The global financial system is not free-market capitalism

There is a common belief among the European public that the current global financial system is the result of “savage” capitalism or the free market “unleashed”. Many think “capitalism” is so intrinsically flawed that not only does it naturally reward the wealthy and the insiders at the expense of the common people and the outsiders, but also that it is prone to such excesses that it would spiral out of control if it weren’t for the protective intervention of governments and supranational institutions to put it back on track.

These excesses are real, but they are wrongly attributed to capitalism, when “capitalism” in the original sense means free-market capitalism and not corporatist state capitalism. It is one of the main reasons why “capitalism” has such a bad connotation with many Europeans, including those who are generally sympathetic to free-market ideas. Yet, anyone with intellectual curiosity could grasp that the current global financial system could not exist in a state of freedom.

The global financial system is state capitalism

State intervention, central banking, and regulatory privileges have over time created a global financial system that artificially concentrates power in a small number of large, politically well-connected companies and institutions. Instead of a genuinely open market, statist initiatives such as legal tender laws, bailouts, capital requirements, and regulatory capture have the intended effect of protecting incumbents, of rewarding “strategic” players, and of suppressing unwanted competition. These policies allow major banks, asset managers, and state-aligned institutions to accumulate a disproportionate influence over society’s wealth—an outcome that reflects structural and political incentives, rather than free-market dynamics.

In the statist capitalist system, currency devaluation, caused by monetary inflation, transfers wealth upward through the Cantillon effect: newly injected fiat liquidity reaches the state, major banks, and favoured financial institutions first at existing price levels, while the resulting price inflation hits wage earners and fixed-income savers only after prices have already risen. Securities markets are artificially boosted by banks’ fiat liquidity and frequently manipulated to help secure earnings for insiders.

Central banks artificially set interest rates and arbitrary inflation targets to benefit the Western ruling oligarchy that owns or controls a significant part of the wealth of the West. Trade tariffs and other policy barriers are used to block certain unwanted foreign competition at the expense of average consumers. Regulation is also often used to erect hurdles that protect dominant and well-connected incumbents in various sectors.

Macroeconomic boom-bust cycles are the consequences of the expansion of the fiat money supply mentioned above. When the economy becomes too distorted by excessive investments and reckless risk-taking, the inevitable liquidation of malinvestments that follows often impacts the unwitting majority (the goal is to “privatise profits, socialise losses”).

Many people call this financial system “capitalism”, though it has nothing to do with free-market capitalism. This happens because of a general lack of interest in macroeconomics and political science, but also because of sophisticated propaganda. Modern instruments of control of public opinion induce the majority to lean towards even more statist interventionism, for instance by calling for regulation (as in “too big to fail” policies). These strategies have been honed over decades and have become so effective that the public doesn’t react when, for instance, their governments bail out banks that had benefited scandalously from the system’s largesse towards them.

Real capitalism is the free market

In the free-market economy, there is no fiat currency; only hard currencies backed by gold or other sound assets, because government cannot print currency and only hard currencies can compete in a free monetary environment. Such a free economy relies not on artificially set interest rates from central banks, but on the natural interest rates that reflect underlying time preferences and the genuine supplies of saved capital.

As a result, there is no monetary inflation in the free market and prices are deflationary, in step with capital accumulation and productivity gains. Any bank that tried to incessantly print monetary certificates and practise fractional-reserve banking would be taking on significant risk for itself and its customers. In the real capitalist system, no tariffs hinder trade, jacking up prices for importers and consumers. Goods, capital and labour flow freely across the economy, from the areas of lesser demand to areas of higher demand.

Instead of sharp booms and busts, the unhampered market economy would sometimes experience natural, localised economic slowdowns, as both geographic and economic areas gradually shift in importance. Monopolies and cartels could not exist to practise unjustified pricing, because no government could support such schemes.

Informing about capitalism

This is necessarily a limited summary of how the financial system works in a free market. It has perhaps been best described for the layman by Ludwig von Mises in his magnum opus, Human Action (1949). In this work, Mises also explained how the market economy is constantly disrupted, throttled and rendered inefficient by statist interventions.

Mises summed up well the current state capitalist system described previously: “This faulty nomenclature becomes understandable only if we realize that the pseudo-economists and the politicians who apply it want to prevent people from knowing what the market economy really is. They want to make people believe that all the repulsive manifestations of restrictive government policies are produced by ‘capitalism.’”

Although the current financial system severely distorts the economy, it stops short of disrupting it completely. Public pressure helps to prevent or delay worse degradation of the economic conditions on the majority, at least in Europe. However, the public remains gullible
about the true nature of state capitalism, just directing their legitimate anger towards expendable politicians. Part of the public is also unmoved by the injustice and inefficiency of the current financial system, perhaps because they profit from it to some degree. Both this ignorance and this indifference prevent freedom from advancing in society. Therefore, information, education, and engagement with the public in these topics are necessary to move towards free market capitalism.