Capitalism Was Just Fine Until Politicians Got Involved

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The genius of capitalism was described by Adam Smith more than 200 years ago: Let a man seek his own advantage; sometimes he will flourish. Sometimes he will flounder. But always, the process of innovation and failure will reward the ‘common good.’

“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest,” is how he put it.

The genius of Reagan and Thatcher was that they allowed capitalism, more or less, to show its stuff. Arthur Laffer doodled the essential insight on a napkin: let people keep more of what they earn… and they’ll earn more. Lowering marginal tax rates would increase gross tax receipts, he prophesied. Ronald Reagan simplified: just “get big guv’mint out of the way,” and everything else will take care of itself.

The result was a boom the likes of which the world had never seen.

Barclays Equity Gilt study, which the bank has been publishing for the last 53 years, takes a long view of the performance of British stocks and finds that for nearly 100 years – from 1899 to 1985 – U.K. stocks actually lost investors money. Compared to retail prices, the real return on equities over that entire period was negative. But in the 20 years following, share prices – in real terms – more than doubled.

In America, the capitalists’ stock rose even more. The Dow index went up more than 1,000% from ’82 to 2000.

Nor was this boom confined to the Anglo-Saxon economies. The Russians wised up fast, knocked down the wall, renounced communism and cut tax rates down to a third of the level in Britain. The Chinese kept their government but changed their creed: ‘To get rich is glorious,’ said Deng Shao Ping. The Indians dropped the “license raj” and got down to business. The whole world bustled and boomed.

But into this Eden of capitalism slithered a serpent. And the snake teased and tempted all who would listen. “Spend… leverage… speculate,” he hissed. To the marginal householder he said: don’t be a fool; borrow… buy a bigger house… it will only go up in value. To the marginal lender, he said: don’t bother verifying income or checking financial statements; you can sell the debt to Wall Street. To the speculators, the financial engineers, and the genius banks, hedge funds and investment houses he whispered: make some dodgy loans… go for risky, high yield investments; if you get in trouble, there’s always the government to bail you out.

Capitalism was just doing what it was supposed to do. Success leads to excess… and then to failure. But the juice in the credit system quickly dried up. The British bank, Northern Rock (LON: NRK), for example, was worth 5.3 billion pounds last year. At the moment it was nationalized on Sunday, it was worth only 375 million – a loss of 93%. The market in complex derivatives worldwide seized up… in 2008 new issues declined 97% from the year before. Wall Street bonuses fell. Country house prices slipped.

So, it came to pass that investors, bankers, and homeowners had eaten of the forbidden fruit. And suddenly, they looked at each other and realized that they were buck-naked. They should have been ashamed of themselves. Instead, they looked around for a chump.

Then, of course, the financial titans who had showed no interest in sharing their profits and bonuses… became exceptionally generous with their losses. And the captains of their government, too, saw their opportunity when the rock began to roll. Saving Northern Rock would have staggered Sisyphus. But the U.K. government rushed in boldly where angels Richard Branson and the bank’s own management had trod so cautiously.

“It is the right thing to do,” said the Chancellor of the Exchequer, Mr. Darling, putting principle ahead of personal safety. “We are acting on behalf of the public,” he went on, hinting that taxpayers might even come out ahead, as if the government hacks had outsmarted the speculators and bankers, and would sell Northern Rock back to investors at a profit.

‘Capitalism doesn’t work,’ said the sore losers and whiners. ‘It favors the rich,’ said the envious. “It needs to be controlled,” said those who wanted their own fat fingers on the knobs and levers.

Only one candidate for America’s highest office is a friend to capitalism – Dr. Ron Paul. Many people have never heard of him. To the voters, he is incomprehensible. To the press he is invisible. Winning candidates do not favor capitalism for a simple reason. Who benefits from the rough and tumble of real capitalism? Nobody in particular.

Whose company will win the race for better technology? Which hedge fund will bet right on the direction of bond prices? Who will win the contest to make more money? Nobody knows. Particular groups vote for their particular interests now, while the real beneficiaries of capitalism – the unborn, the untested, and the unimagined – don’t vote at all.

The baker, for example, wants his own costs controlled and the bakery across the street put out of business. The factory owner wants the borders sealed against foreign imports. And the working man thinks he should have his job as a matter of right. What they all want is protection from capitalism… from the future… and from the unknown. Everyone wants a softer cushion under his derriere and he’ll vote for the politician who offers it to him most convincingly. And almost every voter wants to stop free markets from doing what they do best: separating fools from their money. Now, at least in the case of Northern Rock, the government will have to do it.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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3 Comments on "Capitalism Was Just Fine Until Politicians Got Involved"

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Wingnut
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Ahh, another who is bought-into capitalism’s con. I’ll just repeat a post I left at another place… and see if we can wake this author. Folks need to stop lumping all Americans into the “yay capitalism” cheerleading festival. Some of us can see thru it, and know-well that capitalism is a felony pyramid scheme… infested with servitude, due to inequality. Nobody is “created equal” here in the USA, and parents force their kids to join it (get a job aboard the competer’s church) when the kids turn 18. This is caused by free-marketeer pricetags blockading/gating all the survival supplies. (join… Read more »
John
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Hey Wingnut,

Why don’t you go live in Cuba, or North Korea, or former Soviet Union, and come back and tell us how well off the “poor” people are. You know, the ones digging through dumpsters for their next meal? Those poor people. Not the ones in the US with 2 TVs, a car, and a cellphone standing in the unemployment line.

Josh
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Wingnut, There is no ‘con’ involved in capitalism, it is open and plain for anyone to use and gain from. However, its people like you who instead of trying to get somewhere, whine and expect it given to them. A military/ survival scheme is wrong. It doesn’t make everyones life better, it brings everyone down to your level. If you can’t see by now that socialism is not the answer then you are blind. People like you have nothing to give, no talent, no money, so instead of trying your best, you denounce people who are smart, inventive and successful,… Read more »
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