Hyperventilating observors keep talking about the current economic crisis in terms of a crisis of capitalism. This is a bizarre overreaction. And yet, aren't you asking the same question yourself?
There are many logical fallacies in the very idea of capitalism's demise, not the least of which are (1) what do the armageddonists define as capitalism, and (2) what do they suppose comes after capitalism ends? Self-interest cannot be washed away from any economic system. Its excesses are universal, not a symptom of free markets. At least since 1776, we have learned that harnessing self-interest and mutually beneficial trade is a formula for growth. Nobody, at least not explicitly, thinks the economy should grow less. Logically then, American capitalism is safe.
But this is not the time for logic. It is, in the words of Toy Story's Woody, "a perfect time to panic." People are forgetting long-term lessons about growth (which is too gradual to appreciate), and overwhelmed with instantaneous images of collapse.
Given that society is at root a mental construct of norms, our economic fabric is only as strong as the trust in the basic rules as we understand them. Unfortunately, the Wall Street panic is too complicated for almost anyone but the most arcane experts to fathom, leaving the majority of people with a sense that their worldview was wrong — the basic norms of of "how things are" has been severely shaken. And every day that the stock market boils off another three or four or five percent adds heavily to our confusion and distrust.
The political season does not help things. It is almost impossible to believe that this cycle of events (the onset of a major recession and global finanical meltdown) perfectly coincides with a pivotal U.S. presidential election, to be resolved in just a few days. This constrains not only the current leadership — because all actions taken are taken primarily for political effect, and secondarily for economic effect; while contraining the post-election responses as well due to the electoral statements made by presidential candidates. One example is the political pressure to sympathize and exagerate the dangers, which naturally intensifies public fear, uncertainty, and doubt.
A final piece of kindling is the demographic environment in America. We're spoiled by decades of relative calm. Anyone under 45 has little personal experience with a severe recession. The recessions of 2001 and 1991 were mild, so you have to look back to 81-83 for the kind of turmoil that is comparable to today. Feeling pain in 2009 like we have never felt before, it will be, truly, a perfect time to panic.
All this leads me to become more skeptical that this will be a natural business cycle. The remedies and fixes to capitalism so-called, made by elected officials, could be damaging. Consider the flaws in American capitalism in the eyes of its critics. Failry or not, recent years have been characterized by growing inequality with massive tax cuts for the rich and declining incomes for the middle class. So we might at a minimum anticipate a strong wave of redistributive economics: highly progressive tax changes, universal insurance against health or income losses at taxpayer expense. There will also be pullbacks from international trade, protection of workers at the expense of small employers, tighter regulation of business accounting, and so on. I am afraid almost all of these moves can be fairly described as anti-entrepreneurial.
Capitalism as a word conjures up an image of Wall Street capital. That is literally appropriate, but the system has outgrown its moniker. Over the last few centuries, economists and now average citizens understand that the system of economic freedom commonly called capitalism is unmatched in generating higher incomes. They tend to see that the thing driving growth in their incomes is entrepreneurially-driven technological change. Not capital.
So here's the rub. Remedies for the excesses of capital are easily going to become "remedies" that inhibit innovation and entrepreneurship. America is, I fear, poised to hit the breaks on the creative class.
Will Atlas Migrate?
Ayn Rand's magnum opus asks if the wealthiest citizens will tire of the constant taxation and burdens of a democratic society. Will Atlas Shrug? she asked. It has not been a convincing case, but I think it is about to become so in the decades ahead. One of the defining features of globalization is that migration is ever easier. If moving from the state of one's (Michigan, Florida, New Jersey) to the state of one's adult life (California, Arizona, Missouri) is a no big deal for our generation, why would we think job-hopping from nation to nation will be a big deal for the next generation?
What gives me hope is that underneath the system of entrepreurship in America is not the frontier spirit. The genius of America is competitive federalism - a structure that encourages policy diversity among the states. That kind of structural diversity will be a growing feature of 21st century globalism, meaning that America is facing a new kind of pressure. What may seem at one stroke to be good for quaint notions of "fairness" can swiftly slash national competitiveness and hinder national economic growth. No nation can afford to overburden its wealth-creating entrepreneurs. So while our policy makers may fall to the temptations of statism, we will hopefully prove better at course correction given our experience with federal competition. Some states will rebel. Entrepreneurs will alight. Our dynamic institutions will adjust.
That's the hope.