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March 23, 2009
American Capitalism Is Besieged
By Robert Samuelson
"Can capitalism
survive? No. I do not think it can." -- Joseph Schumpeter, 1942
The story of American capitalism is, among other things, a love-hate
relationship. We go through cycles of self-congratulation,
revulsion
and revision. Just when the latest onset of revulsion and revision
began is unclear. Was it when Lehman Brothers
collapsed? Or when
General Motors pleaded for federal subsidies? Or now, when AIG's
bonuses stir outrage? No matter.
Capitalism is under siege, its future
unclear.
Schumpeter, one of the 20th century's eminent economists, believed
that
capitalism sowed the seeds of its own destruction. Its chief
virtue was long-term -- the capacity to increase wealth and
living
standards. But short-term politics would fixate on its flaws --
instability, unemployment, inequality. Capitalist
prosperity also
created an oppositional class of "intellectuals" who would nurture
popular discontents and disparage
values (self-enrichment,
risk-taking) necessary for economic success.
Almost everything about Schumpeter's diagnosis
rings true, with the
glaring exception of his conclusion. American capitalism has
flourished despite being subjected
to repeated restrictions by
disgruntled legislators. Consider the transformation. In 1889, there
was no antitrust law
(1890), no corporate income tax (1909), no
Securities and Exchange Commission (1934) and no Environmental
Protection
Agency (1970).
We have subordinated unrestrained profit-seeking to other values.
"We've gradually taken into account
the external effects (of business)
and brought them under control," says economist Robert Frank of
Cornell University.
External costs include: worker injuries from
industrial accidents; monopoly power; financial manipulation;
pollution.
Great
reform waves often proceed from scandals and hard times. The
first discredits business; the second raises a clamor for
action.
Parallels with the past are eerie. "No one in 1928 thought that the
head of the New York Stock Exchange would end up in Sing Sing (prison)
in 1938," says historian Richard Tedlow of the Harvard
Business
School. That was Richard Whitney, convicted of defrauding his clients.
Flash forward: Bernie Madoff, once head
of Nasdaq and a member of the
financial establishment, goes to the slammer, a confessed swindler.
Some guesses about
capitalism's evolution seem plausible. The
financial industry -- banks, investment banks, hedge funds -- will
shrink
in significance. Regulation will tighten; required capital will
rise. Profitability will fall. (Until recently, finance
represented 30
percent or more of corporate profits, up from about 20 percent in the
late 1970s.) More of the best and
brightest will go elsewhere.
But Schumpeter's question remains. Will capitalism lose its vitality?
Successful capitalism
presupposes three conditions: first, the
legitimacy of the profit motive -- the ability to do well, even
fabulously;
second, widespread markets that mediate success and
failure; and finally, a legal and political system that, aside from
establishing
property and contractual rights, also creates public
acceptance. Note that the last condition modifies the first two,
because
government can -- through taxes, laws and regulations --
weaken the profit motive and interfere with markets.
The
central reason Schumpeter's prophecy remains unfulfilled is that
U.S. capitalism -- not just companies, but a broader political
process
-- is enormously adaptable. It adjusts to evolving public values while
maintaining adequate private incentives.
Meanwhile, the striving
character of American society supports an entrepreneurial culture and
work ethic -- capitalism's
building blocks. As for new regulations,
many don't depress profitability because costs are passed along to
consumers
in higher prices.
It's also wrong to pit government as always oppressing business. Just
the opposite often holds. Government boosts business.
Some New Deal reforms helped "by making risk more manageable,"
says
Stanford historian David Kennedy. Deposit insurance ended
old-fashioned bank panics. Mortgage guarantees aided
a post-World War
II housing boom. Homeownership rates skyrocketed from 44 percent in
1940 to 62 percent in 1960. Earlier,
the federal government
distributed 131 million acres of land grants from 1850 to 1872 to
encourage railroads. Land,
as well as bank charters and government
contracts, often went to the well connected. Cronyism is sometimes
capitalism's
first cousin.
Still, the present populist backlash may not end well. The parade of
big companies to Washington for
rescues, as well as the high-profile
examples of unvarnished greed, has spawned understandable anger that
could veer
into destructive retribution. Congressmen love extravagant
and televised displays of self-righteous indignation. The AIG
hearing
last week often seemed a political gang beating.
If companies need to be rescued from "the market," why
shouldn't
Washington permanently run the market? That's a dangerous mindset. It
justifies punitive taxes, widespread
corporate mandates, selective
subsidies and meddling in firms' everyday operations (think the
present anti-bonus tax
bill). Older and politically powerful companies
may benefit at the expense of newer firms. Innovation and investment
may
be funneled into fashionable but economically dubious projects
(think ethanol).
Government inevitably expands in
times of economic breakdown. But
there is a thin line between "saving capitalism" from itself and
vindicating Schumpeter's
long-ago prediction.
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