As explained here, when a community or nation enforces some rough approximation of the rule of law, capitalism inevitably follows. When left alone, entrepreneurs will invest and/or produce in order to improve their own lives, and in so doing will benefit those who purchase the goods and services they offer. Whatever its moral virtues, a system of free markets would understandably have very few supporters if it were economically inferior to competing political economies. Fortunately, capitalism is better at both preserving rights and producing the “greatest good for the greatest number.”
It does this (ideally) by means of the efficient allocation of capital and by promoting fierce competition for consumer dollars, forcing producers to continuously drive down prices and to improve quality over time, or lose market share to firms that do. Another way to express this is the term “market discipline.” It is easy to list once dominant corporations that were humbled or driven out of business by firms that created better business models or innovated new technologies: Sears Roebuck, Compaq Computers, Kodak, Polaroid, Circuit City, Pan American Airlines, Blockbuster, etc. Of course, the state obstructs and corrupts this salubrious discipline when it arbitrarily confers advantages on some market participants and handicaps others, or when it creates a “moral hazard” by subsidizing irresponsible behaviors.
As you must know, we are now facing severe loss of confidence if not an outright crisis in our banking system, with dangerous economic spillover effects, following the failure of Silicon Valley Bank and Signature Bridge Bank, and the potential failure of Republic Bank. Notably, since the advent of federal deposit insurance on January 1, 1934, market discipline has largely been eliminated from our banking system. Until the most recent full-blown banking crisis in 2007, this insurance was limited to $100,000 per customer/per bank, when it was then raised to $250,000. Continue Reading »
