Economic Nonsense: 50. Capitalism is unstable, subject to periodic crises, and should be replaced

Capitalism is not a fixed thing, but rather a process which develops and changes in response to changing conditions, and especially changing technology.  To say it is unstable is basically to say that it changes.  It is not by its nature stable.  The capitalism of the 21st century is very different from that which prevailed at the beginning of the 19th century.  It evolves as circumstances change, adapting itself to cope with the new realities that present themselves.

It is certainly subject to periodic crises.  The business cycle has long characterized it, with economists divided as to its ultimate causes.  Periods of growth are followed by periods of a sluggish or even contracting economy, with some observers suggesting that this is a good thing, helping to weed out underperforming businesses and redirect their capital to newer and more successful ones.

Over and above this cyclical behaviour, there are occasional crises that seem to threaten the whole basis of the capitalist economy.  The Great Depression was one such period, and the 2008 recession was another.  Critics look for some alternative that lacks these wild and damaging fluctuations.  No-one has yet produced a better system.  For all its flaws, capitalism is the best way humans have found to generate wealth and to allocate resources.  Even including its great crises, it has still produced steady average growth in developed economies for the best part of two centuries.  In less developed economies it has recently produced growth and wealth on an unprecedented scale.

Capitalism learns from these crises.  It adjusts itself.  Governments learn from the mistakes that led to them, and devise new rules to prevent the same happening again.  Capitalism develops and adjusts, renewing itself each time.

When the 2008 crisis came, critics prematurely celebrated capitalism's decline and wondered what might follow it.  The answer was capitalism, modified to prevent countries repeating the mistakes of the past.  It is certainly imperfect.  Most institutions made by humans are subject to the frailty and imperfection of humanity.  But they can improve by learning from their mistakes and adapting, and this is what capitalism does and why it endures.

Isn't the Venezuelan economy doing well?

The Venezuelan economy is at the top of the world. For something, at least:

The South American oil giant's economy shrank 2.3pc in the third quarter, after contracting 4.8pc in the first quarter and 4.9pc in the second, the central bank said.

The inflation rate, a figure the government had not released since August, came in at 4.7pc for November and 63.6pc for the year - among the highest in the world.

As we've mentioned around here before there's nothing wrong at all with the idea that you'd like to change an uneven income distribution. It may or may not be desirable, may or may not be practicable, but the basic desire for a little less extremity in the gap between rich and poor is not a dishonourable goal. It's just that there are sensible and non-sensible ways of going about this.

President Nicolas Maduro's leftist government has introduced mandatory price cuts and rent controls in a bid to rein in the increases but has not managed to get the inflationary spiral under control.

Inflation has been aggravated by severe shortages of basic goods.

Well, yes, it would be. Because price fixing is the wrong way to go about doing it. The problem that all too many of the simpler sorts of socialists have is that prices are not just what people must pay for something, they're also information to those producing things. So, if we price fix because we want the poor to have, say, toilet paper, we then find that the information going to those producing toilet paper is corrupted.

If we set prices above the market clearing price then forests will be razed to provide enough paper to overwhelm the very nation. If prices are set below that market clearing price, as they have been, then there will be shortages of this most basic accoutrement of a civilised bathroom experience. As there have been. And if we set prices at the market clearing price (ignoring that we can't actually calculate that without using the market itself to do so) then what the heck are we doing anyway?

Further, deliberately lowering prices by fiat will reduce production. Thus increasing the price of what is produced on that black market that will inevitably develop and this increasing inflation.

Price fixing just isn't the way to do it.

This is a lesson that our own socialists here in the rich world have learnt to some extent. They still get a bit confused over things like electricity, housing and health care, but at least for general consumables and comestibles they've got it. The way to enable the poor to enjoy more of these things is not to try to fix the price low but to simply give the poor some more money so they can buy at that market price. Which is what we do with tax credits and the like.

Whether we should be reducing inequality is a different matter: but if we are to then we should be doing it in a sensible manner. As Venezuela so obviously isn't.