Slavoj ŽižekAfter the financial collapse of 2008, there was plenty of finger pointing. Yet by far the most blamed agent was unregulated, laissez-faire, liberal capitalism. It is the word on the street; it is in the media; politicians constantly talk about it. And it is an especially favored subject of leftist intellectuals — among whom is Slavoj Žižek, a champion of Lacanian and Marxist theory.
However, contrary to what Žižek believes, the United States has not been practicing liberal capitalism. While one could perhaps make the case that some warped and watered-down version of capitalism was in place, it is a far cry from the liberal capitalism Žižek criticizes in his essay “It’s the Political Economy, Stupid!”[1]
Proponents of true capitalism have an upward battle to fight. The definition of capitalism itself has been skewed by many, and its reputation has been tarnished in the resulting confusion. Free-market advocates around the world should shudder at Žižek’s blatant stereotype of the financial meltdown of 2008 as a product of capitalism.
But is capitalism really what caused the economic crisis? If capitalism is defined as private ownership of property and wealth, as opposed to state control, then there is truly a problem on our hands if a leading intellectual believes capitalism accurately describes our economy. For what caused the financial meltdown of 2008 was not capitalism, but rather a form of fascist, state-controlled economics. And with each false attribution, capitalism is seen as a less viable system.
What Causes Speculative Bubbles?
Citing Keynes, Žižek argues that in a capitalist economy, markets go up and down based solely on what “average opinion expects the average opinion to be.”[2] There is a kernel of truth here: the market often goes up and down based on what the majority anticipates. However, more often than not, the market comes down not because of speculation, but because the reality of a company’s status does not live up to the expectations people had for it.
The market facilitates the creation of bubbles based on speculative growth, but these bubbles are consistently corrected when people realize investments are overpriced. The only determinate of long-term growth is how well an industry produces a product in accordance with demand. Thus, speculation alone has a long-run handicap. Every independent study shows that the vast majority of active investors do not outperform the average of index investments over time.
If the speculation that is intrinsic to free markets did not cause the meltdown, then what did? Friedrich Hayek argued that central planning and government debt, which belong to the nanny-state ideology, contribute the most to business cycles:
What we should have learned is that monetary policy is much more likely to be a cause than a cure of depressions, because it is much easier, by giving in to the clamour for cheap money, to cause those misdirections of production, that make a later reaction inevitable, than to assist the economy in extricating itself from the consequences of overdeveloping in particular directions.[3]
There comes a point at which speculative expectations cannot stand in the way of depression. Even if investors on Wall Street — the men Žižek believes are running the show — were to believe that an easy-money policy was the right thing to do, the system is nevertheless doomed to fail because its economic fundamentals are impaired.
Expectations and the Present Crisis
The horror of all this is not even so much that Žižek believes markets in general are driven by expectations of expectations, but rather that he believes our existing economic framework relies upon this principle!
But is economy really a science? Does the present crisis not demonstrate that, as one of the participants put it: “No one really knows what to do”? The reason is that expectations are part of the game: how the market will react depends not only on how much the people trust the interventions, but even more on how much they think others will trust them — one cannot take into account the effects of one’s own interventions.[4]
Are we to believe that the right thing to do is what the majority of people will react well to? Perhaps, if real economic growth was — like a democracy — based solely on what the majority of investors believe we should invest in.
For Žižek, it is a “sudden shift in uncontrollable circumstances” that causes a loss of wealth, through speculation.[5]
When circumstances are truly out of control — such as a war in the Middle East that drives up the price in oil or an overestimation of stock value in the case of the digital bubble — prices should come down. What caused a catastrophic loss in wealth around the world in 2008 was not an uncontrolled circumstance, but rather an overly-controlled circumstance. In the case of the housing market collapsing, it is easy to blame Wall Street for being “drunk,” as President George W. Bush described, but as Austrian economist Peter Schiff consistently reminds his audience: who provided the alcohol?[6]
When the tech bubble burst in 2000, Alan Greenspan initiated an even bigger bubble — the housing bubble — by lowering interest rates. Even while masquerading as capitalism’s best friend, Bush supported the endeavor. Washington followed suit by passing housing legislation to help stimulate the real estate market.
Žižek is astute enough to pick up on the way one bubble transfers its malinvestment to another bubble, writing that “today’s meltdown is the price paid for the fact that the United States avoided a recession five years ago.”[7] In a true, liberal, capitalist country, there is no feasible way to avoid a recession without making it worse. It is only due to its fascist regime that the United States was able even to attempt to prevent a recession.
A Capitalist Economy?
This financial meltdown exposes the larger problem, which is that our economic system is not as capitalist-driven as we may believe it to be. The existence of a central bank which adjusts the money supply, such as the Federal Reserve, cannot serve as a back-bone for liberal capitalism.[8] Only a currency system in which the private banks individually control interest rates can serve as a back-bone for a capitalist economy. Otherwise, the state has control and can manipulate the markets, and the market is doomed to instability. As Hayek writes,
The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process.[9]
The twentieth century saw the creation of what seems to be an endless number of government-sponsored agencies, which make it impossible for anyone to refer to the United States as a capitalist country. The Departments of Commerce, Energy, Agriculture, Labor, Health and Human Services, and Housing and Urban Development are but a few from a very long list — all of them designed to control how private companies and individuals carry on in their affairs.
