Last week I gave a speech on “healthy capitalism” at Oxford University. Before doing so, I tried the idea out on an academic friend of mine. He scoffed at it. For him, “healthy capitalism” was an oxymoron. Five years after the start of the world’s worst financial crisis in decades, it is easy to mock capitalism. The system ran amok – leading to debt, unemployment and shrinking economies.
But that’s precisely why the world needs healthy capitalism. Health involves vigour, well-being and resilience. Capitalism – with its basis in free enterprise and private property – can have all those qualities provided warped incentives are corrected and the culture of greed is tempered. State socialism certainly cannot. The practical alternative is to reform capitalism not throw it away.
But how should it be reformed? After the tribulations of recent years, the conventional wisdom is that the problem has been too much freedom. That, though, is a misdiagnosis. Most of the diseases that have become apparent during the crisis have been caused by a distortion of free enterprise rather than too much freedom.
Sickness number one was Alan Greenspan’s habit of lowering interest rates at the first sign of trouble during the pre-crunch era. Investors dubbed this the “Greenspan put”. The theory was that, since the U.S. Federal Reserve would always ride to the rescue, it made sense to take high risks. Fear was numbed and greed left untrammelled. The natural balance of a healthy organism was distorted.
Central bankers do have a role in mitigating the extremes of the economic cycle. But it is vital that, in doing so, they don’t just stoke up more trouble. They need to have the expertise to recognise bubbles and the courage to prick them – an idea which has, thankfully, gained currency in the post-Greenspan era.