Whither Capitalism? *

The global financial crisis and policy responses to it have led many to question their fundamental belief in market‐based capitalism. In the U.S., the epicenter of the crisis and poster child of capitalism, signs of creeping nationalization of the financial system have raised fears that the basic model is being turned inside out. In this essay, the author argues that, with more than 90% of the U.S. private sector still operating “largely as a free‐enterprise system,” concerns about nationalization and government involvement in the marketplace are greatly exaggerated. More troubling are the diminishing prospects for a prompt post‐crisis normalization of fiscal and monetary policy, and for a decisive and transparent exit strategy from the present “policies of crisis containment.” In the absence of such decisiveness and transparency, the debate over the efficacy of market‐based capitalism will continue. The longer‐run challenge is to learn from the crisis and take measures designed to limit risk‐taking to acceptable levels in today's global financial environment, with its continuous cross‐border flow of information, trade, and human as well as financial capital. Making Wall Street the villain is the path of least resistance in a politically charged environment, but any fix must be grounded in shared responsibility. As the author says in closing, “Governance, or the lack thereof—both within the private sector as well as by those charged with regulation and oversight—proved to be the weak link in the chain. Fix that, and capitalism will be just fine.”