For centuries the capitalists and the socialists have been on the extreme end of the economic divide. Recent events in the world economy have brought to the fore once again the futility of not looking at economics as a science that study the behaviour of rational actors (government, households and entrepreneurs) under the influence of a given stimulus.

Some countries (e.g. China) have chosen a market system where the government owns the major industries. The object of this kind of market system is to protect the households from the “greedy entrepreneurs”. Many leftwing politicians and economists are hampering on the current events in the world economy to justify their call for the nationalization of the major companies and adopt the Chinese model.

China has developed the concept of a “socialist market economy”, which the Chinese refers to as “Socialism with Chinese Characteristics”. It is an economic system where the state owns all the major industries but competition within a market determined pricing system is encouraged between the industries. But it remains to be seen whether the Chinese characteristics will remain the same indefinitely.

The Chinese government directed and managed its industrial development prior to economic reforms and has continued to take a paternal interest in guiding the country’s industrial development. It was in the late 1980’s that the Chinese government thought it wise to start to design a market-oriented economic system that takes into account the characteristics of its people.

China went further to put in place new industrial policies to replace the existing traditional planning tools in order to achieve macroeconomic stability and the required industrial development. China was in effect implementing a capitalist system with continued state involvement in an attempt to overcome the shortcomings of a competitive capitalism.

Reading newspaper articles and the various interviews of the world leading economists on the current economic downturn, makes one wonder if those who claim to be economists fully understand the theory underpinning the various competition theories and economic models.

Why would any capitalist have cold feet because of the credit crunch? Didn’t they predict this outcome in a competitive market in the event of disequilibrium? I read with dismay at some revisionist politicians who appear to jettison their deepest lifetime convictions about the market system because they have been rattled by current events in the financial market.

The real surprise for me is the ineptitude of some economists appointed to manage Central Banks and leading financial institutions, who appear not to recognize the signs of market disequilibrium. I am shocked and horrified by the lack of preparedness for the occasions, and the will power to see it through, when the market decides to correct itself.

The current credit crunch problem doesn’t lie with the principles of the price system but with people not understanding the conditions that make the price system works. Those who are quick to recommend the Chinese model fail to understand that the government owned industries would suffer a greater loss due to high level of inefficiencies than what befell the AIG, Fannie and Freddie in American and HBOS takeover in the UK.

Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSEs) and by implication they were public interest companies. Their business activities were in effect guaranteed by the US government. These companies do not provide mortgages direct to the public but give guarantees to mortgage banks to protect them against economic downturn when people can no longer afford to pay their mortgages.

The reason why they are important public interest companies is that they give guarantees to mortgage banks in order to make house purchase affordable to the Americans. The companies have in effect taken over the housing responsibilities of the government. It should be the responsibility of government to guarantee mortgages. It is understandable why the US government felt obligated to rescue these companies because they were really government proxies.

Some Marxist agitators (including Mick Brooks, general secretary of the UK National Association of Head Teachers) have mischievously compared the spending by government to rescue these failing banks with a situation when the British and American governments say that there is no money when it comes to assisting the poor and the working class with their food and fuel bills. How ridiculous is the comparison!

Of course, true to form, the Marxists are celebrating what they regard as the failure of the capitalist system. For them, the US government economic summersault is just the icing on the cake. They are calling for the government to take over the rest of the big companies. They forget to tell the poor and the working class what faith has for them if these banks have been allowed to fail and trigger a world recession.

The Marxists are not telling you that the biggest problem with these two heavyweight mortgage financial institutions was that they did what the government regulators told them to do rather than act on the dictates of market forces. In order words, the real problem was the incompetence of some faint-hearted capitalists with socialist tendencies saddled with the responsibilities of monitoring these companies.

The financial market situation in the USA has been bad for a couple of years. It should have been obvious to the regulatory authority. It got so bad that 80% of US mortgages were in the books of Fannie Mae and Freddie Mac. In a properly managed capitalist economy, such a monopoly power by two companies over a huge economy as the USA would never have been allowed.

