There are quite a few people who still think it was the "free market" or "Capitalism" that failed. On the contrary, it was the government, regulation and central banking that failed. Lets see what the dictionary has to say:

Main entry: cap·i·tal·ism
Function:noun
Date:1877
: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

Hmm, no, we definitely never had Capitalism...Maybe this is what we have:

Main Entry:mer·can·til·ism
Function:noun
Date:1838
1 : the theory or practice of mercantile pursuits : commercialism
2 : an economic system developing during the decay of feudalism to unify and increase the power and especially the monetary wealth of a nation by a strict governmental regulation of the entire national economy usually through policies designed to secure an accumulation of bullion, a favorable balance of trade, the development of agriculture and manufactures, and the establishment of foreign trading monopolies

Ah, that sounds better! This crisis was caused by Mercantilistic (Keynesian) policies, not Capitalism. There is no 'flaw' in Capitalism. Allowing the free market to do its thing with minimal interference is the road to relative wealth and prosperity for all. A continuation of the failed policies of the Mercantilists will slow any potential recovery. Unfortunately it appears our omnipotent leaders have decided they want more of the same; indeed, it will be owed to what we have left of the free market when we eventually get out of this slump, not the actions of Rudd, Swan and Gillard which have been nothing but detrimental to recovery.

The prevailing opinion on the streets is that capitalism has failed and the government is a necessary evil required to "fix it". This opinion is so well ingrained it's almost impossible to sway with logic and reasoning; indeed, people seem to be passionate in their hatred towards the "greedy banks" and support of "job creation". This all follows the media storm around the banks raising interest rates despite the RBA keeping rates on hold, with a follow-up RBA study indicating that, contrary to what the Commonwealth bank was claiming, funding costs have not increased.

The issue of the whole central banking system aside[1], why is everyone so worried about the banks charging an interest rate (which is the price of borrowing capital) higher than it costs them to acquire? That's like saying because it only costs a bookstore owner $5 to produce a book, they shouldn't be allowed to sell it for above $6, as that's a "fair price" and anything above that would be "exploitative" (as determined by some all-knowledgeable bureaucrat). Let's not lose sight of the fact that every exchange is voluntary and no one was or is coerced into borrowing money (government "incentives" to take on debt aside!). The real issue, of course, is the government intervention that prevents competitors from entering the banking business. As long as the government doesn't restrict competition, no one is able to either exploit labour or remain in a "monopolistic" or "cartel" position for long.

In other news, I also noticed that today's Financial Review (Australian Edition) contained an article showing that of the OECD nations, Australia has the most progressive tax system - we outstrip even the quasi-socialist European countries as far as wealth redistribution and welfare 'nanny' state goes[2].

Finally, I've updated the Recommended Reading section with some great books and essays which anyone is free to read or download. One in particular is "The Myth of the Failure of Capitalism" by Ludwig von Mises, a short essay addressing the fallacious views that the market and not the government is to blame for this crisis. Here's an excerpt:

The crisis under which the world is presently suffering is the crisis of interventionism and of state and municipal socialism, in short the crisis of anticapitalist policies. Capitalist society is guided by the play of the market mechanism. On that issue there is no difference of opinion. The market prices bring supply and demand into congruence and determine the direction and extent of production. It is from the market that the capitalist economy receives its sense. If the function of the market as regulator of production is always thwarted by economic policies in so far as the latter try to determine prices, wages, and interest rates instead of letting the market determine them, then a crisis will surely develop.

Click here if you would like to read the full essay.

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[1] I personally think we need a return to sound money and free banking to avoid political manipulation of the money supply -- which, by the way, has been increasing by almost 20% YoY for the past decade. I'll provide a nice chart showing this growth within the next week.

[2] As with the above, I plan to write about this sometime in the next two weeks.

In today's Unleashed, Bruce Haigh wrote an article entitled "What can Rudd do to restore a healthy economy?", outlining his thoughts on what the Rudd government should do to make sure our economy gets back on track. Initially I thought he was on to some good points, stating that Australian's haven't learnt much from the past...before unleashing against capitalism and promoting full-blown socialism.

Mr. Rudd has a responsibility in times of a shrinking economy to provide a minimum wage, housing, health care, transport and education for adults and children least able to financially cope in the forthcoming straightened circumstances. This is survival spending, it is not designed to create jobs; it is to keep people alive and healthy and to provide the means for their children to participate in and help engineer a revitalised economy when the global economic sickness has passed. This is basic humanitarian assistance; it will not in the short to medium term, of itself, rebuild the economy.

