Bailout: Are we 'all socialists now?'

By: Roger McCain

Posted: 10/3/08

In the mid-1990s - I don't recall the exact year, but my dad was still living - he and I were together for New Year's, just the two of us and a brew or two. "Well," he said to me, "Now that communism is gone, when capitalism crashes, where do we go from here?" His question seems very relevant this week. After the nationalization of Fannie Mae and Freddie Mac and the "rescue" of AIG a couple of weeks ago, a television talking head said, "We are all socialists now." This was on CNBC, the financial channel, where free-market conservatism goes without saying. But the House of Representatives gave its answer Monday: no, we are not all socialists, not yet. Nevertheless, as my dad asked, where do we go from here?

The talking head had a point when he said, "We are all socialists now." After September, the idea that large corporations are simply a form of private property no longer seems clearly true. Corporate shares are private property if it is convenient for public policy that they remain so; if not, not. And as we have learned in Iraq, you can't unscramble eggs.

There are some things capitalism is not very good at. One, as we have seen, is maintaining a stable financial system. Even the great free-market economic philosopher Milton Friedman held that the stability of the monetary system must be a government responsibility. Another is attaining a high target for saving and investment. That's crucial for the future of the country. Since 2000, our social saving (private saving minus the government deficit) has been increasingly negative. According to official figures, even private saving has moved into the negative range - though I would be cautious about those numbers. As a country, we have to be more frugal. And, as Keynesian economics (and bitter experience) have taught us, there can be a "paradox of saving." When everybody tries to save, cutting back on consumption spending, the result is not an increase in saving but a recession or depression. And that is a real danger in the next few years, as almost everybody understands.

But there also are things that socialism is not very good at. One of them is eliminating failed enterprises. When an enterprise continually loses money, because it is not producing anything anyone wants or is very inefficient, but it provides people with jobs they are accustomed to, it can be very difficult to get rid of. In a capitalist system, an enterprise like that would be liquidated. The employees would have to work at other, more productive jobs, whether they like it or not, and the former owners might recover a few cents per dollar of their original investments. This is sometimes called "creative destruction." But socialism isn't very good at creative destruction. (One thing the September crisis showed is that our system, call it what you will, combines some of the worst points of both capitalism and socialism.)

Another thing that socialism is not very good at is initiative - starting new things. Most people would say that the successes of capitalism arise from "entrepreneurship:" the freedom and willingness of people to start new businesses, bringing new technologies into use and reorganizing markets. But entrepreneurship is risky, and if people are going to risk resources on innovative initiatives (most of which will fail), it is essential that there is some check. In a capitalist market system, in theory, if the enterprise does not produce what people want, the entrepreneur will lose his money. Therefore, he has a motive to sift the possibilities carefully, and not go ahead unless there is a good chance of success. If the enterprise is to be public property, this review will have to be political. And experience teaches us that politics is not kind to innovations, especially successful ones.

That leads me to the conclusion that there has to be an arm's length relationship between government and economic decision-making. In fact, one of the things I believe is wrong with our "capitalism" is that it is too often a "partnership of government and business."

The American future may or may not be socialist. That depends on how you define the word "socialist," not so much on what the future will be like. Karl Marx thought that the organization of corporations was in itself a step toward socialism. Perhaps he was right after all. Our huge corporations are indeed the products of capitalist entrepreneurship, but if they are "too big to fail," then we are certain to see an increased government role in their ownership and management. But we must find ways to organize our "socialism" (or whatever you want to call it) so that we have more - not less - initiative, stronger - not weaker - motives to move resources from less to more productive uses, greater - not less - separation of economic decisions from politics, and more saving matched by more investment. If we do not, we can expect more crises and an even more drastic restructuring of our economy.

Whether we want to call it "socialism" or not, we need to think carefully and deeply about what the economic system in our future should be. And that's not something we can do in the midst of crisis. It will take time and calm conditions to figure it out. But we had better start now.

Roger McCain is a professor in the department of economics and international business. He can be reached at op-ed@thetriangle.org.