How Can Capitalism Ever Be The Same?

NO MATTER WHAT deal is finally cut between Hank Paulson, the Democrats, and unhappy conservative Republicans, or even if no deal at all is finally worked out, market capitalism as practiced in the United States will never be the same. Well, "never" might be too long, so let's say it won't be the same for a very, very long time.

We are witnessing a radical modification of capitalism. Some of this is obvious. We know that the old view that some banks are too big to fail has been augmented by the view that some financial institutions are too interconnected to fail. So Freddie Mac, Fannie Mae, AIG and others are bailed out by one device or other, even though no depositors were directly threatened by the demise of these institutions. Carnegie Mellon economist Allan Meltzer might be right when he says, "Capitalism without failure is like religion without sin." But it seems safe to say that our tolerance of failure is just not what it used be. The great economist Joseph Schumpeter talked of capitalism's awesome power of creative destruction. Were he still around he would be unhappy to note that we are in for both less destruction and less creativity. There is a growing desire for shelter from the storms of market economics.

But the change in attitudes and policy towards failure--the greater willingness of policymakers to risk moral hazard in order to reduce risks of threat to the financial system--is only one of the changes reshaping market capitalism.

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