The only thing Mr. Rudd has a responsibility to do is to make sure this doesn't happen again. He needs to do exactly the opposite of what Bruce recommends above and avoid any and all involvement in the economy, financial system, education, health care and so on. We haven't been living with capitalism; on the contrary, we've had statists masquerading as 'capitalists' to suit their own personal endeavors. Rudd himself was a self-proclaimed believer in the market until this crisis happened, but he sure jumped ship quickly (he was always a socialist). There is no middle-ground (see The Myth of the Failure of Capitalism by Ludwig von Mises, 1932.

It can't happen overnight -- the state is so involved in everything we do it's going to be a slow process but these are the types of policies we need. From Friedrich Hayek in a 1975 Meet the Press:

"No, but it goes back to the same cause. The unemployment of which you speak, which is the initial cause, is due to labor being temporarily directed into places or activities or industries where they cannot be maintained without further inflation. Therefore you can only cure that by achieving a new redistribution of labor between employments. Adaptation to a condition in which aggregate demand need not progressively increase to maintain that employment."

"We mustn't assume that all problems are solvable in the short period. There are problems that we cannot solve or which trying to solve them quickly may do more harm than good."

Hayek was saying (he was talking about the U.S. economy) to do the opposite of what Bruce is recommending. The government created this distortion in the allocation of labour and the market needs to redistribute it to more productive areas. Any short-sighted attempt to "save jobs" will do more harm than good. Back to Bruce,

"Mr. Rudd will need to take some drastic and decisive action, taking into account the lessons learnt from the last Great Depression. He will need to cancel some overseas defence orders and rethink defence requirements and strategies, utilising local capacity, particularly in ship building. He will need to take over the local car manufacturing industry, which can also be used for defence production. These decisions will protect and provide new jobs as well as build a local defence production capacity in what will be uncertain times."

I agree with the removal of our (due to our alliance with the US Empire) overseas troop contingent but I'm not sure how to read the rest -- is Bruce really suggesting we mobilize our economy 1930s style to prepare for some (looking at his words, inevitable?) upcoming war? This won't protect jobs. This won't create wealth. Times are only uncertain because people such as Bruce are advocating full-on socialism as a response to the continued failures of the state!

The government needs to regulate the banking industry and get back into the business of banking. It needs to take over Telstra, railway infrastructure and rolling stock and providing an air service in remote Australia. The tyranny of distance demands it. User pays has failed, particularly in rural Australia.

No, the government has had its turn at running banking, telecommunications and public transport into the ground. It needs to remove ANY and ALL involvement in these industries as soon as possible. It needs to remove the red tape completely. It needs to stop creating monopolies through regulation and laws. It needs to let people decide what they want!

The federal government needs to take over the management of water and abolish water licences, as a short and long term stimulator of the economy, particularly the rural economy.

The water debacle is a creation of the government. How will more involvement solve anything? This is a touchy one though, because the state is so involved already (massive property rights issues) you can't just privatise the whole thing in an instant.

The private schools must fend for themselves, that's what private used to mean and the funding of public education significantly increased, particularly in the area of skill creation. Pulling out of depression will require it.

Here's an idea: cut all funding for schools and return the tax dollars used in it back to the parents. As with all of the above, spending needs to be cut dramatically and the market needs to be allowed to provide these services. Private schools can fend for themselves perfectly well -- that is, of course, unless they're competing with these "super schools" with endless pockets and no profit motive!

Import replacement needs to be encouraged and funded, directly, and from loans through the government bank.

Absolutely not. People should be free to choose where they buy their goods from. If there's a market for it, and people really care as much as you think about saving local jobs, then there will be an opportunity for profit (by charging premiums for "made in Australia" products) that entrepreneurs will capitalise on. Why should the government make this decision for us, at our expense? We need to remove all tariffs, subsidies and "import replacement" schemes as soon as possible.

This depression is a direct result of Globalisation. Australia should seek future protection from the buffeting of overseas financial institutions by exercising more control, discipline, stimulus and protection of its own economy.

You're right -- the U.S. Federal Reserve is the key culprit in this crisis, fuelling banks across the world with cheap credit and encouraging consumer debt. But we should not, under any circumstances, revert to a protectionist state-run economy. This cannot work and will serve only to lower our standard of living considerably. We can insulate ourselves against this sort of thing by abolishing the RBA, significantly shrinking the size and involvement of the state, and allow free banking (in other words, let banks create their own currency, backed by commodities of the markets choosing).

Despite what he says, Bruce obviously hasn't learnt anything from the past failures of the policies he advocates.