Saturday, February 23, 2008

Will Capitalism Be A Victim of Its Own Success?

The economist Joseph Schumpeter describes what he sees as capitalism's Achilles Heel in his book Capitalism, Socialism and Democracy.

[Thanks to for the image.]

Writing in a more approachable style, another economist Benjamin A. Rogge gives an overview of Schumpeter's main points in his work Can Capitalism Survive?. (See this excerpt.)

Rogge begins by citing Schumpeter:

"Can capitalism survive? No, I do not think it can. The thesis I shall endeavor to establish is that the actual and prospective performance of the capitalist system is such as to negative the idea of its breaking down under the weight of economic failure, 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 and which strongly point to socialism as the heir apparent."

Marx said something similar about capitalism, but the difference is that Marx relished the idea, and Schumpeter feared it.

Rogge interprets Schumpeter's theory thus:

"In effect if capitalism is to survive, it must defend itself in the arena of values and emotions—and here its very success as an economic system reduces its chances of victory."

I've been looking for the reasons for capitalism's lack of general defense and appeal, and this sounds like a plausible explanation. We ignore at our own peril the influence of emotion and culture over logic and observation.

Schumpeter demonstrates why most types of individuals do not have the incentive to protect the very system that provides them with their standard of living. Rogge's translations of Schumpeter's ideas are so clear and succinct that I'll paraphrase him.

Who are these individuals who don't know a good thing when they see it?

1. The working people. Why will they not protect capitalism? In Rogge's words, "[b]ecause they do not connect their affluence with the capitalist system, because they are incapable of understanding any economic system as such, because they are more aware of their daily frustrations and insecurities under the system than they are of their long-run gains from the system, and because they are taught by the intellectuals in society to resent the capitalist system and its central figure—the businessman."

2. The businessman. Why will he not protect capitalism? "[E]ven if he were fully aware of the problem and determined to do something about it, the businessman lacks the capacity to capture the imagination of the society." Or as Schumpeter himself says so eloquently, "[t]he stock exchange is a poor substitute for the Holy Grail."

Schumpeter also explains:

"A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose—both in the drawing room and on the platform. Knowing this he wants to be left alone and to leave politics alone. [...] There is surely no trace of any mystic glamor about him which is what counts in the ruling of men."

A perfect example of this is General Motor Corp Vice Chairman Bob Lutz's recent statement dismissing global warming as "a total crock of s---." Ironically, he is part and parcel of GM's decision to spend millions of marketing dollars proving to the public that the company takes environmental factors seriously.

Schumpeter claims that business faces a second setback. Rogge puts it this way:

"As capitalism matures, the form of the business firm and the role of the businessman change in such ways as to weaken the businessman's will to resist the critics of capitalism. [...] Capitalism creates the organization man—and the organization man is indifferent to the fate of capitalism."

I'd written something similar in a previous post. I said:

"A businessman is a businessman. He is not an idealogue, or even an idealist, except in his more private moments. A businessman enjoys the challenge. He plays by the rules, no matter what they are."

Not an idealist indeed. We have only to observe how the big corporations, including the trade unions, wait until they see who the winner is likely to be before handing out campaign finance money.

3. The intellectuals. Why will the majority of them not protect capitalism?

"The intellectual tends always to be a critic of the system, of the establishment, whether he is in Russia or the U.S. [...] [I]n 1942 Schumpeter accurately foresaw the current surplus of intellectuals, surplus in the sense of there being far more intellectuals than employment opportunities with income and prestige equal to the self-evaluations of such people. For this, said Schumpeter, the intellectuals will hold the capitalist system responsible, which will add fuel to their already burning critical fires. Moreover, the widening gap between their own incomes and those of the businessmen will induce them to find ego-restoring explanations of the businessman's success—luck, exploitation, fraud, monopoly, etc. These rationalizations are described by Schumpeter as 'the autotherapy of the unsuccessful.'"

4. And lastly, the politicians. Why will they not protect capitalism? Because "the governmental bureaucrats, with whom [the intellectuals] share a common educational background [...] will be increasingly involved in administering anticapitalist legislative policies"--presumably by nature and by definition, because not to do so would be professional suicide.

Read the rest of the Rogge piece. It's a great one.

So ultimately, our socioeconomic system is determined by the politicians we elect, and the majority of voters (and therefore most politicians) are anti-capitalist--and this is true whether they be Republican or Democrat.

To make this point clear, I'll refer to the expert on that subject, Virginia Postrel, author of The Future and Its Enemies. In her perspicacious work, she pulverizes the split between left and right, turning the compass around so that it divides "stasists" from "dynamists", i.e. those Republicans and Democrats who prefer the status quo, who believe they can control the uncontrollable, and who fear change, on the one hand; and those who are confident in themselves and in society's capacity to organize itself, and who therefore crave the freedom and uncertainty of evolutionary dynamism, on the other.

Schumpeter and Rogge, you're right. I think the stasists are winning, at least for the short, medium, and shorter long-term. Hopefully, good sense will win in the end, at least in the Darwinian sense.

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