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Capitalism is in crisis, claims Richard Posner on the pages of the Wall Street Journal today. This crisis happened, he says, because “a capitalist economy, while immensely dynamic and productive, is not inherently stable.” Furthermore, he suggests that “the banking crash might not have occurred had banking not been progressively deregulated beginning in the 1970s.”

Unfortunately for Mr. Posner, unless he lived through the period of economic freedom most resembling capitalism—during the late 1800s—he has no idea what he’s talking about. Mr. Posner’s idea of capitalism is a system in which “businessmen seek to maximize profits within a framework established by government” [emphasis added]. This type of system can by no means be characterized as “capitalism”; what he describes is a mixed economy, a system comprising elements of freedom and statism. Capitalism, on the other hand, is a political system in which the government exists solely for the protection of individual rights; economically, this means laissez-faire—the total separation of economy and state. As we have made clear in our recent bailout flyer and elsewhere, the financial industry is perhaps the most heavily regulated of all industries, myths of banking deregulation notwithstanding. Thus, the problems inherent in a mixed economy are not failures of capitalism, as Mr. Posner claims, but of the destructive role of pervasive government interventions.

Consequently, the solution is not, as Mr. Posner offers, better regulatory oversight but a repeal of regulations and the agencies that enforce them. By restoring freedom to individuals and markets—i.e., by introducing actual laissez-faire capitalism—we can and will emerge from this crisis and prevent future disasters. But before then, we must identify the real nature of the events we are experiencing today: this crisis is a failure of a bloated regulatory state.

For more information on the financial crisis and its causes check out these sources:

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