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The economy: Free-market capitalism, RIP

The meltdown of the economy has upended all our assumptions about free-market capitalism.

Capitalism is dead,” said Steven Brant in Huffingtonpost.com. For generations, Americans have believed that they live in a free-market system in which government keeps its grubby hands off private enterprise. In classical capitalism, as defined by famed economist Adam Smith in his landmark 1776 book, The Wealth of Nations, individual pursuit of self-interest creates wealth that benefits the entire society. The “invisible hand” of free markets corrects all mistakes: Bad or inefficient businesses are driven out, while those that meet the public’s demand prosper. Now, the meltdown of our economy has upended all our assumptions. It’s not just the meltdown that’s killed capitalism, said Harold Meyerson in The Washington Post. It’s Washington’s unprecedented attempt to save Wall Street from its own folly, with bailouts of Fannie Mae, Freddie Mac, AIG, and, next, of the entire financial industry. With taxpayers taking a $1 trillion stake in private businesses, a line has been crossed. “A new order, in which Wall Street plays a diminished role and Washington a larger one, is aborning.”

For this sea change, you can blame the American people themselves, said Irwin Stelzer in The New Republic. “Under the old capitalism, the public was willing to endure the moderately bad times that often followed the very good ones.” But no more. If there’s a natural down cycle—a recession—furious voters punish whoever’s in office. And both ordinary investors and giant institutions automatically expect Uncle Sam to save them from any misfortune. It was, perhaps, inevitable, said Robert McElvaine in The Washington Post. Today’s globalized economy is controlled by titanic companies and intertwined, insanely complex markets that “don’t behave according to the ‘natural’ laws of the simple economy of Adam Smith’s day.” They must be regulated for the public good. But the “economic fundamentalists” who drove this country into the Great Depression, and have run it since the Age of Reagan, have resisted sensible government regulation of markets and businesses. That’s now changing—permanently.

Reports of the death of capitalism are greatly exaggerated, said the Chicago Tribune in an editorial. “No one ever said markets were perfect at the tasks required for a functioning economy—only that they are generally superior to the alternative.” Just ask anyone from the Soviet Union. Our economy is now in trouble because of “too much government, not too little.” Consider what  government has wrought, said investment officer Joseph Calhoun in Realclearmarkets.com. It helped create the housing bubble by demanding that lenders extend mortgages to low-income home buyers. It enabled foolish loan practices through the quasi-public companies Fannie Mae and Freddie Mac, which backed billions in shaky mortgages. The cure to what ails us is a return to old, time-proven principles. “Trust capitalism. It works.”

Yes, it does—but only with government help, said economist Robert Shiller in The Washington Post. The truth is that the U.S. economy has never been “a shining example of pure unfettered market forces.” From our nation’s founding, when Washington spoke of “diffusing and diversifying by gentle means the streams of commerce,” government has provided the foundation for private economic success. In the 19th century, for example, Congress opened the nation to development and countless new businesses by spending public monies on highways, canals, railroads, and other infrastructure. The present proposed bailout, dramatic though it is, is but the latest example of federal intervention designed to keep the economy on the right track. “Simply put, capitalism evolves.” If we’re both smart and lucky in coming months, that evolution may create “a better, more robust financial democracy.”

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