NPR logo A Free-Market Economy Keeps Capitalism Ticking


A Free-Market Economy Keeps Capitalism Ticking
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Want another perspective on this issue? Read Robert S. McElvaine's commentary, "A Spoonful Of 'Socialism' Makes Capitalism Work," here.

On Oct. 29, 1929, Wall Street spiraled in on itself, and the world economy went boom. So what have we learned in the 80 years since Black Tuesday? Not much, if you believe the myth that unrestrained capitalism was the root cause of our economic collapse — then and now — and that only increased government regulation and intervention will right the ship. In fact, this myth has no logical relation to reality.

First, a brief historical recap: The Great Depression was not caused by a lack of government regulation. In fact, the opposite is true: In the years preceding Black Tuesday, the Fed lowered the interest rates to unprecedented levels, thus stimulating a temporary boom (e.g., "the Roaring '20s"). The public overinvested — often on credit — and when the Fed finally realized that it could not sustain its policies and raised interest rates to stave off inflation, thus choking off the money supply, an inevitable burst followed. Get it? Government manipulation of interest rates, not unrestrained capitalism, caused the Depression — in 1929 and today.

Had the government not compounded the Great Depression with further mismanagement of the money and credit supply, it almost certainly would have ended in two to three years — as was the case with every Depression that preceded it. Then, as now, business and labor would adjust to decreased spending by lowering prices until consumer spending was again stimulated.

Armstrong Williams is heard weeknights on Sirius/XM Power 169 at 9 p.m. ET. Courtesy of Armstrong Williams hide caption

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Courtesy of Armstrong Williams

Armstrong Williams is heard weeknights on Sirius/XM Power 169 at 9 p.m. ET.

Courtesy of Armstrong Williams

So why do these anti-free-market myths persist? They are appealing because it allows us to channel our collective angst onto an easily identifiable group of villains — greedy bankers who fatten themselves on our misfortune. In placing the blame on unrestrained capitalism — and its most easily identifiable symbols — we create a mental paradigm that allows us to digest something that is incredibly difficult to face: a temporary contraction of our future possibilities (e.g., a business cycle).

What is most difficult for the populace to digest is that recessions are good for an economy. They force inefficient and obsolete businesses to reform. This creates necessary and positive change. Unfortunately, people don't like change, and recessions force necessary economic change. The economist Friedrich Hayek referred to this as "creative destruction."

However difficult this is to accept, we must realize that business cycles are inevitable, and not necessarily totems of doom. You can't have prosperity without recessions. Famed economist Robert Lucas summed up the trade-off succinctly when he argued that if forced to choose between removing business cycles or increasing the annual economic growth by 0.1 percent, the latter would make people better off overall.

Translation: Allowing the market to reach its natural equilibrium will carry with it the greatest buying opportunity of our lifetime. So long as the market is kept free.

Armstrong Williams is heard nightly on Sirius/XM Power 169 at 9 p.m. ET.