by A.M.S. Fatemi

Posted on May 17, 2010

Once again with the fear of contagion as the Greek fiscal and financial crisis continues to shake the markets, the familiar doomsayers have resumed their dire predictions of doom and gloom forecasting the imminent end of capitalism as an economic system. In the United States such talk is rare and quickly dismissed for they have heard it many times before since the Depression of 1929, whereas in Europe, and particularly in France, periods of financial and economic turmoil are the heydays for left-of-center intellectuals and amateur  economists. As far as alarmist commentators are concerned, the further removed their discipline from economics and business, the more authoritative sounding they pretend to be. With the fears of the sub-prime crisis in the US subsiding and employment figures moving in the positive territory, the Greek fiasco and the fluctuations in the markets have become the new indications for the ultimate failure of capitalism and free markets for the scaremongers.

For any innocent bystander perhaps a brief familiarity with economic history might provide sufficient background to realize that business cycles, volatility and even economic recessions are neither unprecedented nor necessarily preventable. As Joseph A. Schumpeter, one of the three most influential economists of the twentieth century (the other two, in my opinion, being Milton Friedman and John Maynard Keynes) has taught us, capitalism is by nature an engine of economic change and thus can never be stationary. He believes that continuous change is due to society's evolutionary character. Economic life goes on in a social and constantly changing environment with all factors and data subject to dynamic variations.  In Schumpeter's own words "... the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates..... The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. . . ." [1]

What we are witnessing today is nothing but an expression of the need for change. When existing legal and other institutional formats are not capable of dealing with the changed technology, knowledge and innovations, the system reacts like a machine which has been overloaded beyond its capacity. With new opportunities and expanded capabilities, renewal of institutions, rules and operating practices become inevitable. In free and open societies, unlike centrally planned economies, rules, regulations and institutions are consensual and not dictated by ideology or force. Obviously it takes more time for reaching agreement among the various interest groups.  The so-called crisis and the unavoidable delay in finding and agreeing on reform measures imposes economic and social costs, but that is the only way available for reaching consensus legislation in democratic societies. It may take months for the Americans and the Europeans to re-wire the capitalist machine and make it fit for the new globalized age, but at the end the capitalist system will survive with enough changes to make it fit for the first half of the twentieth century. In this process of' creative destruction,' certain institutions and rules will be destroyed in order to create more suitable ones for the constantly changing world economy.

[1] Joseph A. Schumpeter: Capitalism, Socialism and Democracy, Harper, 1975, p.82