Financial History Issue 127 (Fall 2018) - Page 14

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. 1 EDUCATORS’ PERSPECTIVE 3 2 4 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  | The Peril