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Redefining Capitalism

One of the twentieth century’s most influential economists was Joseph Schumpeter. Writing post the 1930s Great Depression, Schumpeter noted that “economists and popular writers have once more run away with some fragments of reality they happened to grasp.” Some eighty years later than his book Can Capitalism Survive? was first published, the same charges could be laid economists and popular writers today. Events such as the dot.com crash of 2000 followed by the 2008 Global Financial Crisis have provided the commentariat economica reasons to challenge the morality of capitalism and its distribution of wealth and income.

Schumpeter’s contribution to economics was his thesis of “Creative Destruction” to describe the evolutionary characteristics of capitalism; which scorches aging industries, without deference to owners and workers, and from whose ashes new industries emerge. Historically, we can see this with the replacement of iron by steel, kerosene lighting with electricity, horse drawn carriages by automobiles, and typewriters with personal computers. Needless to say, each of the new industries spawned new and large wealth at the expense of the old.

At the time of writing the equivalent to the gargantuan firms of early twentieth century are appearing. Apple, founded in the 1970s, has a stock market capitalization of around $2 trillion dollars. Amongst its peers are Microsoft, also founded in the 1970s; Amazon founded in the 1990s, and Facebook and Alphabet (Google) each founded in the 2000s. With the exception of the late Steve Jobs, of Apple, the founders of the tech-behemoths lead the world’s wealthiest people on both the Forbes 400 and Bloomberg Billionaires Index. These ground-breaking levels of wealth creation has invited calls for disentitlement. This is not without precedent.

During the late nineteenth century there emerged a “populist” movement amongst those displaced in industries aligned to agriculture. As the benefits of industrial employment pervaded wider communities discontent receded; only to be replaced by a “progressive” movement that emerged in response to the Great Depression. The progressives, mainly urbanized, called for greater government intervention in the economy. With the New Deal they got their way and government paternalism continued largely unabated into the 1980s. What followed was decades of flat performance for stock market investors.

Society’s overwhelming concern of the 1930s, of which Joseph Schumpeter wrote, was the scourge of high unemployment. At the end of a period of prosperity known as the “Roaring Twenties” and culminating with the 1929 stock market crash, the Great Depression fell between two world wars. This sequence of events would bear witness to America’s ascendancy to the world’s economic powerhouse; the antecedents of which occurred in the early 1890s when America overtook the United Kingdom as the world’s largest steel producer.

Schumpeter recognized that the “supernormal unemployment” of the Great Depression was not isolated; and had followed the earlier periods of prosperity during the 1820s and 1870s’. He cautioned, however, against drawing false conclusions “from observations and theorems that are almost completely true” in respect of recurring income inequality. This was fortuitous in that it took eighty years, preceding the Global Financial Crisis, when income disparity reached those of the late 1920s. What is observed are rapid cyclical economic corrections of inequality.

In The future of capitalism, Professor Paul Collier acknowledges that “the word ’capitalism’ provides widespread contempt” and that the “one feature of capitalism that people find most repellent, is its obsession with making profits (p.69). Collier, whose book makes the case for ethical states, ethical firms, and ethical families, reminds us correctly that it was Nobel Laureate economist Milton Freidman’s 1970s who asserted that profits are the sole purpose of the firm. He also contends that the shift to Friedman’s thinking came after a prolonged period of government paternalism; that began with the New Deal response to the Great Depression.

In a similar vein to Schumpeter, the Oxford University professor accuses the media of using leftist ideology to denigrate capitalism as a lazy way of feeling intellectually superior. One economist contributing to the anti-capitalism debate, who cannot be considered lazy or “running away with fragments of reality”, as Schumpeter noted, is French economist Thomas Piketty. The media has picked up on his long tome, Capital in the twentieth century, earning it a rebuttal in the Economist Magazine. One of the issues with conventional measures of inequality statistics is that they fail to take the quality of goods and services consumed into consideration and changes in taxation. An undisputed driver of capitalism is competition and its drivers to reduce prices while increasing quality and reducing waste in the process of production.

Where capitalism comes under fire so does the discipline of economics and its preoccupation with reducing events to numbers. This has validity as do a number of the issues raised in the book Tailspin by journalist Steven Brill; who questions the denigration of American values over the last fifty years. As easy as it is to tie into the profit motive, and Professor Paul Collier also does, there needs to be a separation between long-term ownership and short-term management. The question that begs asking is whether there would be a difference in government and enterprise morality under a socialist system. History suggests that there would not.