You Cannot Have Capitalism Without Failure


Capitalism is an approach to economics that is organic. Self-interest drives individuals to pursue wealth. Through entrepreneurship and hard work and ingenuity, an economy morphs into existence. Capitalism is the ultimate meritocracy; the smartest and the most creative and the most tenacious thrive; those who cannot compete ultimately fail and must find another way to be productive market participants.

That describes what happens in a capitalist system that has not been corrupted and gamed  to the point where institutions are incentivized to direct more money and effort to lobbying for political protection, and less to competing harder and smarter.

“You cannot have capitalism without failure.”

Jim Rogers, when he made that statement, was referring to the lunacy of using public money to preserve failed private enterprise in a “capitalist” economy. That is what we did, after all. We saved failed institutions, failed individuals, and failed thinking. That is wrong on many levels. But we went a step further: we saved dishonesty, criminality, and corruption. That is a far more serious proposition.

Bill Black is arguably the most important voice when it comes to the criminality that was preserved. If you are not well-versed in the criminal aspects of the crisis and in Gresham’s Dynamics, the following is an important video to watch (I recommend following the Powerpoint presentation while running the video – filmed 2/18/2010):

Powerpoint slides from the presentation can be viewed here.

Steinhardt Lecture 2010 at Lewis & Clark College presents Dr. William Black from The Resource Lab on Vimeo.

Capitalism requires failure. Without failure, the worst actors game the system so that they are able to thrive. In the process, they deprive honest entrepreneurs of opportunities that make a capitalist economy stronger and more resilient. Without failure, Gresham’s Dynamics – in banks, in ratings agencies, in government, in academia – are perpetuated and catalyzed. And without failure, moral hazard corrupts the thinking of all market participants; they are taught that crime pays and honesty is, in some ways, punished.

We have perpetuated criminal environments that are not going to resolve themselves. Those environments are once again buried in profits and bonuses and rising stock prices and lobbyist-written legislation that creates opacity. But the criminality has not been addressed. Since our leaders are not undertaking the house-cleaning that could rid us of the worst actors and send a message to others, we have to expect the corrosive results of institutionalized dishonesty to continue to undermine our capitalist economy in fundamental ways. Unfortunately, we likely will not have the luxury of being able to lower interest rates and loosen credit availability so as to paper over our economic problems next time… we have played those cards.

The USA has arguably been stressed to its limits when it comes to public debt, private debt, currency debasement, and interest rate drops. Add in rampant dishonesty in the highest echelons of private and public power, and we are facing a serious threat to our well-being.

Predicting how this will play out is impossible. But ignoring the big issues is a mistake. At the very least, if you want to protect yourself and your community, you have to pay attention to what is happening in our macro-economy. And since no mortal with a job outside of finance can possibly stay on top of these issues, it is vital to find analysts who are not compromised.

Capitalism Without Failure