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”