Where is Capitalism Going?

In Financials, Misc, Politics on October 19, 2009 at 11:18

capitalismDo models fail cause they are flawed, or are we actually incompetent to use them the right way and make the best out of them? Do we understand the real dynamics of a model we adopt, or are we just gambling and hope for the best? Was capitalism chosen through a trial-and-error process? Is capitalism what’s best for human prosperity? How should I know..!

What I do know though, is history as it happened. Communism failed because it was unable to compete against capitalism for obvious reasons. But what about capitalism? Has it failed? Are advanced economies suffering an identity crisis? The answer to the latter question is yes, but capitalism per se has not failed. It is and will continue to be the core of market mechanisms around the world. Unless humans and firms stop being utility and profit maximizers respectively, capitalism will be the ruling system due to the economic freedom it bolsters. But, capitalism’s biggest virtue, its freedom, is also it’s biggest flaw. In general terms, this translates into market fragility, especially when an increasing number of countries are embracing this model.

Incentive is the driving force behind production, growth and as a result prosperity. When incentives are mis-percieved, this is where the economy moves to the wrong direction. In the case of large financial institutions, there was lack of accountability and misinformation to the market participants. The state was absent and Central Banks were “adding booze to the party”. This was not capitalism. This was the rule of jungle..

The current crisis hasn’t been a sign of failure, but an indicator that’s time for major correction to the system. Capitalism needs to be modified. The state doesn’t have to get more involved as bad as it needs to address the issues of accountability and misinformation, issues of paramount importance for the incentive drivers.

Markets do fail, but in a sensitive and complex world like ours, when they fail they fail big time. So, until a fitter economic model shows up, which doesn’t seem likely anytime soon, capitalism will prevail.

by the Self-Seeker

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