Final Thoughts

Over the last number of weeks I have examined the link between capitalism and financial crises.  In week one I examined the origins of capitalism, and highlighted the powerful growth mechanism it seems to provide.  I also suggested that what just happened in the recent financial crisis was merely another blip in what Minsky described as a crisis-prone system. 

In week 2, I then focused on why capitalism may be prone to crises.  I began by investigating the ideas of Karl Marx, and found that whilst many of his arguments have been discredited, his suggestion that capitalism is inherently unstable has considerable consistency with reality.  Extending on this, I examined the creative destruction rationale of Schumpeter, who suggested that crises provided the necessary destruction to catalyze innovation and growth.  Furthermore, I also discussed animal spirits and irrational exuberance which gave rise to the boom-bust cyclical pattern observed in capitalism, and so highlighted why this creative destruction was inherently necessary.  Additionally, I identified how the capitalist waves may be exacerbated by the cushion of limited liability. 

Last week, I then examined the association between capitalism and various crises throughout history.  Ultimately, I found that crises have considerable consistency, and tended to result as a product of financial innovation, credit quality and government regulation reasons.  I also suggested that in early crises, a broad lack of financial sophistication may have led to periods of irrational exuberance which ultimately led to bubble formation.  However, I suggested that in later crises financial institutions and investors may have rationally engaged in the bubble to generate profits, perhaps due to a lender of last resort (moral hazard problem).

Finally, this week I examined the future of capitalism and suggested that it will probably survive the latest crisis.  However, in a society with greater economic and informational freedom I postulated that this may lead to a more responsible capitalism with greater regulation and accountability.  Yet, capitalism will probably always be crisis prone, and will most likely self-destruct when we least expect !  I finish with a quote from P.J. O’Rourke who summarizes the implications of capitalism concisely,

“The idea of capitalism is not just success but also the failure that allows success to happen”