Capitalism: A Postmortem Examination - Part I
We live in a time of immense confusion. Words that used to mean one thing suddenly mean another. The values which made us prosperous and free are being questioned and trampled on. We are in a mess, and our instinctive reactions seem to make things worse.
In 1989, following the collapse of the Soviet Union, Francis Fukuyama declared "The End of History" and noted that 'The triumph of the West, of the Western idea, is evident first of all in the total exhaustion of viable systematic alternatives to Western liberalism'. Twenty years later, the ideological appeal of classic liberal values - free markets, property rights, civil liberty, and individual responsibility - is in decline, following an economic meltdown in developed countries and the perceived success of the authoritarian-socialist model, most notably in the People's Republic of China. Capitalism as we know it is dying. Some say it already died a long time ago.
In 1942, Joseph Schumpeter published Capitalism, Socialism, and Democracy. Shumpeter, an Austrian aristocrat and former Minister of Finance, left his professorial position at the University of Bonn, Germany, and fled to the US following Hitler's rise to power in the early 1930s. He taught at Harvard University from 1932 until the day he died. His life's work was the search for an ideal economic and political system.
Schumpeter opens his most famous book by asking 'Can Capitalism Survive?', and immediately responds 'No, I don't think it can'. Schumpeter was not a Marxist and did not wish for capitalism to perish, but he thought that capitalism's evolution into a new form of socialism was inevitable. At odds with the Marxist view that capitalism would be destroyed by the angry "proletariat", Schumpeter believed that 'capitalism would be destroyed by its successes'.
But why? And how? Since most of you are busy people, I prepared a brief summary of Schumpeter's main points, based on Capitalism, Socialism, and Democracy, as well as other publications, most notably The March into Socialism, a speech he delivered shortly before his death. While his work covers a broad array of issues - entrepreneurship, democracy, consumerism - my summary will focus on his ideas concerning the decline of capitalism.
Before we proceed, it is important to put things in historical context. Schumpeter was born in a world divided between imperial powers. He witnessed the triumph of America and England's relatively pure form of capitalism during the final decades of the 19th century and beginning of the 20th century. Back then, capitalism was synonymous with small government and individual responsibility. Schumpeter saw the erosion of this notion through the establishment of many institutions that seem to us, today, as god-given components of any capitalist system: When Schumpeter was 20, the US had no Central Bank, no progressive Income Tax, no military industry of any significance, no social security, and no government healthcare.
Schumpeter wrote his book at a time when only 14% of government expenditure was funded by individual income tax, as opposed to about 40% today; The expenditure on defense was about 1.7% of US GDP (in 1940), and is over 3% today. In 1960, ten years after he died, spending on Health and Human Services still took less than 3.5% of all government expenditure, compared to about 25% in the 2000s. The total Federal Government outlays in 1940 amounted to 9.8% of US GDP compared to about 20% during the 2000s - and that's before taking into account the recent government bailouts and stimulus packages, which take these numbers completely off the charts (additional historical data can be found in this PDF report published by the White House). Most importantly, Schumpeter lived at a time when the US Dollar was (mostly) tied to gold, and the government was severely limited in its ability to create new money and generate inflation.
Government control of economic affairs has grown by leaps and bounds during the last 60 years, and many of the things that we now take for granted were considered purely socialist back then. Ironically, the fact that so much has changed, and that we still call our current system "capitalism", makes it somewhat difficult to understand how astute Schumpeter was in his prediction of capitalism's demise. We might be proud to claim that capitalism is still alive and well, but - based on how much it has changed - many would argue that what we still call capitalism is simply a sophisticated form of socialism.
Stay tuned for Part II.