Future historians, attempting to understand the period we are currently living through, will be struck by the reversal in previously comfortable attitudes to free enterprise and open markets.
Headlines in major dailies are asking: “Is Capitalism Dead?” Letters-to-the editor are appealing to governments to “do something” about failed markets. Political leaders oblige, creating stimulus “packages” and promising to jumpstart ailing economies. Unfortunately, and despite the current white-knuckle ride in the financial world, this reversal in cultural attitudes, if permanent, will do more long-term damage to western civilization than any plunge in the markets.
Psychologist David McClelland, in The Achieving Society written over fifty years ago, pointed out that culture predicts success better than economic conditions at any given time. Going back over thousands of years, McClelland searched nursery rhymes for cultural beliefs, reasoning that stories told to small children reflect cultural beliefs more reliably than the contrived communications of the adult world.
He found that some nursery rhymes display achievement values where the characters’ actions make a difference, while others are based on luck and circumstance beyond the characters’ control. Successful societies, he wrote, tell the first kind of nursery rhyme, declining ones the second. For example, in bustling nineteenth-century Britain, the tale of a poor boy who thriftily became the mayor of London was as popular as Aladdin had been during the Arabian empire’s decline. And writing in 1951 McClelland confidently predicted that the nursery rhymes of war-torn Japan indicated a coming economic superpower.
As with declining societies of the past, too many of us today have lost sight of the achievement values that link effort and reward. Around the world, honest, taxpaying, thrifty citizens are being forced to bail out the overextended and the malfeasant. Despite intuitively knowing that that is not the kind of values we want to instill in our children, governments are rewarding those who personify them. The overwhelming trend in public discussion suggests that we have forgotten our heritage, forgotten that, over the last 200 years, we have built our societies based on a belief in private ownership and free markets. It was, after all, during that period that life expectancy doubled (it was forty in Britain in 1800) and obesity rather than hunger has become our biggest (no pun intended) problem.
History is replete with examples of how free and open economies have enriched us. Think of China, then think of Hong Kong, think of East then West Germany, or North then South Korea. All are obvious examples of the enduring relationship between free economies and prosperity. The assertion that markets don’t work is absurd.
However, recent reports of capitalism’s sickness are not entirely exaggerated. Even in the cradle of capitalism, the U.S., governments have meddled, often with disastrous results. Pumping the world full of dollars for political reasons after 9/11 helped create the credit bubble; Politically-driven lending regulations designed to expand home ownership even to those who could not afford homes (see the Carter-era Community Reinvestment Act and its later versions) undermined sensible lending practices; U.S. government backed Fannie Mae and Freddie Mac sucked up the resulting bad debt before virtually going broke; Land use policies restricted housing supply and pushed house prices higher than they otherwise would be. In California for example, the average home cost eleven times income in 2008.
Canada, which eschewed some of our southern neighbor’s big government excesses, is faring much better. Yet, every day, there are calls for government intervention which, history has shown us, don’t work. We forget that the implementation of some of those interventions in the past is as much to blame for the current financial mess as any current failings in the market.
There is no doubt that the financial situation we now find ourselves in is causing real economic distress but more enduring damage to the Western world will result if we forget our history and ignore the market-based foundation of our society. By abandoning achievement values (which are part of our culture) and adopting a confused version of our own history, the results will be more than paper losses.