Is the Economic Crisis an Indictment of Capitalism?

One of the sad narratives of the financial meltdown of 2008 and its aftermath is that it was and remains the result of unbridled capitalism. Too much freedom spoiled the economic broth.

While doing research for a current project I’m working on, I came upon a remarkable essay by Ludwig von Mises. It turns out that Mises considered the question of whether economic crisis is an indictment of laissez-faire capitalism back in 1931 in the wake of the worst global economic downturn of the Twentieth Century.

In an essay, “The Economic Crisis and Capitalism,” published in the German Neue Freie Presse (available in English Translation in Selected Writings of Ludwig von Mises, Vol. 2), he explains why the answer to the question is a decided no!

The structure of our society resets on the division of labor and on the private ownership of the means of production. In this system the means of production are privately owned and are used either by the owners themselves–capitalists and landowners–for production, or turned over to other entrepreneurs who carry out production partly with their own and partly with others’ means of production. In the capitalist system the market functions as the regulator of production. The price structure of the market decides what will be produced, how, and in what quantity. Through the structure of prices, wages, and interest rates the market brings supply and demand into balance and sees to it that each branch of production will be as fully occupied as corresponds to the volume and intensity of the effective demand. Thus capitalist production derives its meaning from the market. Of course, a temporary imbalance between production and demand can occur, but the structure of market prices makes sure that the balance is reestablished in a short time. Only when the mechanism of the market is disturbed by external interventions is the effect of market prices on the regulation of production prevented; they are disturbances that no longer can be remedied by the automatic reactions of the market, disturbance that are not temporary but prolonged.

In a free market rooted in private property, the only way entrepreneurs are able to sustain profits is by serving customers better than anyone else. It is only when they receive special privileges through preferential regulation, subsidies, bailouts and the like that they are able to reap profits for which they have not sowed productive activity.

I was struck by how much of what Mises said about the response of many to the Great Depression applies closely to our current situation. Just like Mises, we must never tire of explaining the fallacies in the thinking of those who think the Great Recession is a clear case of the failure of capitalism. In fact, it is a quintessential example of the failures of interventionism to bring about anything other than economic destruction and relative impoverishment.