The 'That's Capitalism' Argument

It seems that everyone has decided what capitalism is.

Capitalism, apparently, is the ability to let stuff fail. NAMA and, by extension, any other government support are not capitalism, because they deny the possibility of failure and replacement. This rhetorical line leads us directly to soak the rich-type propositions, carping about privatising gains, socialising losses, and aren’t bankers horrible people, etc, etc, etc (All of which might be true).

Lurking at the edges of an argument like this is an insider-outsider proposition that, really, those in government are bailing out their friends, using the systemic nature of the crisis as their excuse for doing so. Oddly, in invoking capitalism, the authors are just a hop and a skip from the kind of power-pyramid analysis a Marxian economist or social theorist would be quite comfortable with.

(But let me take a step back before getting accused of calling Brian Lucey et al Marxists.)

I’ve a problem with this assumed notion of capitalism as just the ability to let `bad’ businesses fail, to be replaced with other, potentially more profitable, ones. This is a vision of capitalism as petri dish. Capitalism does have failure of unprofitable—or unlucky—businesses as part of its makeup, but it is not true to say that using government to stop insolvent businesses fail is inimical to capitalism. Capitalism is the mobilisation of society’s resources based on the profit motive, assuming private property rights and a defined legal system of rights around property title transfer. Capitalism is defined by an entire system of social relations among both producers and consumers, but with a primary emphasis on the demands of production for a profit. So, when things get highly unstable, as we have in Ireland right now, the resources of the State get used to maintain that system of social relations, because, in previous periods, that system of social relations gave rise to high profits. We have several, competing sets of interests in a standard presentation of capitalism: the drive to accumulate capital, the market, and division between private and public realms.

Viewed from this angle, it makes no sense whatsoever to let banks fail, and it seems pretty clear to me that officials in the Department of Finance, and their Minister, have an idea like this at the back of their minds when making decisions about Ireland’s damaged banking system.

The only time a large scale failure of profit-taking entities is desirable is when they actively damage the likelihood of making profits in the next period.

That’s bonkers, I hear you say. Surely new entrants, or potential new entrants, keep prices at or near marginal costs of production? Don’t we need new companies walking over the bodies of old companies for the system to evolve? Yes, we need all of those things, but the process is disordered and complex, and no one, to my knowledge, understands much of that process at all. Witness the system’s reaction to the collapse of Lehmans, the example given by Minister Lenihan (in addition to ICELAND!), when talking about rescuing Ireland’s banks.

But think about that rationale for letting banks, or other large firms, fail again: the only time it makes sense to do so is when they damage the likelihood of future profits. Zombie banks, and Zombie hotels do just that, because they constrain credit, and bleed jobs, which hampers the generation of profitable companies in future periods. Futhermore, legitimising the behaviour of banks in previous periods emboldens those banks to get large enough to make vast profits during the next upswing, only to get bailed out again when things go horribly wrong.

What’s anti-capitalist about the Irish State’s relationship with its banks is first, the inability to punish risk-taking among those who explicitly took risks within our banks, and second, much more importantly, we hamper our future growth prospects by keeping the banks as they are—zombies. Outright nationalisation one year ago would have taken care of both of these problems at once, and would have been exactly in line with the capitalist system, despite smacking of socialism at the time.