The credit crunch is a market reaction to how capitalist banks perceive the US housing market, which we all know is overheated through government policy- induced reckless lending. In order for the bank staff to boast their commissions and bonuses many borrowers got a mortgage even when their credit assessments clearly indicated they couldn’t afford to pay.

There is nothing happening in the financial market today that accountants and economists had not warned us all about for decades. Banks are literarily overtrading. Most US banks have capital adequacy ratio of about 8%. What this means is that they can lend 12½ times the funds they have in their vaults. The ratio for Fannie Mae and Freddie Mac is 2% to 2½% and leveraged 40 to 50 times their assets. This is unacceptable in any well managed economy.

If you want a market system, you should be ready for what comes with it. The US economic policy failure is the consequence of the artificially created economic boom and cannot be ascribed to the failure of the market system. When the times are bad, as it is now, highly leveraged companies fall victim to bankruptcy or takeover. This isn’t a new theory.

Nosa@Olotu.org

Robot  Villager

# 1 For centuries the capitalists and the socialists have been on the extreme end of the economic divide. Recent events in the world economy have brought to the fore once again the futility of not lo...Read the full article. Posted by Robot| 25.09.2008 22:31

emenanjo  Villager

# 2 Capitalism still contains the seed of its own destruction. Palliative and cosmetic measures coupled with scissor-and-paste fire brigade approaches would not save it. Capitalism promotes and strives on war, induces war here and there and sustains war here and now. It thrives on propaganda and speculation. It has no human face. It is ruthless, callous, selfish and individualistic. It promotes crime and artificial unemployment; encourages and promotes all manner of evils; has destroyed marriages and the family units because of the lust for money, money, money, which have been found inherent in capitalism. There is no love anymore. Fake smiles everywhere and impression management here and there. America, as the greatest epitome of capitalism, exports nothing but crises to Latin America and other parts of the world. I can tell you emphatically that the world is better off without capitalism. It is the crudest economic system ever visited onto man on this earth. Wickedness and evil have filled the earth because of this anaconda called capitalism. Posted by emenanjo| 26.09.2008 05:49

Enforcer  Villager

# 3 =emenanjo;274001> I can tell you emphatically that the world is better off without capitalism. It is the crudest economic system ever visited onto man on this earth. Wickedness and evil have filled the earth because of this anaconda called capitalism. emenanjo It is understandable if you feel that way in light of what is happening now. But capitalism (with human face!) still remains the best market option. Remember, it is the capitalist system that makes it possible for you to seat in the comfort of your house to express your opinion on the matter. I mean the internet!! Posted by Enforcer| 26.09.2008 12:54

valteena  Villager

# 4 =Enforcer;274127>emenanjo It is understandable if you feel that way in light of what is happening now. But capitalism (with human face!) still remains the best market option. Remember, it is the capitalist system that makes it possible for you to seat in the comfort of your house to express your opinion on the matter. I mean the internet!! You are right to a certain degree. The fact is that communism is antithetical to human nature hence it eventual decline as ideal as it may have seem. Whereas capitalism on the other hand is congruous with human nature manifested in avarice and the quest for that illusory "freewill" Posted by valteena| 26.09.2008 14:06

Enforcer  Villager

# 5 =valteena;274140>You are right to a certain degree. The fact is that communism is antithetical to human nature hence it eventual decline as ideal as it may have seem. Whereas capitalism on the other hand is congruous with human nature manifested in avarice and the quest for that illusory "freewill" valteena I agree. The difficulty with capitalism is mainly the failure of government to perform its role properly. The credit crunch today is a consequence of bad economic policies. I would not ascribe it to the failure of capitalism as some people would want us believe. Posted by Enforcer| 27.09.2008 08:53

