Survival of Capitalism Dependent on New Way of Thinking

American Business Editor of The Economist offers insight at Great Decisions Lecture

WOOSTER, Ohio - Navigating our way back from the brink of financial ruin will require not only a recalculation of our route but also a reassessment of our roots in capitalism. That was the gist of Matthew Bishop's message Thursday evening at the second Great Decisions lecture in Gault Recital Hall of Scheide Music Center.

Bishop, the American Business editor and New York Bureau Chief for The Economist and author of the newly released book, The Road from Ruin: How to Renew Capitalism and put America Back on Top, called for a new way of thinking as he addressed a crowd of approximately 150 students, faculty, staff, and area residents. "It's time to consider a new set of ideas," he said. "We need to rethink the way we look at the role of markets relative to government."

Bishop contended that capitalism as we know it came to an end on Sept. 15, 2008, when Lehman Brothers filed for Chapter 11 bankruptcy protection. "That triggered the worst financial bust in half a century, and tipped the world into the worst global downturn since the 1930s," he said, adding that there are two prevailing and equally wrongheaded ideas about how to "turn back the clock" in response to the current crisis. The first is associated with those, like Paul Volker, who prescribe turning back the clock to the 1930's and reinstituting strict government regulation. The second is associated with a Wall Street mentality that wants to turn back the clock to 2006 and pretend like nothing happened.

As we move forward on "the road from ruin," Bishop argued, we must avoid making any of a series of "wrong turns." The first is the belief that bubbles are entirely negative. "We tend to get carried away with these bubbles, which usually are the result of some new innovation that benefits society," he said. "We have to realize that something good has taken place, but also to be careful not to over value its potential. When that happens, the bubble bursts and everything comes crashing down to earth."

The second wrong turn is the prevailing assumption that government should avoid bailing out financial institutions. Despite widespread criticism of the government for its efforts to assist these institutions, Bishop suggested that it may not have gone far enough. "When the banking system collapses, a disproportionate share of negative consequences occur," he said. "Things would have been much worse had the government not stepped in."

The third error in navigation is government falling victim to the temptation to address the symptoms of a crisis rather than the underlying causes. "This is a global economic crisis," he said. "Washington's response cannot ignore the rest of the world."

The fourth mistake is the notion that the economy will recover on its own. "Government must stimulate spending (in times like these)," said Bishop. "The stimulus plan was an effective response. Without it, unemployment would be much higher." Bishop acknowledged that there will be consequences, such as inflation and tax increases, but nothing compared to what might have happened had the government not acted at all.

The final blunder is the rush to potentially damaging regulation that is put into place without proper assessment of the problem. Instead, Bishop said that response to this and future crises will require patient and thorough analysis of the contributing causes to economic crisis, long-term vision. and a renewed emphasis on values.

In order to recover from the current crisis and ensure more stability in the future, Bishop outlined four measures that "go against the grain of traditional thinking," including what he described as the disconfirmed idea that markets are rational and efficient, most of all when completely unregulated. "We need, first, to move forward beginning with a new economic paradigm," he said. "Our view of economics today is antiquated." Bishop added that we need to fully acknowledge that we are part of a global economy. "World leaders must write a new set of rules that will work in a global environment," he said.

The third tenet of Bishop's proposal is the need to put long-term values back into capitalism. "There's too much emphasis on the short term," he said. "We need to focus more on sustainability and solutions that produce mutual benefits." The final principle of Bishop's plan is a movement to make financial literacy more of a priority. "This has to be part of the school curriculum," he said. "Politicians are reluctant to address the fundamental issues of the economy because most people don't understand. Even the politicians themselves don't always understand the issues."

Despite the gravity of the crisis, Bishop is hopeful about the future. "There are a lot of reasons to be optimistic," he said. "I believe we can learn from history and reshape a more effective model of capitalism."

The Great Decisions of Wayne County lecture series is a joint venture between The College of Wooster and the local Wooster community. It began in 1981 and has run annually since that year. The primary purpose of the series is to bring to the region experts (from a variety of backgrounds) on various issues pertaining to foreign policy and international affairs. The next lecture is scheduled for on Tuesday, Feb. 16, when Reza Aslan, assistant professor of creative writing at the University of California, Riverside, and a native Shi'a Muslim from Iran, presents "God, Globalization, and the End of the War on Terror."