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When Adam Smith published The Wealth of Nations in 1776, he laid the groundwork for free market capitalism. He pointed out all the benefits of unbridled competition and has inspired economics up to and including the present time. In the late nineteenth century, an avid student of Smith, Karl Marx, pointed out the dark side to unbridled free enterprise. In particular, he noted that capitalism is, at heart, a pyramid scheme...he didn't use those words...where the existence of profit demands that surplus production will always pile up until the market peridodically crashes. The key element is that workers, as a group, can never buy back all that they have produced. He predicted that this aspect alone would lead to ever greater crises until capitalism itself collapsed. HIs work also inspired economists, noteably those whose governments tried out communism, despite the fact that Marx's critique of capitalism didn't really spell out any alternatives.
In the twentieth century, various economists, notably Keynes, thought they had discovered a way around Marx's dire predictions. They introduced debt and inflation to the mix, reasoning that since capitalism produces so much "new" wealth, that it could proceed to expand indefinitely. Debt allows the workers to buy back everything they produce and inflation means that the money they use to repay the debt will be worth less than the money they borrowed in the first place.
The same logic was applied to governent spending. So called "deficit financing" was frequently applied in order to ameliorate the effects of the peridodic market crashes. Germany even used this "principle" to completely pay off its World War I reparations, since the Treaty of Versailles did not specify what currency must be used to pay that debt. Hyperinflation quickly made the German mark worthless, but the debt got paid in full!
Similar forces are at work right now. Once again, the market has crashed...BIG TIME...and the recipe for recovery is once again to increase government debt...MASSIVELY...which must eventually lead to inflation, most likely also massive. The statement by free market enthusiasts that this is new debt is being passed down to our descendants is true, but not really relevant, since governments...ours included...don't really intend to EVER pay off this debt, at least using money worth as much as it currently does.
Other blather being passed around is:
All true. All irrelevant. The truth is that the world economy is not now a "free market" nor has it been for most of the past century. While both Smith and Marx had good handles on how free enterprise really works, nobody seems to know what will happen when it is NOT free. Keynes assertion that the business cycle...boom then bust...can go on indefinitely is a pipe dream. What happened during the thirties and what is happening now are both historical indications that there is no free market remedy...and perhaps no government interventionist solution...for the ills of capitalism. Both Smith and Marx were right. Free market capitalism is a great engine for growth but it must eventually end.
So, what is to be done? Out next essay will spell out some possible alternatives.
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