nero africanus  Villager

# 6 =Enforcer;274127>emenanjo It is understandable if you feel that way in light of what is happening now. But capitalism (with human face!) still remains the best market option. Remember, it is the capitalist system that makes it possible for you to seat in the comfort of your house to express your opinion on the matter. I mean the internet!! enforcer, not necessarily , innovation is not a prerogative of capitalism , rather it is a prerogative of necessity , history showed adequately over the last 100 years that the innovations of the socialist states, seemed to be greater than that of the capitalist states. to explain what i mean , the indices that you might use to compare might be different from the operational criteria of a communist command economy. for this reason, a capitalist society might deem mobile phones a necesity , because it provides a means to extract surplus value , while a communist society like cuba might decide it is not necessary. a communist society like soviet union might decide that education and health are the two most important things and give it the attention and resources it deserves while in a capitalist society, the average family will have to take a loan to send the child to university. the internet was developed as a tool of war by the american military , and its commercial use is only secondary. Posted by nero africanus| 27.09.2008 10:35

nero africanus  Villager

# 7 =Enforcer;274428>valteena I agree. The difficulty with capitalism is mainly the failure of government to perform its role properly. The credit crunch today is a consequence of bad economic policies. I would not ascribe it to the failure of capitalism as some people would want us believe. enforcer , i like to beleive that you belong to the school of thought that wants the market to allocate resources and regulate itself , this afterall the the basis of capitalism , laisez faire. unfettered freemarket has just failed and bankers and all manner of free market fundamentalists are looking to the state for bail out . the question is what does the state receive in return for the bail out? let capitalism self destruct as it is bound to you cannot ascribe bad economic policies to a government that the market refused to let regulate it. pope john paul the second said before he died , that unbridled capitalism is worse than communism. lo , we didnt have too long to wait , the hour is already here let the free market fail with its attendant suffering , so only then can it prove its superiority Posted by nero africanus| 27.09.2008 10:45

Enforcer  Villager

# 8 nero africanus, You have actually supported my point when you write: pope john paul the second said before he died , that unbridled capitalism is worse than communism. No one is advocating unbridled (uncontrolled) capitalism. A bridled (controlled) capitalism is far better than communism of any sort. The US government economic policy was to encourage these failed banks to lend to any willing borrowers in order to create the impression of a boom and thereby win political favour with the electorates. That is the point I was making when I said that "the credit crunch today is the consequence of bad economic policies." The US government conduct is akin to fraud on a massive scale. The capitalist market is telling President Bush that he can't burke the market. It is a lesson to all on how not to run a capitalist market. Posted by Enforcer| 27.09.2008 13:00

nero africanus  Villager

# 9 =Enforcer;274493>nero africanus, You have actually supported my point when you write: No one is advocating unbridled (uncontrolled) capitalism. A bridled (controlled) capitalism is far better than communism of any sort. The US government economic policy was to encourage these failed banks to lend to any willing borrowers in order to create the impression of a boom and thereby win political favour with the electorates. That is the point I was making when I said that "the credit crunch today is the consequence of bad economic policies." The US government conduct is akin to fraud on a massive scale. The capitalist market is telling President Bush that he can't burke the market. It is a lesson to all on how not to run a capitalist market. my dear enforcer , we shall not burk the market , but let the market take care of itself Posted by nero africanus| 27.09.2008 14:05

emenanjo  Villager

# 10 =Enforcer;274127>emenanjo It is understandable if you feel that way in light of what is happening now. But capitalism (with human face!) still remains the best market option. Remember, it is the capitalist system that makes it possible for you to seat in the comfort of your house to express your opinion on the matter. I mean the internet!! Where is the human face in the present dog-eat-dog red blood practice of capitalism? I am not convinced that it is still the best. Yes, in the comfort of my house indeed but so is the fact that most of the hand set or cell phones you use are made in China, that practices socialist capitalism with a seemingly human face. Second, no country is an island, they will trade and depend on each other for humanity's benefit. Posted by emenanjo| 27.09.2008 15:33

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