Inherent Weakness Of Capitalism
By Hema Senanayake –January 8, 2016
Hema Senanayake
China’s economy is slowing down. Is China on the verge of economic collapse? This is the talk of many financial capitals around the world with the dawn of the year 2016. About eight years ago two largest economies of the world namely the EU and the United States collapsed in 2008. By 2008 the third largest economy by that time namely Japan has already been experiencing an economic crisis which triggered in early 1990s, even after launching a few rounds of Quantitative Easing.
By 2008 none suspected that Chinese economy would face severe problems some eight years later. The common element of all these crises was and is “debt” no matter countries carry trade surpluses or deficits. Capitalism globally is in a true crisis. This is a fair conclusion when all four largest capitalist economies of the world collapsed or faced with severe problems within a time span of two decades. What is the problem in capitalism?
There is one significant inherent weakness in modern Capitalism. If any socialist system or any other economic model if available, accepts the use of money as a unit of measure of the value of economic produce, then that system too would inherent the same weakness. There is virtually no political revolution which can remove this inherent systemic weakness.
That weakness cannot be removed by narrowing the gap between the rich and poor. However, narrowing the gap between the rich and poor is a necessity but is a different story. Also it cannot be removed by having a global balance in international trade. Yet, it can be theoretically removed by two methods.
One method is to create debt-free money by a designated government authority while stopping the operation of Fractional Reserve Banking System which system we use today. In this method stopping of fractional reserve system is a must. In an economic system in which Fractional Reserve Banking system is used as its core banking practice, most of the money is created as a monetary substitute known as “credit money” during the process of lending by commercial banks.
Under the first method we will stop the creation of “credit money” instead debt-free money would be created by the government. In other words under this method the government does not need to borrow money instead any possible budget deficit is financed by the new money created by the government. The founder of monetarist school of economics Milton Friedman in the latter part of his life has been said to have supported the idea of the creation of new money by around 3% per annum while having done away with fractional reserve system.
