The price of being free

Carlos Alberto Montaner

Who said the market is stable and wealth must grow incessantly? A few years ago, economist Joseph E. Stiglitz received the Nobel Prize for demonstrating how asymmetric information upsets the balance of stock-market results. Only those who have no historic memory ignore the entrepreneurial cycles and periodic crises that rattle societies in which economic freedom and a production system based on the existence of private property predominate, and where prices are fixed by the market in accordance with the law of supply and demand. That phenomenon, which equally affects the Scandinavian redistributive models and those that experience a lesser fiscal pressure (something that invalidates the foolish distinction between a good and a bad capitalism), is intensified in the more dynamic and creative societies, which are the most innovative and interrelated and perform the most transactions.

In contrast, in the nations subjected to central planning, where production is directed by functionaries and commissars -- North Korea, Cuba, the Soviet Union and its satellites in the good old days, if they ever existed -- nations where the state acts as an entrepreneur, the economy does not make such sudden lurches and doesn't usually regress suddenly. But the cost of that relative stability is stagnation, mediocrity, a palpable misery and an increasing backwardness when compared with the economy of free societies. What's the reason for such lack of vitality in collectivist societies? It is their lack of productivity, due to the systematic asphyxiation of entrepreneurial people and the crushing of the creative impetus of researchers and innovative spirits. Of course, it is also the lack of a market and the absence of competition, which prevents them from having a reasonable system of prices.

In the late 19th Century, during the Grover Cleveland administration, “the panic of 1893” occurred. The stock market plunged and it seemed that U.S. capitalism (the world's leading economy at the time) was irretrievably sinking. While that happened, the country's electrification accelerated, telephones began to ring insistently, the first cars rode down the highways, shipyards launched huge ships designed with new technology, man's voice was recorded in wax cylinders, and something called “the cinema” captured images in motion. Capitalism was a lot more than just a catastrophe at the stock exchange or uncertainty over the value of the dollar.

One generation later came “the panic of 1907.” It was Teddy Roosevelt's last year. Banks were swamped by an avalanche of people withdrawing their savings. Again disaster struck and again the pessimists announced the end of capitalism. But that happened in the years when commercial aviation spread its wings, U.S. engineers joined the two oceans by the Panamanian waist, and began to change the urban profiles of Chicago, Manhattan, and eventually the rest of the world.
The Crash of 1929 was like a financial and market earthquake. President Hoover could not foresee it and F. D. Roosevelt later erred in the way he picked up the pieces. But it was a period when the English (who were also much affected) gave us television and antibiotics, the United States developed plastics and nuclear energy. After World War II, out of every dollar generated by the blood-soaked planet, 50 cents were produced in the United States. The Crash of ’29 was a thing of the past.

May we go on? The financial crisis of 1973, when the price of oil rose sky high, the gold standard came to an end, and a severe inflationary process began (only to end a few years later under Carter's administration), developed along with impressive space journeys, the popularization of computer communications, amazing discoveries in the fields of physiology and medicine (the DNA, anticancer drugs, spectacular surgical operations). The technical and scientific gap between the First and the Third World became a daunting trench.
In 1987, the credit system failed again. The savings-and-loans went bankrupt. They were killed by inflation, and their burial cost was a whopping $500 billion. But those were the glorious years of the Internet, mobile telephony, the inglorious agony of the USSR and its satellites, a preamble to the prosperous era of Bill Clinton that made us dream of a fantasy where economic cycles were a thing of the past.

What I'm getting to is very simple. The true engine of the market economy is not its financial system but the amazing creativity of its entrepreneurs and innovators. The financial system enables all transactions with flexibility, the way blood flows through the body, but the central force is in the brains of the most creative citizens, in the institutional design and in the civic virtues of the population. It is true that, every so often, when we err because we made wrong decisions, an upheaval occurs, but those countermarches are proof that we are free. Freedom has its consequences.

October 28, 2008

Print this page