ism’s wings, re­plac­ing it with cen­tralised, re­dis­tribu­tive pol­icy agen­das. Cen­tral banks are now act­ing more like plan­ning author­i­ties; they no longer re­strict their ef­forts to guar­an­tee­ing mone­tary sta­bil­ity, but seek to neu­tralise mar­ket forces.

In or­der to save the euro, the Euro­pean Cen­tral Bank adopted Mario Draghi’s “what­ever it takes” pledge and par­tially sus­pended the price mech­a­nism, which is so cru­cially im­por­tant for the mar­ket econ­omy. In ef­fect, the eu­ro­zone no longer has true mar­ket in­ter­est rates. How­ever, this has not curbed Euro­pean states’ ex­ces­sive in­debt­ed­ness – it has ex­ac­er­bated it. At the same time, con­sid­er­able mis­al­lo­ca­tions have emerged in the econ­omy and on prop­erty mar­kets. In the past, so­cial­ist gov­ern­ments na­tion­alised pri­vate en­ter­prises. To­day’s planned economies are not achieved via na­tion­al­i­sa­tions, but by politi­cians in­creas­ingly med­dling in the af­fairs of busi­nesses and us­ing fis­cal and labour-mar­ket poli­cies, reg­u­la­tions, sub­si­dies and pro­hib­i­tive leg­is­la­tion to deprive them of their free­dom to act. Fi­nan­cial and health sys­tems around the world are the most reg­u­lated in­dus­tries. Is it any sur­prise that they are fail­ing so badly?

Un­der the guise of “fight­ing cli­mate change”, politi­cians in many coun­tries are in­creas­ingly in­ter­ven­ing in their economies. In Ger­many, the costs of An­gela Merkel’s “en­ergy tran­si­tion” are es­ti­mated at €1 tril­lion (£892bn).

Free mar­kets are un­der threat around the world, as demon­strated by Don­ald Trump’s pro­tec­tion­ist poli­cies.

In­stead of recog­nis­ing that cap­i­tal­ism and glob­al­i­sa­tion have re­duced poverty, Western coun­tries are en­gaged in emo­tion­ally charged de­bates about the “gap be­tween the rich and the poor”. De­mands for state-led re­dis­tri­bu­tion in­ten­sify. The global suc­cess of French economist Thomas Piketty’s Cap­i­tal in the 21st

Cen­tury, in which he calls for an 85pc wealth tax, is am­ple proof of this. The same holds true for the rise of the loud and proud so­cial­ists, Bernie San­ders in the US and Jeremy Cor­byn in Bri­tain.

‘The fi­nan­cial cri­sis is not, as is of­ten claimed, the re­sult of dereg­u­la­tion and mar­ket fail­ure, but of gov­ern­ment in­ter­ven­tion’

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