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Since the onset of the financial and economic crisis not quite a year ago, a growing number of voices have been raised, often gleefully, to proclaim the death of capitalism. Without a clear definition of terms it is impossible to know what many of these critics mean, but the argument seems to run like this: the current crisis is the result of lax regulation of business and a too-cozy relationship between politicians and business executives, and the only solution is for government to get tough on business by exerting greater regulatory – and sometimes financial and management – control over companies and financial institutions.
The problem, as these critics see it, has its roots in the Thatcher-Reagan philosophy of free markets and minimal government control of enterprise, which even the subsequent left-of-center governments of Bill Clinton and Tony Blair dared not tamper with. Capitalism, it appears, has collapsed from its own internal contradictions – the lack of regulation leading to reckless and destructive corporate behavior – and although private initiative can produce great public benefit, it should henceforth be allowed to do so only under strict government control. As it happens, these critics of capitalism may be right in predicting the death of capitalism, but they are right for the wrong reasons.
As is so often the case, it is helpful to refer to Joseph Schumpeter, one of my favorite economists and a man of considerable style, whose stated ambition was to be the world’s greatest economist, lover, and horseman, though he admitted to having some trouble with the horses.
Schumpeter predicted that capitalism would die, not because of its failings but because of its success. Schumpeter believed that there was no economic reason for capitalism to fail, but that “its very success undermines the social institutions which protect it and inevitably creates conditions in which it will not be able to live.” He placed responsibility for this development at the feet of the intellectual class: “All those who are unemployed or unsatisfactorily employed or unemployable drift into the vocations in which standards are least definite…They swell the host of intellectuals…whose numbers hence increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment [and] righteous indignation about the wrongs of capitalism.”
These discontented and indignant intellectuals, as poorly adapted as they are to the world of work, nevertheless find their niche. In Schumpeter’s words, “intellectuals invaded labor politics [and] radicalized it… [This]…explains why public policy grows more and more hostile to capitalist interests. Intellectuals rarely enter professional politics and still more rarely conquer responsible office. But they staff political bureaus, write party pamphlets and speeches, act as secretaries and advisers, make the…politician’s…reputation….In doing these things they…impress their mentality on almost everything that is being done.”
Schumpeter may be too severe. You could safely call William F. Buckley, George Will, and even P.J. O’Rourke intellectuals, and all of them are or were solidly in favor of capitalism. There are even some intellectuals who have real jobs in corporations that make and sell stuff. And I don’t go in for the kind of anti-intellectualism that has become the calling card of the Republican Party. There were plenty of reasons not to elect John Kerry President, but his ability to speak French was not one of them. I was not happy about the prospect of a Vice President who insisted on referring to a country called “Eye-Rack,” located next door to another country called “Eye-Ran.”
These cavils notwithstanding, Schumpeter’s analysis is right. Intellectuals by and large will try to replace capitalism with something else – socialism, for example – in which it is they who make the decisions rather than leaving matters to the Invisible Hand. Nothing helps to accelerate capitalism’s demise more than an economic crisis that leaves most people bewildered about what has happened and why, and causes them to lose faith in the institutions they hold responsible for the current mess.
I don’t actually think that President Obama or most of his advisers are socialists. But I do think that they, few of whom have ever had a real job in the private sector or have met a business person who is not a campaign contributor, have no real understanding of business and markets and what makes them work. For all that they praise entrepreneurship, they can’t really grasp what makes entrepreneurs tick (hint: it’s not all or even mostly about the money). They don’t understand Schumpeter’s concept of “creative destruction,” the process by which companies and jobs are destroyed to make way for new ones.
Contrary to people like Rush Limbaugh, Sean Hannity, and Michael Steele, I don’t think that President Obama or the people around him are secretly or overtly trying to destroy capitalism. But with the very best of intentions they may do just that.
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