Even the FDIC, which insures the money an individual places into the bank, belies our capitalist system.
Such agencies, along with the Federal Reserve, actually fight the cause of capitalism. The role of government in a capitalist society is very simple: provide transparency and expose fraud.. Only a government that does this and only this may preside over a true liberal-capitalist economy.
Part of Žižek’s argument is his claim that capitalism is not a system that just works. He writes that “the very notion of capitalism as a neutral social mechanism is ideology (even utopian ideology) at its purest.” He disputes Guy Sorman’s description of capitalism, in which Sorman claims that the system itself does not give rise to dreams or love, and is not enchanting or seductive. Žižek counters this by writing,
This description is, again, patently not true: if there ever was a system which enchanted its subjects with dreams (of freedom, of how your success depends on yourself, of luck around the corner, of unconstrained pleasures), it is capitalism.[10]
Žižek is correct in asserting that capitalism is inherently ideological. However, what Žižek misses is that these ideologies are built upon the laws of economics, which simply are what they are. Even if a culture is founded upon egalitarian principles, the laws of the economics still apply. A culture of capitalism is one that utilizes and exploits the laws of economics.
The laws of economics from which liberal capitalism is built are not scientific in the sense that they can be falsified. Mises rejected the notion of scientific fallibility in relation to providing answers to economic theory. Instead, Mises considered the economic science to be founded upon psychological conscious action, as described in his theory of praxeology.[11]
High-profile proponents of Austrian economics such as Ron Paul refer to the validity of these economic laws based upon a study of history: Countries that have flourished have done so only by exploiting the laws of economics by adhering to liberal capitalism. Countries that trend toward planned economies have not flourished. Either way, the laws of economics remain.
A Potent Combination
The US Constitution is believed by small-government proponents (such as Ron Paul) to ban almost all central planning. It does so by stripping down the function of government to a few services that do not interfere with the marketplace. This is how capitalism must function to remain true to its laissez-faire origins.
Strict constitutionalists have a problem, however. The text of the Constitution is elegant and simple, and it is easy to interpret it in the context in which it was written. However, modern interpreters of the Constitution, including the Supreme Court, want to interpret it in a different context.
There was an interesting exchange of dialogue with Peter Schiff and other news pundits in which they argued over the constitutionality of TARP.[12] After Schiff explained that there was no constitutional authority for the federal government to enact TARP, one pundit argued that the commerce clause (located in Article I, Section 8, Clause 3 of the Constitution) allowed for the kind of deficit spending that occurred during the Roosevelt presidential terms and is the constitutional justification for enacting TARP.
The clause itself is very short and simple. It states, “The Congress shall have power … to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” With such a statement open to endless interpretation, it is no wonder that the federal government has drifted so far away from its humble origins. Schiff responded to the pundit by saying,
That’s an abuse of that clause. According to you the government can do whatever it wants so let’s just tear up the Constitution.
Here Schiff hits a key point: if the federal government can interpret the Constitution in such broad ways, there is no real limit to its power.
Unless America’s mentality towards governance transforms overnight, proponents of capitalism have a problem.
Conclusion
The fate of the US economic system depends upon a society full of people who have learned to despise what they think is capitalism. The only hope for actual capitalism — and our economy — is to distinguish true liberal capitalism from the neoconservative and Keynesian interpretations that have replaced it.
The liberal capitalists of today agree that any money pumped into the economy by the Federal Reserve will directly increase the prices of everyday goods without an increase in wages. The only question left is, will this environment serve better the cause of extreme collectivism and socialist agendas, or will capitalism prevail? It is on this note that we should resonate with Friedrich Hayek when he writes,
The supposed chief weakness of the market order, the recurrence of periods of mass unemployment, is always pointed out by socialists and other critics as an inseparable and unpardonable defect of capitalism. It proves in fact wholly to be the result of government preventing private enterprise from working freely and providing itself with a money that would secure stability.[13]
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Notes
[1] Slavoj Žižek, “It’s the Political Economy, Stupid!” (2009).
[2] “Long ago, John Maynard Keynes nicely rendered this self-referentiality when he compared the stock market to a silly competition in which participants must pick only a few pretty girls from a hundred photographs; the winner is the one who chose girls closest to the general opinion.” (Ibid.)
[3] F.A. Hayek, Denationalisation of Money, (London: The Institute of Economic Affairs, 2007 [1976]), p. 102
[4] Žižek, 2009.
[5] Ibid.
[6] “Capitalism is not about propping up failed companies, we need to let them fail … Now of course behind it all is the Federal Reserve, if the Federal Reserve had not intervened … had they not poured all this alcohol, then Wall Street wouldn’t have gotten drunk — but they did.” (Peter Schiff, “Peter Schiff Gets Cut off by CNN for Speaking Truth.”)
[7] Žižek, 2009.
[8] See F.A. Hayek, Prices and Production (1931) and Pure Theory of Capital (1941).
[9] Hayek, 2007, p. 102.
[10] Žižek, 2009.
[11] See Ludwig von Mises, Human Action, Scholar’s Edition (Auburn: Ludwig von Mises Institute, 1998 [1949]).
[12] TARP, short for Troubled Assets Relief Program, was enacted by the US government in 2008 to purchase assets and equities from financial institutions in order to provide financial relief and increase the flow of monetary credit.
[13] Hayek, 2007, p. 101
