The Wall Street Journal reports today that the world’s elite, gathering in Davos this week, are amazed at how little they know about the economy. There is even talk about how capitalism itself is a failing business model. One participant, who is giving a business leadership seminar there, is quoted as saying:
The capitalist myth is lovely and youthful. It kicked off the industrial revolution, but maybe we need a new one.
Instead of looking for new government quick-fixes, business and government leaders need to discover (I wish I could say, rediscover) what is real capitalism–free-market capitalism–in theory and practice.
Today’s problems can be traced to the government side of the mixed economy, as well as a perverted capitalist ethic in the boardroom. (The two are related to each other.) Business prudence has been weakened by politically set and artificially low interest rates, by regulations, and by government jawboning for “common-good” lending.
Real capitalism is about government neutrality and noninterference in the economy. From the business side, it is about principled entrepreneurship ™, defined as “maximizing long-term profitability for the business by creating real value in society while always acting lawfully and with integrity” (see p. 79 here). Such value creation can only be measured in a free market where consumers have choices, and where profits and losses are meaningful measures of business performance. And such wealth creation eschews political profiteering, which redistributes and destroys value rather than creates it. Thus political capitalism is discouraged in favor of free-market capitalism by the company practicing principled entrepreneurship.
The World Economic Forum has always been a haven for the political capitalists. In 2001, Ken Lay gave five talks at Davos on his views of Enron and corporate social responsibility (see the Epilogue in Capitalism at Work about Enron’s anti-capitalistic business model).
Indeed, a new business model is needed, and one quite different from what the participants are likely to hear.
I hereby prescribe the mandatory reading of F.A. Hayek’s “The Road to Serfdom” and also his “The Fatal Conceit” to all Davos attendees before they are allowed to register.
One of the main arguments by the capitalism-has-failed-us crowd is that had the right regulations been in place, the financial crunch would either have been avoided or its impact would have been greatly lessened. This point is little more than an uninteresting truism. By definition the “right” regulations would have ensured good and prevented bad.
The trick is to identify the right regulations, get them through Congress relatively intact, signed by the President, and properly enforced. That this is extremely difficult to accomplish is demonstrated by the fact that a lot of the “wrong” regulations were in place (CRA, et al), which is why we are where we are.
[…] 1/29 Louis Carabini’s Inclined to Liberty, published by the Ludwig von Mises Institute, is a clearly-written series of meditations on classic free market themes with updated social science data. The New York Review of Books publishes China’s Charter 08, in Section II of which appears the following excellent quotation: “… Human rights are not bestowed by a state. Every person is born with inherent rights to dignity and freedom. The government exists for the protection of the human rights of its citizens. The exercise of state power must be authorized by the people. The succession of political disasters in China’s recent history is a direct consequence of the ruling regime’s disregard for human rights.” (Thanks to Tibor for the link.) Meanwhile, as we tilt sharply towards even more state power, Don Boudreaux updates P. J. O’Rourke’s classic title: Parliament of Pimps, not Parliament of Whores. And Robert Bradley, who also has a new book out (Capitalism at Work), reports on the World Economic Forum’s summit in Davos whose high-profile participants are looking for a new economic model. […]
Government “participation” in the free market and implied “back stops” are what removed the basic tenants of capitalism; self regulated RISK management, accountability and “fix or fail” corporate governance in the the boardroom was removed due to the notion “too big to fail” and the basic assertion of “systemic risk”. These provide a “safety net” for the institutions and destroy any hopes that a market can regulate itself.
(FDIC) is a customer protection plan (insurer) and bankruptcy conservator, but has morphed into a institutional strong-arm pimp and real estate advocacy group acting like an owner of institions instead of a rgulator. The expansion of this entity will be greatly maligned in the future.
On regulation, I find it interesting that Barney Frank actually gets it ( I was convinced he was dead from both ends) and that is you can have 1 million regulations in place but you will never have the one you need in the future because someone is always looking to find the missing one.