It is intrinsic to capitalism when we look at it from the point of view of systems control theory that it is unstable With all respect, Frank, I think the above is a very mistaken assumption.
No "system" designed by the best minds and based on the best theories can ever be more stable than free market capitalism. The very "instability" of the process when millions of human beings are actively engaged in trying to make the most of their money - is the greatest stability possible. It allows all errors and excesses to self correct with most efficiency - through money and other assets changing hands.
It's not an assumption. It's a description.
It's not an assumption the economy is a system evolved from thousands of years of human exchange of property, stuff, services, and money standing for the value of these things. Already 5 thousand years ago folk were having to deal with credit problems that we still have no problem recognizing.
In evolutionary time economic system developed in less than a nanosecond and formal scientific understanding of anything developed in even less time. None of our understanding is close to perfect. There is no reason to believe our economic system or our understanding of it is perfect.
You claim,
No "system" designed by the best minds and based on the best theories can ever be more stable than free market capitalism.
But I've described how a component of it, non-financial company private debt formation, leads to financial crashes causing deflation, depression or stagnation.
If I understand you correctly you are saying such an outcome is the best we can hope for:
The very "instability" of the process when millions of human beings are actively engaged in trying to make the most of their money - is the greatest stability possible. It allows all errors and excesses to self correct with most efficiency - through money and other assets changing hands.
I don't believe the depression of 1930s, Japanese stagnation the past 25 years, or our stagnation post 2008 is the most efficient outcome neither in human deprivation and lost opportunities, nor in time, if there is an alternative.
I should discuss the following. Unfortunately I don't see how to make this short:
Free markets are infinitely adaptable - while any imposed "systems" are rigid, subject to the needs of politicians, and will lead towards a snowballing of errors.
Government involvement is usually - maybe even always - self serving. Govt/Fed, by artificially manipulating rates, are damaging the free market process through their interference with price signals - including the price of capital itself.
Let's start with the latter claim about governments.
What governments did until the last couple of centuries:
Protected property rights and until recently, extremely recently, the only people who owned significant property were the rulers;
Protected, not surprisingly, the rich from the poor and European history is rife with peasant uprisings proving this point;
Minted money and protected its currency from counterfeiting and clipping and tolerated informal currency such as tally sticks.
When convenient, government sometimes protected the commons;
Made law and ran the courts;
Levied taxes and tariffs, awarded franchises and subsidies;
Regulated trade;
Regulated usury;
Protected the realm, (hopefully)
Protected custom (social contract), when convenient.
I don't think the list is exhaustive but you get the picture. Two things are apparent:
1. Government is inextricably entwined with economy, has been since pre-biblical time, always will be. Adam Smith and others called their subject of study Political Economy to distinguish it from household and business economy. (In fact the original Greek word had to do with household management). They did this for good reason since households and businesses don't get to raise taxes, print money, issue bonds, don't get to own their own central bank, and don't get to pass and enforce laws.
2. Government is run for those who own it. So lets do some real political economy. Nowadays we, the people, own the government but there are always folk who want to disposess us from ownership, either formally or informally, from all or part of it. I'm not kidding. The Brussels bunch want to take all the ownership of government away from European folk and that is why the British voted for Brexit. The Brussels folk have been overweening and vainglorious in their ambition and the Europeans are going to pay dearly while they unravel the mess.
But lets suppose it's about 1960 and your ambitions are more modest and merely venial and you're a business guy, (lots of business guys and bankers), who just wants to make shitloads of money and you can't because the full employment policy the government, (which we own), has followed since WW2 has made it damn difficult. Labour has been in the driver's seat since about 1952, unions have never been stronger, wage demands are nudging up inflation, your company's stock is taking a beating, lenders' margins are being nibbled, factory workers are building swimming pools fer God's sake, and their smart ass kids are going to cheap universities and taxes are just too damn high.
What to do? Story time: A new life and opportunity for the world's poor and downtrodden. By 1965 the corrupt, drunken but talented Teddy Kennedy fronted the immigration bill. That probably would have been sufficient to discipline the unions but these guys were on a roll.
So they started on Right to Work. Set up "research" foundations to market 19th century Ricardian economic theory to counter the "socialist" Keynesian theory and market the benefits of "free" trade and blind otherwise intelligent conservative types with money and homesteading rights. They didn't neglect the leftish politicians either as long as they did things that distracted folk. Lots of money went there until it reached the absurd amounts paid to HRC. And they endowed economics departments which basically have been telling the same story since 1970 all on the basis of a defective model.
Then, joy of joys, their folk managed to get the WTO boondoggle going. They had already, by 1980 got themselves to a place where they could tell the union types take it or go to Texas, but then Asia came on stream and China! Outsourcing ecstasy. Same stuff happened in Canada, UK, and Europe with modifications suitable for local conditions. What's US union membership now? Less than 10%?
So they stole part of the government we own by selling a story and spending what? Twenty $billion? A hundred $billion? Small change. They made $trillions.
And they hollowed out the industrial heart of the West. They halved the living standards of 80% of the population. How do I know that? Because in 1960 one industrial worker could support a family of four and now it takes two. QED.
Conclusion. Governments are never self serving. They serve those that own or steal the government.
About this:
Free markets are infinitely adaptable - while any imposed "systems" are rigid, subject to the needs of politicians, and will lead towards a snowballing of errors.
Because economic system as it has evolved over at least five millennia inextricably has government entwined in it there can not be a market without some regulation modifying it. Markets found within economic system are very adaptable within some limits mostly not understood.
The only imposed economic system I know of is communist economies of Soviet Union and China and they were disastrous. They replaced a government entwined economic system evolved over thousands of years with a system of government ownership of everything and with government direction of economic activity and with market mechanisms eliminated. The snowballing of errors as you call it led to stagnation.
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