confessing my ignorance

credit:

5. confidence in a purchaser's ability and intention to pay, displayed by entrusting the buyer with goods or services without immediate payment
6. reputation of solvency and probity, entitling a person to be trusted in buying or borrowing: "Your credit is good."
8. time allowed for payment for goods or services obtained on trust: "90 days' credit."
10. a sum of money due to a person; anything valuable standing on the credit side of an account: "He has an outstanding credit of $50."
12. Bookkeeping.

a. an entry of payment or value received on an account.
b. the right-hand side of an account on which such entries are made (opposed to debit).
c. an entry, or the total shown, on the credit side.

13. any deposit or sum of money against which a person may draw.


(see here)

Why is credit being called "the lifeblood of capitalism"? Isn't capital the lifeblood of capitalism?

capital:

4. the wealth, whether in money or property, owned or employed in business by an individual, firm, corporation, etc.
5. an accumulated stock of such wealth.
6. any form of wealth employed or capable of being employed in the production of more wealth.
7. Accounting.

a. assets remaining after deduction of liabilities; the net worth of a business.
b. the ownership interest in a business.

(see here)

I'm not being flippant in asking this question. Credit seems primarily to be about faith and good will: you provide your service, trusting that the recipient of the service will pay as s/he promises, i.e., this person isn't paying up-front. That opens the door to spending beyond one's means, and the writer of the above-linked Post article seems to be saying that this style of business is the lifeblood of capitalism.

It seems to me that not all capitalists would give the concept of credit such pride of place-- that many would, in fact, suggest that a better, stronger capitalism results from spending within one's means, with disciplined self-regulation being better than regulation from above. Not being an econ major, though, I find myself totally at sea in such discussions.

What first needs to be cleared up for me is whether the Post writer is speaking descriptively (i.e., this claim is meant to be taken as actual fact) or prescriptively (i.e., this is how things ought to be). Banks do routinely offer loans, and credit cards do abound, so there's an empirical argument to be made that the Post article's claim is factual, that these practices lie at the heart of capitalism. But in describing X as the "lifeblood" of Y, one is speaking in a fairly sweeping, grandiose manner, which makes me wonder whether the writer is speaking more in terms of "oughts" than in terms of "is"es.

So: what do you think is meant by the claim that "credit is the lifeblood of capitalism," and further, do you agree (1) that that's how things are, and (2) that that's how things should be?

UPDATE: Take a look at this excerpt from the article, noting the parts in boldface:

The Bush administration is considering a partial nationalization of some banks, buying up a portion of their shares to shore them up and restore confidence as part of the $700 billion government bailout. The notion of government ownership in the financial sector, even as a minority stakeholder, goes against what market purists say they see as the foundation of the American system.

Yet the administration may feel it has no choice. Credit, the lifeblood of capitalism, ceased to flow. An economy based on the free market cannot function that way.

The government's about-face goes beyond the banking industry. It is reasserting itself in the lives of citizens in ways that were unthinkable in the era of market-knows-best thinking. With the recent takeovers of major lenders Fannie Mae and Freddie Mac and the bailout of AIG, the U.S. government is now effectively responsible for providing home mortgages and life insurance to tens of millions of Americans. Many economists are asking whether it remains a free market if the government is so deeply enmeshed in the financial system.

Given that the United States has held itself up as a global economic model, the change could shift the balance of how governments around the globe conduct free enterprise. Over the past three decades, the United States led the crusade to persuade much of the world, especially developing countries, to lift the heavy hand of government from finance and industry.

But the hands-off brand of capitalism in the United States is now being blamed for the easy credit that sickened the housing market and allowed a freewheeling Wall Street to create a pool of toxic investments that has infected the global financial system. Heavy intervention by the government, critics say, is further robbing Washington of the moral authority to spread the gospel of laissez-faire capitalism.

How is one supposed to read this? The article's title and the second boldface selection both want to steer us to an examination of American capitalism, implying there are many types of capitalism (but, apparently, only one type of American capitalism). The first boldface selection, however, makes a general claim about capitalism, tout court. I'm getting mixed messages, here.

But wait-- it gets even more interesting. As you go further down the article, it becomes clear that "American-style capitalism" is code language for "relatively unregulated capitalism," i.e., a capitalism that relies on the risks and vicissitudes inherent in a free-market system. The article's author seems to be leaning toward a more highly regulated, European-style capitalism, without considering the third alternative I mentioned above: a capital-based capitalism in which people don't spend beyond their means: eliminate credit altogether! Is that asking too much? A world with no credit would certainly be a simpler place: you've either got the money for your purchase or you don't. "Credit" would be a concept bandied about only by family members and friends: "Spot me a twenty?" I admit I have no idea what role regulations would play in a capital-based world; ideally, self-discipline would be the best regulator, but it wouldn't be hard to counter-argue that most people are fiscally undisciplined, and would soon be spending beyond their means without outside intervention. Then again, self-discipline wouldn't be the only regulator in my scenario: you go to the hardware store, see a $200 piece of equipment, check your bank account, realize you don't have the requisite cash, and leave. The store's non-acceptance of credit will carry force even if your self-discipline fails. What could be simpler?

You know... it's a good thing I'm not in charge of the US economy.



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