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Thursday, January 24, 2008

The ineffable resilience of capitalism?

My lecture course is off and running again this week, and as I said to my students on Tuesday, I can't imagine a more exciting time to study the history of American capitalism. For a historian (not to mention those with more intimate connections), the fascinations are endless.

This morning's financial pages have me mulling over two dimensions of the current economic mess:
  • Risk
This is a core attribute of capitalist activity, as everyone knows. Read the letters of Manhattan merchant Gerard R. Beekman from the 1760s (as my students are doing) and you will get a very concrete sense of the array of risks that traders faced in his time. Over the long haul, business people have continually sought, as he did, to minimize risk, the methods changing as the nature of risks changed. If they ever achieved complete success, of course, not much would be left of capitalism.

What is fascinating about the current crisis in the money/housing markets is that financial people by the 1990s thought they had mastered risk -- for example, by slicing and dicing it into collaterized debt obligations and the like -- only to discover that they had done their work too well. They spread risks so broadly that no one knows for sure where they are anymore and now everyone is potentially at risk. So what's that about? The ineffable resilience of capitalism?
  • Competition
Another of those core attributes of a capitalist economy. And, like risk, competition is something that business people have spent extraordinary energy trying to reduce -- in the informal ways famously noted by Adam Smith, by means of cartels in the 1870s and 1880s, via mergers during the Great Merger Movement at the turn of the twentieth century, and so on into the early twenty-first century. The resulting oligopolies are so common in so many lines of business that they have become naturalized and thus go largely unnoticed today.

Occasionally, however, events force us to notice them and to confront the reality that oligopoly-building to reduce competition has generated a variety of new risks. Consider the recent financial turmoils: suddenly everybody knows that there are only a handful of big auditing firms, or that only two bond insurance companies carry on most of the business (the big new concern in the financial pages). Success in reducing competition to a handful firms
in these lines of business has made large segments of American business dependent on their health, in effect increasing risk for everyone else. The ineffable resilience of capitalism?