The story of American capitalism is a contradiction. It has succeeded brilliantly in creating widespread material well-being; and yet, it has not satisfied a popular yearning for a society with less economic insecurity and more “fairness” and equality. Can the two faces of capitalism coexist? Or is one bound to triumph over the other?
These questions hover over the impending midterm election. Democrats — self-styled “progressives” — clamor for a more humane capitalism or an embrace of “socialism.” Meanwhile, the Trump administration rejects socialism and advocates more tax cuts — a juiced-up capitalism.
The stock market’s recent turmoil is a reminder of the system’s instability. Granted, capitalism lacks a precise definition. It’s more a spirit than a strict formula. Still, capitalism requires some bedrock conditions: property rights and widespread private ownership; reasonably free markets so that decisions of what to produce and how are left mainly to private firms and individuals; and an acceptance of some inequality to reflect differences in talent, work effort, risk-taking, and good or bad fortune.
We now have a splendid overview of capitalism’s successes and failures in a new book, “Capitalism in America: A History,” by former Federal Reserve chairman Alan Greenspan and Adrian Wooldridge, an editor at the Economist.
You may have thought (I did) that the United States’ economic advances have alternated between rapid gains and stretches of stagnation. Take the years between 1790 and 1860; they surely were dull decades.
In 1793, Eli Whitney invented the cotton gin, dramatically improving cotton’s profitability and entrenching a slaveholding economy. The Civil War became a virtual certainty. In 1825, the Erie Canal opened transport between Albany and Buffalo. A canal-building boom ensued. By 1850, America’s canals totaled 3,700 miles.
Nor was that all. In 1844, Samuel Morse introduced the telegraph. Greenspan and Wooldridge consider it more important than the later invention of the telephone, which mainly stimulated socializing. By contrast, the telegraph quickly expanded the reach of business. Railroads were big users because they needed to coordinate train movements.
What explains America’s success at creating prosperity, argue Greenspan and Wooldridge, is society’s willingness to accept change. “The central mechanism of this progress has been creative destruction,” they write, evoking the phrase coined by economist Joseph Schumpeter.
Creative destruction involves a collective, though informal, bargain. In return for accepting the disruptions of new technologies, management methods and consumer tastes, people expect to be rewarded with higher incomes and living standards.
This bargain is besieged, as Greenspan and Wooldridge note. Gains have dwindled; wages and productivity increases have slowed. Meanwhile, pain — or public intolerance of pain — has increased. Unemployment after the Great Recession peaked at 15 million . Income inequality has risen. Many corporate executives and Wall Street traders seem ridiculously overpaid.
As a result, the sanctity of American capitalism is now questioned more than at any time since World War II. Critiques have proliferated, including a provocative and informative book (“ Can American Capitalism Survive?”) by my Post colleague Steven Pearlstein.
Describing some dubious incidents of business conduct, he writes: “These individual stories . . . now color the way we think about American capitalism. . . . What was once considered the optimal system for organizing economic activity is now widely viewed . . . as having betrayed its ideals and its purpose and forfeited its moral legitimacy.”
Some of this rancor reflects a hangover from the 2008-2009 financial crisis and Great Recession, when the system’s near-breakdown coincided with much self-interested, ethically challenged or greedy behavior. If nothing else, this reminds us that capitalism has always had its seamier side of exploitation and fraud.
Pearlstein argues that the distribution of income could be improved — without harming the rate of economic growth — by public policies that emphasized worker profit-sharing and an overhauled welfare system based on a “guaranteed minimum income.”
Maybe, or maybe not.
The truth is that American capitalism is a joint venture between the private sector and public policies (regulations, taxes, government spending and monetary policy). Laissez-faire (literally “leave to be”) died a long time ago. But the interaction of so many pressures frustrates our ability to control the outcome.
We don’t know whether capitalism is reinvigorating itself or whether it is in long-term decline, overwhelmed by the cumulative effect of government regulations, higher taxes and aging populations.
Writing in the 1940s, Schumpeter feared for capitalism’s future: “Can capitalism survive? No. I do not think it can.” Capitalism’s very success in raising physical output would, especially among “intellectuals,” produce a backlash by unsettling social classes and making materialism seem virtuous.
Greenspan and Wooldridge echo the same thought. “By producing prosperity, capitalism creates its own gravediggers in the form of a comfortable class of intellectuals and politicians,” they write. “People link arms to protect threatened jobs and dying industries. They denounce capitalists for their ruthless greed.”
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