Friday, February 17, 2012

Regulatory Suicide

In 2000 The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Elseby Hernando De Soto was published. It's a very well researched book, certainly worth the read. In it De Soto endeavors to discover--per the title--why capitalism is so much more successful in the West than practically everywhere else. He investigates the economies of various second and third world countries in South America, the Middle East, and Asia and discovers what he believes to be the core issue, with regard to the question: property rights.

People of a more marxist or progressive point of view will no doubt argue that the reason for capitalism's success is that it is based on exploitation and the West has the wealth to engage in such exploitation more effectively. Thus the apparent success of capitalism is an illusion, as the second and third world nations will forever operate from a disadvantage. And others with a libertarian or conservative perspective will argue that De Soto puts too much emphasis on property rights, that government, cultural, and social institutions have a significant role, as well.

Nonetheless, I believe De Soto captured an important--nay, critical--idea. And he did so not by merely theorizing, but by actually digging in to processes in other nations, where capitalism has had limited success. In many cases, property rights in these nations are near-impossible to exercise legally. Government bureaucracies are so corrupt and inefficient as to make it virtually impossible to--for instance--open a new business that is legally licensed to operate, to actually do business, without extended wait times and massive out-of-pocket expenses. Similarly, selling property can be just as difficult.

These situations are particularly true in urban areas, where there should be, of course, far more opportunities to do business. As a result, a great many businesses operate outside of the law, businesses that are otherwise engaged in wholly legal activities, from selling food and merchandise to providing various services and even insurance.

And because of this situation, capital accumulates for reinvestment at a much slower rate; profits are technically extralegal so are kept outside the financial markets or are effectively laundered, thus decreasing potential growth. Also, property and business values are largely unavailable as sources for added capital, as a means to expand business, aside from illegal options like loan-sharking. The markets are there, they exist, but are so severely constrained as to prevent large-scale wealth creation via capitalism.

Since the publication of De Soto's book, things have changed in some places. Many governments--eager to partake of the wealth created by consumerism--have made efforts to ease the burden on businesses, some businesses at any rate. Oftentimes, preferential treatment is given to international companies based in the West, thus the proliferation of companies like McDonald's and Starbucks in second and even third world nations. And ultimately, while such situations do benefit local populaces from an economic perspective, created wealth is not wholly available for reinvestment in a given country, since much of it is moved back outside. Thus, the leftist claim of exploitation is something of a reality, but not for systematic reasons but instead for systematic failures.

Given this reality, that bureaucratic structures strangle free market capitalism, the growth of such measures in the United States is both disheartening and somewhat unbelievable. The Economist gives an overview of such stupidity, focusing narrowly in on the Dodd–Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in 2010:
Consider the Dodd-Frank law of 2010. Its aim was noble: to prevent another financial crisis. Its strategy was sensible, too: improve transparency, stop banks from taking excessive risks, prevent abusive financial practices and end “too big to fail” by authorising regulators to seize any big, tottering financial firm and wind it down. This newspaper supported these goals at the time, and we still do. But Dodd-Frank is far too complex, and becoming more so. At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929. Worse, every other page demands that regulators fill in further detail. Some of these clarifications are hundreds of pages long. Just one bit, the “Volcker rule”, which aims to curb risky proprietary trading by banks, includes 383 questions that break down into 1,420 subquestions.
Such legislation not only slows economic growth in the short term (amazing how little attention this reality has received), it also undoes the structures of the economic system--the capitalist system--that enable it to function as a capitalist system.

Capitalism as a system is not all peaches and cream. It exists because of the business cycle which necessarily must lead to periods of anemic growth or even actual contraction. That is a part of the cost for its ultimate success in creating wealth, far more wealth that can otherwise be created, which establishes higher and higher standards of living for all, even those at the lowest levels, and provides governments with the necessary revenues to create safety nets--limited ones--for those who desperately require them.

The attempt to remove these negative consequences of capitalism and somehow keep only the positive ones is doomed to fail and will--if not checked--ultimately doom the U.S. economy. But those who think they know better, who believe in such a utopian vision seem unable to recognize this. They would do well to review De Soto's work and see where this path will truly lead.

Cheers, all.

1 comment:

  1. We keep coming at similar topics from different directions, which I find interesting. Your paras 3-5 echo the theme of my post about the underground/apolitical economy and its rapid growth.

    OTOH, your viewpoint is always just far enough from mine to improve my stereovision of the world.

    Great minds, and all that. :)