Is America becoming Socialist?

I participate in an Internet discussion with a number of African free market thinkers who participated in the Mont Pelerin Society meetings in Nairobi last year. A number of them have commented on the financial crisis centered in the U.S. and whether the proposed Mortgage Backed Securities bailout was a surrender to Socialism. This morning I contributed the following to that discussion.

Stella, Rejoice, James, Leon and others raise a very important, fundamental, and difficult question about capitalism—what is the best relationship between individuals, enterprises, markets, and governments. Capitalism is not anarchy. Its incredible success in raising the standards of living of so many depends on an ever evolving set of rules and relationships within which we all interact. As James has said, “capitalism is about driving self interest…,” meaning directing self interest into serving the general welfare. Some market infrastructures are better than others, but the winners are generally sorted out Darwinian fashion over time. A critical corner stone in the foundation of capitalism is the efficient establishment and enforcement of property rights under the rule of law. These were not presented to the world on golden tablets but have evolved from experience. Capitalism is and always will be a work in process.

Some of capitalism’s infrastructure of practices, rules, and laws emerged from the private sector and some from government. America has been particularly successful because of the flexibility with which this infrastructure has adapted to new technology and knowledge and to experience. The unavoidable dark side of capitalism’s dynamism is that many fail along the way (the storms of the invisible hand). This may indeed raise moral questions but it certainly raises a practical one. The freest possible private market economy we believe in can not exist without very broad acceptance by our fellow citizens. Thus we offer safety nets to the losers to soften their fall in part to win their support for playing the game. Capitalism is prone to booms and busts and asset price bubbles and as with social safety nets for individuals we need to find that balance of government intervention that maximizes the freedom of the market that the public is prepared to accept.

With that background, yes, the government needs to help restore confidence and liquidity to American financial markets but with due regard for the potential moral hazards of how they do it. Doing so is not socialism. I addressed some of these issues in my blog posted here a few days ago. The FDIC assisted resolution of a very large U.S. bank (Wachovia) provides a good example of what in my view is the right balance. A major bank failed, wiping out its shareholders, with no damage to its depositors nor contagion to other banks. The FDIC’s interference in “pure” market solutions was in the best interest of the insurance fund (reducing the cost of an insurance pay out from bankruptcy) and the market more generally. Considerable (but not total) market discipline was preserved in a way acceptable to the market.

This does not mean that America is becoming socialist (I am not sure that such dichotomous terminology is useful). It means that it is forever searching for the right balance in the partnership between government and individuals in support of capitalism. It does not always get it right by any means but I am of the view that over time we learn from our mistakes more often than not and that we have thus generally enjoyed progress.

Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.

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