Is capitalism fatally flawed?

No. But conservatives should embrace smart regulations, or risk fulfilling Marx's vision.

Recessions, like hurricanes, leave wreckage behind – bankrupt businesses, high unemployment, and sometimes even tattered philosophies.

The philosophy of economic conservatism has long been one of unquestioned deregulation. Conservatives have considered it as a way of unhooking government leashes that the economy strains against, setting it free to run at full speed and lead us to wealth.

But this philosophy seemed to collapse in the moral and financial wreckage of today's recession. Like many conservatives, I was left facing uncomfortable questions, chiefly: Is capitalism itself fatally flawed? I decided to consult a few past thinkers.

In "The Communist Manifesto" (1848), Karl Marx and Friedrich Engels propose that capitalism has inherent weaknesses. Marx said these would lead capitalist economies to collapse and become government-run socialist economies, and eventually utopian systems that he called communist. Today his words sound eerily current, like answers on a Sunday morning political show:

Interviewer: "Mr. Marx, not that long ago, lovers of capitalism pronounced your ideas dead. Now, according to at least one source, we are all socialists. What changed?"

Marx: "It is enough to mention the commercial crises that by their periodical return put on its trial, each time more threateningly, the existence of the entire bourgeois society."

Interviewer: "Nowadays we call these 'crises' recessions. You predicted that over time, capitalism would become dominated by larger and larger firms."

Marx: "[T]he concentration of capital and land in a few hands."

Interviewer: "And how does this concentration bring on socialism?"

Marx: "By paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented."

Interviewer: "So the bigger firms become, the harder they fall. In the US economy, some firms have become 'too big to fail,' and the government has moved in. As this plays out, what will happen to capitalism?"

Marx: "Its fall and the victory of the proletariat are equally inevitable."

Marx's disturbing words seemed even more prescient to me when I thought about what has happened in the US banking industry.

As recently as 1980, the US was a nation of mostly small- and medium-sized banks. Employees knew, often on a personal basis, both the depositors and the borrowers. Deposits that were not loaned out had to be kept in low-risk investments such as government bonds.

People who claimed the mantle of conservatism dismantled the regulations behind this system. This shook the industry. Through mergers and acquisitions, resources were centralized. The number of banks declined. Huge conglomerates arose and created the complex world of global finance that later collapsed. This is capitalism's dark side of impersonal corporations, recessions, and class conflict.

Another famous thinker, Adam Smith, saw a different side of capitalism. Seven decades before the "Manifesto," he wrote "The Wealth of Nations," about the capitalism of his day. It was one of small, decentralized firms – butchers and bakers. The driving force was not blind greed but a healthy interest in improving one's own lot by helping others. It was a capitalism that looked a lot like the banking sector before deregulation.

Marx and Smith each saw a piece of the truth – two different sides of the coin of capitalism. Capitalism itself is not fatally flawed. But a hyperconservative approach to it is. Regulations that promote decentralized competition on a human scale are regulations that conserve Smith's side of capitalism. These regulations should not be the enemy of conservatives; they should be our aim.

Many conservatives will want to stick to the dogmatic ideological line of deregulation. But the capitalism produced by blind support of deregulation is one of bureaucratic corporations, greed-fueled booms, and fear-riddled busts. If conservatives do not embrace regulations that preserve Smith's capitalism, we might just wake up one day to see it gone and socialism in its place, just as Marx predicted.

Paul McDonnold is a freelance writer. He has taught economics courses at several universities.

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