It’s too early to evaluate the free enterprise system

By Money Matters Editors

These days, it’s become popular to criticize the free market system, or capitalism, and much of it is justified.

Over-leveraged banks, home owners who treated their houses as ATM machines or who bought homes they could not afford when interest rates reset to normal rates, and mortgage lenders who granted curious and in some cases absurd mortgages to home buyers, all played a role in creating the financial crisis. And others were complicit. It was a tragic play involving debt, too much debt, and fraudulently obtained debt, and it is deserving of rebuke.

Still, from another perspective, much of the criticism that’s occurring now in many places is off the mark and out of place.

It’s off the mark in that it frequently looks for single-person or single-institution scapegoats or ‘causers’ of both the crisis, and now, of the debt burden the United States. and world will be paying back for years.

It’s out of place in that this is not an appropriate time to form conclusions about the effectiveness, social impact, or morality of capitalism, of the free enterprise system. And the reason why it’s not? The system is not at equilibrium. Just as it wasn’t fair to evaluate the free enterprise system during the leveraging boom, when housing prices were increasing at better than 10 percent per year, and seemingly anyone could obtain a mortgage to buy three condominiums as investment property in Las Vegas or Florida with no money down, so it’s also unfair to evaluate the free enterprise system now, during the slow recovery from the leveraging bust, when many small/medium-sized businesses still can obtain not the loans they need to expand commercial operations, and likewise good-credit, prospective home buyers can’t obtain mortgages. Both the boom and the current bust periods present a distorted picture of free enterprise, hence no accurate generalization can be reached about the system at the current time.

In other words we know the free enterprise system – capitalism – will be different. But at this juncture we can not say the free enterprise system will not resume producing its many benefits, the chief among these being - entrepreneurship, innovation, ingenuity, dynamism, risk taking, wealth building, a more-efficient deployment of resources, self-enrichment, and the primacy of commerce.

We’re just too early in the post-financial crisis era to reach any enduring conclusions regarding the above.