Has Capitalism Failed?

If you look in a dictionary, the definition of capitalism goes something like this: “An economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations operating in a free market, especially as contrasted to cooperatively or state-owned means of wealth. The creation of ideas and taking advantage of conditions to provide services or supply goods to the free market via privately controlled production and consumption, the success of which is dependent upon the accumulation of profits gained in and reinvested in a free market”.”Capitalism has failed” is a popular outcry today but those who believe this have misread the causes of our current economic conditions. If we consider our position today from a macro perspective, it is quite apparent that our economic distress has been caused by a failure of our regulatory framework, not the failure of capitalism.There are several blatant examples of these regulatory failures: 1) the failure of the SEC to investigate Bernard Madoff after several acusations of his operation being a ponzi scheme over a 15 year period, 2) the failure of bank regulators to understand the risk position of the institutions they were charged with overseeing, 3) the Fed’s ruinous interest rate policy under Alan Greenspan during 2002-2005 during which interest rates were kept too low for too long, 4) a failure to regulate the credit default swap market, the ramifications of which are still unknown to most on The Street and off The Street, and most importantly and outrageously, 5) the absolute collapse of economic policies in favor of ad hoc “deals” which are more politically influenced than economically influenced.Let’s be clear, government non-performance is the reason for our current economic circumstances, not the failure of capitalism. We should not be surprised by this as history has shown us the US has a long tradition of regulatory failure under all administrations.In the fall of 2008, the Treasury and the Federal Reserve were empowered to take actions which threw out longstanding rules of economic behavior. As the US transitioned from longstanding policy to ad hoc decision making, predictability and transparency disappeared in a matter of weeks. Decisions were made in a matter of hours regarding the fate of companies. Moreover, these decisions were made with limited and poor information.The result was that the politically blessed received billions but these actions have produced disasterous results. Hundreds of billions of taxpayer dollars were wasted, trillions of wealth were destroyed and 4 million jobs have been lost……..so far.Ad hoc decision making is not how things should be. In the US economy, winners and losers should be determined based upon the old fashioned principles of 1) satisfying customers, 2) controlling costs and 3) constantly adjusting to changing markets. Today, we have devolved into a nation similar to Russia or Venezuela where your success is predicated upon your political connections rather than your economic ability.In order to have a prosperous economic system, we must have certainty, transparency and people must win or lose based upon economic ability not political ability. When we saw rules replace by fiat, we saw investors and consumers move to the sidelines in droves.To say that we have witnessed, since the fall of 2008 (which encompases both Republican and Democratic administrations), the most abysmal economic leadership since the 1970s era of wage and price controls is not an overstatement. Economic analysis has been thrown out the window because the government has replaced the precepts of economics with government mandate.There is, however, a reason to be somewhat optimistic. While Hank Paulson was an ad hoc deal junkie, Larry Summers and Paul Volker, two of the present administration’s key economic advisors, are policy oriented. whether we love or hate the policies, we must remember that policies are better than deals.Capitalism has not failed, our elected decision makers have.