Carl Schramm: Schumpeter's Moment
[Mr. Schramm is president and CEO of the Kauffman Foundation and co-author of "Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity".]
We continue to be in the middle of a frightening economic drama, one that is putting the core tenets of modern capitalism at the center of the global debate. That is an important debate to have, considering that the fundamental assumptions of modern economics -- that governments have appropriately designed counter-cyclical tools, that central banks are omnipotent, that the business cycle has been tamed and that our securities markets have finally rationalized risk -- have been shattered.
Is this the moment the Austrian economist Joseph Schumpeter had envisaged when he spoke of "creative destruction"? After all, it was Schumpeter who worried more than any other modern economist about what might be called the fragile condition of capitalism. He did so having lived through the economic horrors of Weimar, witnessed the terror of Soviet-style political economy, experienced the Depression -- and seen the chaos of World War II. Plenty of destruction, to be sure. His life's work concentrated on entrepreneurs renewing the economy through what he called "creative destruction."
If Schumpeter were alive today, he would surely ask, What caused this crisis? And, is this kind of scandal or drama endemic to the nature of capitalism itself? While a lot of attention has been given to the first question, I want to focus on the more ominous second one. Namely, how to save capitalism from a potentially fatal reaction to this crisis.
We need to remember that Schumpeter embraced capitalism not as a reaction or as the second-best solution to the unproductive reality of utopian economic planning. Rather, he saw capitalism as the foundation of two complementary forces. The first was economic expansion. The second was its role in protecting individual freedom.
For Schumpeter, to sacrifice one was to imperil the other. More starkly, he would remind us in no uncertain terms that, whatever our present doubts, the only way freedom is secure for any individual is within a growing economy. In other words, political freedom depends on economic expansion. In our own time, the Indian-born economist Amartya Sen has shown the importance of this tandem for the world's developing economies where economic expansion has become synonymous with freedom.
The connection between economic growth and democracy is, as political scientist Michael Mandelbaum says, a "tendency," not an "invariable law" of political economy. Economic growth usually brings higher rates of literacy and education, as well as a general shift from rural to urban living, elements shown to be correlated with democracy. Moreover, the overlap between free markets and democracy -- in private property, limited government, a thriving civil society, and established rule of law -- makes the causal connection even stronger.
As a general rule, only capitalism can create wealth and liberty at the same time. And, of course, capitalism can expand welfare faster than any other social or economic order has ever done.
However, given the pressures of the current crisis, a future where growth and freedom continue to jointly secure each other and anchor civil society is not assured. It seems that when economic contractions occur in their inevitable, yet unpredictable way, the critique of capitalism itself becomes more powerful and shrill.
From Schumpeter's vantage point, capitalism's very success allows rich societies to use government to relax the impersonal rules that govern markets, creating new rules that buffer citizens from the rigors of risk-taking and failure. In that sense, government invents for itself the task of mediating market outcomes. Schumpeter had seen the dangers of this play out in Bismarck's conception of Prussia's welfare state. In the face of the Marxist threat, the elite secured its position by causing government to dispense social benefits. Political entrenchment, not charity, had motivated Bismarck. When distorted in such a way, free-market capitalism is seen to suppress -- rather than to encourage -- social and economic mobility.
Since the New Deal, Americans have come to see government as somehow the ultimate protector of their financial welfare. In reality, though, the evidence of the U.S. government behaving in this way during the New Deal is thin to say the least. Although it is largely forgotten now, much of the government's action during the Depression actually had a marginal impact on individual lives. Monetary expansion and technological innovation boosted the economy, while the "second" depression of 1937-1938 is widely understood as having been induced by Roosevelt's attempt to manipulate credit markets.
So what about the ultimate Schumpeterian challenge: Can capitalism be saved?..
Read entire article at WSJ
We continue to be in the middle of a frightening economic drama, one that is putting the core tenets of modern capitalism at the center of the global debate. That is an important debate to have, considering that the fundamental assumptions of modern economics -- that governments have appropriately designed counter-cyclical tools, that central banks are omnipotent, that the business cycle has been tamed and that our securities markets have finally rationalized risk -- have been shattered.
Is this the moment the Austrian economist Joseph Schumpeter had envisaged when he spoke of "creative destruction"? After all, it was Schumpeter who worried more than any other modern economist about what might be called the fragile condition of capitalism. He did so having lived through the economic horrors of Weimar, witnessed the terror of Soviet-style political economy, experienced the Depression -- and seen the chaos of World War II. Plenty of destruction, to be sure. His life's work concentrated on entrepreneurs renewing the economy through what he called "creative destruction."
If Schumpeter were alive today, he would surely ask, What caused this crisis? And, is this kind of scandal or drama endemic to the nature of capitalism itself? While a lot of attention has been given to the first question, I want to focus on the more ominous second one. Namely, how to save capitalism from a potentially fatal reaction to this crisis.
We need to remember that Schumpeter embraced capitalism not as a reaction or as the second-best solution to the unproductive reality of utopian economic planning. Rather, he saw capitalism as the foundation of two complementary forces. The first was economic expansion. The second was its role in protecting individual freedom.
For Schumpeter, to sacrifice one was to imperil the other. More starkly, he would remind us in no uncertain terms that, whatever our present doubts, the only way freedom is secure for any individual is within a growing economy. In other words, political freedom depends on economic expansion. In our own time, the Indian-born economist Amartya Sen has shown the importance of this tandem for the world's developing economies where economic expansion has become synonymous with freedom.
The connection between economic growth and democracy is, as political scientist Michael Mandelbaum says, a "tendency," not an "invariable law" of political economy. Economic growth usually brings higher rates of literacy and education, as well as a general shift from rural to urban living, elements shown to be correlated with democracy. Moreover, the overlap between free markets and democracy -- in private property, limited government, a thriving civil society, and established rule of law -- makes the causal connection even stronger.
As a general rule, only capitalism can create wealth and liberty at the same time. And, of course, capitalism can expand welfare faster than any other social or economic order has ever done.
However, given the pressures of the current crisis, a future where growth and freedom continue to jointly secure each other and anchor civil society is not assured. It seems that when economic contractions occur in their inevitable, yet unpredictable way, the critique of capitalism itself becomes more powerful and shrill.
From Schumpeter's vantage point, capitalism's very success allows rich societies to use government to relax the impersonal rules that govern markets, creating new rules that buffer citizens from the rigors of risk-taking and failure. In that sense, government invents for itself the task of mediating market outcomes. Schumpeter had seen the dangers of this play out in Bismarck's conception of Prussia's welfare state. In the face of the Marxist threat, the elite secured its position by causing government to dispense social benefits. Political entrenchment, not charity, had motivated Bismarck. When distorted in such a way, free-market capitalism is seen to suppress -- rather than to encourage -- social and economic mobility.
Since the New Deal, Americans have come to see government as somehow the ultimate protector of their financial welfare. In reality, though, the evidence of the U.S. government behaving in this way during the New Deal is thin to say the least. Although it is largely forgotten now, much of the government's action during the Depression actually had a marginal impact on individual lives. Monetary expansion and technological innovation boosted the economy, while the "second" depression of 1937-1938 is widely understood as having been induced by Roosevelt's attempt to manipulate credit markets.
So what about the ultimate Schumpeterian challenge: Can capitalism be saved?..