Can We Save Capitalism?

The anonymous author of the Schumpeter column in TheEconomist is closing out his tenure. Fittingly, he ends by asking whether capitalism can survive? At a time when all sensible human minds understand that no viable alternative exists, capitalism faces the danger of being hollowed out from within.

Inspiration for the column comes from Joseph Schumpter. Today’s columnist explains:

This column was inspired by the young Schumpeter’s vision of the businessperson as hero—the Übermensch who dreams up a new world and brings it into being through force of intellect and will. On its debut in September 2009, we argued that Schumpeter was a perfect icon for a business column because, unlike other economists, he focused on business leaders rather than abstract forces and factors. But as Schumpeter grew older, his vision darkened. He became increasingly preoccupied not with heroism but with bureaucratisation, and not with change but with decay.

Of course, capitalism has triumphed. It has succeeded in lifting most of the world’s poorer countries out of poverty. One need only but mention that China, whose extreme poverty rate in 1970 was over 80% now has an extreme poverty rate under 10%.

The columnist writes:

The socialist alternative that loomed large back in 1942 has imploded. The emerging world has capitalism to thank for its escape from millennia of poverty. 

The original Schumpeter was concerned that capitalism would be undermined from within. Today’s columnist says that Schumpeter feared elites, a guardian class of philosopher kings who did not trust markets but who trusted their own brilliance and believed fervently in the ideal-du-jour. Today, it’s the ideal of equality—apparently, capitalism does not provide people with an equal quantity of misery.

He says:

His [Schumpeter’s] biggest worry was that capitalism was producing its own gravediggers in the form of an anti-capitalist intelligentsia. Today that very elite, snug in Los Angeles canyons and university departments, has expanded. Hollywood studios denounce the wolves of Wall Street and the environmental vandals at large in the oil industry. The liberal sort of academic (meaning the type that favours big government) far outnumbers the conservative kind, by five to one, according to one recent study.

It takes a well-tuned prophetic sense to have seen the rise of an intelligentsia that cares more about its own importance than about the prosperity of the citizenry. And that cares more about its gauzy ideals than about whether the people are well nourished.

Obviously, the Marxist fairy tales spun out by what is called the Frankfort School have captured the minds of many academics in their web. While railing against consumerism these great minds ignore the fact that true socialism does not need to worry about consumerism because it produces nothing worth consuming.

Among the forces militating against capitalism was the state bureaucracy and its will to its own power. The original Schumpeter saw it in Roosevelt’s New Deal. He would not be reassured by today’s bloated government bureaucracies:

Another of Schumpeter’s concerns was that the state activism of Roosevelt’s New Deal was undermining the market. But in 1938 the American government was spending only a fifth of GDP. Today it is spending 38%—and that constitutes neoliberalism of the most laissez-faire kind compared with Italy (51% of GDP) or France (57%). Big regulation has advanced more rapidly than big government. Business is getting visibly flabbier, too. European industry has been old and unfit for years and now stodge is spreading to America. The largest firms are expanding and smaller ones are withering on the vine. The share of American companies that are 11 years old or over rose from a third in 1987 to almost half in 2012.

Two points should be underscored. “Big regulation”-- which happens to be the hallmark of the Obama administration--  has tamped down the growth of business and the economy. One may question whether or not it has redistributed wealth. It has certainly not created wealth. Thanks to excessive regulation small business cannot really get a toehold. Compliance costs too much.

The columnist continues:

Many big firms thrive because of government and regulation. The cost per employee of red tape—endless form-filling and dealing with health-and-safety rules—is multiples higher for companies that have a few dozen staff than for those with hundreds or thousands. Schumpeter called for owner-entrepreneurs to lend dynamism to economies. Today capitalism exists without capitalists—companies are “owned” by millions of shareholders who act through institutions that employ professional managers whose chief aim is to search for safe returns, not risky opportunities.

This has stifled productivity across the developed world:

The rate of productivity growth across the rich world has been disappointing since the early 1970s, with only a brief respite in 1996-2004 in the case of America. There, and in other rich countries, populations are ageing fast. Meanwhile, the fruits of what growth there is get captured by an ever narrower section of society. And those who succeed on the basis of merit are marrying other winners and hoarding the best educational opportunities.

Today’s populist revolt against the elites demonstrates something of  a recognition of the problem. While the columnist understands well that the “people” might not be an infallible source of wisdom, he knows that the “smug and self-serving” elites have provoked the reaction:

It may be nonsense that “the people” are infallible repositories of common sense, but there is no doubt that liberal elites have been smug and self-serving. And populism feeds on its own failures. The more that business copes with uncertainty by delaying investment or moving money abroad, the more politicians will bully or bribe them into doing “the right thing”. As economic stagnation breeds populism, so excessive regard for the popular will reinforces stagnation.

He concludes—more as a warning than as a solution-- that if the popular will recommends interfering in the markets it might well aggravate the problem. And yet, if by populism one means undoing regulations and diminishing the power of the bureaucracy it might end up being a good thing.

The Schumpeter columnist will henceforth be writing the Bagehot column for the Economist. We wish him well and thank him for his good work.