points out, Hayek also knew that capitalism does not work in
every situation. The successful foundation needed for capitalism
to thrive includes: (1) “the existence of a generally accepted set of
social norms (among them the sanctity of private property),” (2)
“a system of laws reflecting these norms” and (3) a government
that enforces those laws fairly.
Cassidy points to the collapse of communism as a case in point
for testing Hayek’s three preconditions. He notes that in Hungary,
Poland and Czechoslovakia, collectivist economies were quickly
transformed into capitalist economies. According to Cassidy, this
was accomplished because capitalism, which predated commu-
nism in these countries, had already established the rule of law,
and private contracts were generally recognized by their respec-
tive governments. Such a transformation was stymied in Russia,
“where capitalism had never taken root, legal contracts were an
alien tradition and official corruption was rampant.” The Arab
Spring of 2010, which many thought would result in a capitalist
transformation in the Middle East, also failed largely because of
the absence of Hayek’s three preconditions for capitalistic thriving.
Capitalism has never received divine sanction or blessing. It is an
economic institution devised by humankind, and it works rea-
sonably well under the right circumstances. Therein lies the peril.
Capitalism, like any institution, can fail.
Internally, capitalism faces the challenge of maintaining its
Hayekian foundation. Fortunately, this strong foundation has
weathered many storms and proven to be resilient. The Great
Depression (1929–1939) and the Great Recession (2007–2009)
both dealt near fatal blows to capitalism, but the system was able
to adapt, revive and thrive through these difficult periods.
During the Roaring 20s, societal norms experienced dramatic
changes that were often fueled by errant monetary policy. The
communist experiment in the Soviet Union, which seemed to
be working, caused many to wonder if a government-controlled
economy was preferable to capitalism. Depression era govern-
ment intervention, such as the National Industrial Recovery Act
(NIRA) of 1933, threatened to undermine free markets and funda-
mentally change how government regulated industry.
Prior to the Great Recession, societal norms and government
policies again combined to threaten capitalism. Ethical standards
took a back seat as greed fueled the pursuit of increasingly shaky
The photographs on pages 12–13 are from Dollar Street, the brain child of
Anna Rosling, daughter-in-law of the late Swedish professor, Hans Rosling.
Dollar Street features photographs from 300+ homes in 52 countries and
orders them by income. The dollar values below represent the monthly
consumption amount available to each adult member of the household
shown in the photograph. More information on Dollar Street can be found at
1. Burundi, $27
2. India, $221
3. Ukraine, $10,090
4. Jordan, $7,433
5. China, $730
6. Haiti, $39
7. Brazil, $685
8. United States, $4,446
12 FINANCIAL HISTORY | Fall 2018 | www.MoAF.org