In the wake of the collapse of financial markets, a number of people are asking “Is this the end of capitalism?” But what is capitalism? Are the current political/economic systems really capitalist? Here is a dictionary definition of capitalism:
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.
While this definition makes no mention of any political system, it implies a political system that does not have the powers to engage in economic activity. Clearly such a political system does not exist today. The US economy, commonly regarded as capitalist runs on a fiat currency, the price of credit is decided by a central banking system, investments and production are controlled by antitrust laws and regulatory authorities, prices are controlled by tariffs and subsidies, distribution is controlled by federal grants and welfare schemes. This is not a capitalist system by any stretch of the imagination. That it is so regarded is only an indication of how little the concept is understood.
The collapse of the financial sector of the US economy is not a failure of capitalism but a failure of centralized control of credit. The crisis is commonly projected as a liquidity crisis. But the loss of liquidity is just an effect. The cause was the bad credit provided to unwise borrowers by setting artificially low interest rates. The responsibility for the crisis clearly belongs to the federal reserve. What we are witnessing now is not the end of capitalism. Capitalism ended about a century ago when the world switched to an elastic fiat currency. What we are witnessing is another demonstration that credit-based elastic unreal money necessarily leads to catastrophic failures.
Update: I have a more detailed post about Capitalism here