In defence of capitalism

Nigel Lawson, former UK Chancellor, has an interesting article in the FT on remedying an aspect of the economic crisis. He begins:-

That capitalism has been shown, in practice, to be endemically flawed should come as no surprise. That is the nature of mankind. What is more important is that history, notably the history of the world after the second world war, has demonstrated beyond dispute that every other system of economic organisation is far worse. So capitalism both deserves to survive, and will survive, just as it did after the even greater economic disaster of the 1930s.

This paragraph is an excellent one. It is an excellent riposte to those, such as NZ’s Matt McCarten who wrote in the HoS yesterday:-

The cause of the world’s economic problem is that market deregulation has failed. Only massive public investments and government control of gangster capital will save us. The rest of the world gets this but our Government is going in the other direction.

Leave aside the silly demonisation of capitalism with the epithet gagnster capital. McCarten’s analysis is faulty overall. Lawson mounts a robust attack on proponents of protectionism, whilst McCarten laments the absence of trade barriers. Lawson strongly defends capitalism in his analysis, whilst McCarten crows at what he sees as a defeat and Lawson sees as part of the economic cycle.

Lawson writes in this regard:-

It is essential, both in the US and in Europe, that this is resolutely rejected. The first and most important requirement for the future of capitalism is the preservation of globalisation, and the massive benefits it confers on mankind, in particular in the developing world. There are, inevitably, costs of globalisation; but they are hugely outweighed by the benefits. So resistance to protection, whatever arguments may be used in its favour, must be rigorously maintained. Nor is this an exclusively economic argument. It is a moral imperative, as well. Moreover, a trade war with China could well have unpredictable, and potentially highly damaging, political consequences.

Lawson before becoming a politician was a highly regarded financial journalist. He has not lost his skill with words.

In the remainder of the article he argues that this crisis has been exacerbated by the failure to maintain the separation between commercial and investment banking that largely prevailed until the late 1980s. He calls for countries to re-introduce the equivalent of the Glass-Steagall Act.

Lawson suggests that commercial banking should be supervised and investment banking left to face the risks of the marketplace.

He argues:-

The overriding reason why this separation is essential is straightforward. It is only a commercial banking crisis that poses a systemic risk and can lead to the sort of mess we face today. It is folly to allow core banks to be in a position where they can be brought down by exciting but highly risky investment banking activities. But the idea that this can be prevented by judicious regulation of investment banking activities is a chimaera. In the real world, that is not possible: either the investment bankers will outsmart the regulators, or the regulators will respond with damaging overkill.

Thus investment banks should be left to their own creative devices, and subject essentially only to the discipline of the marketplace.

A stimulating article.