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Friday, December 23, 2016
Interesting observations by Schumpeter in the Economist
IT WAS in 1942 that Joseph Schumpeter published his only bestseller, “Capitalism, Socialism and Democracy”. The book was popular for good reason. It was a tour de force of economics, history and sociology. It coined memorable phrases such as “creative destruction”. But it was a notably dark book. At a time when people were looking for hope during the life-and-death struggle with Nazism, Schumpeter offered only gloom. “Can capitalism survive?” he asked. “No, I do not think it can.”
This column was inspired by the young Schumpeter’s vision of the businessperson as hero—the Übermensch who dreams up a new world and brings it into being through force of intellect and will. On its debut in September 2009, we argued that Schumpeter was a perfect icon for a business column because, unlike other economists, he focused on business leaders rather than abstract forces and factors. But as Schumpeter grew older, his vision darkened. He became increasingly preoccupied not with heroism but with bureaucratisation, and not with change but with decay. The same is true of the outgoing author of this column.
It would be going too far to echo the master and warn that capitalism cannot survive. The socialist alternative that loomed large back in 1942 has imploded. The emerging world has capitalism to thank for its escape from millennia of poverty. But in the West the problems that led Schumpeter to worry have grown. And to them are appended new difficulties that he never foresaw.
His biggest worry was that capitalism was producing its own gravediggers in the form of an anti-capitalist intelligentsia. Today that very elite, snug in Los Angeles canyons and university departments, has expanded. Hollywood studios denounce the wolves of Wall Street and the environmental vandals at large in the oil industry. The liberal sort of academic (meaning the type that favours big government) far outnumbers the conservative kind, by five to one, according to one recent study.
Another of Schumpeter’s concerns was that the state activism of Roosevelt’s New Deal was undermining the market. But in 1938 the American government was spending only a fifth of GDP. Today it is spending 38%—and that constitutes neoliberalism of the most laissez-faire kind compared with Italy (51% of GDP) or France (57%). Big regulation has advanced more rapidly than big government. Business is getting visibly flabbier, too. European industry has been old and unfit for years and now stodge is spreading to America. The largest firms are expanding and smaller ones are withering on the vine. The share of American companies that are 11 years old or over rose from a third in 1987 to almost half in 2012.
There is nothing necessarily bad about this. One of Schumpeter’s great insights, from his later years, was that big firms can be more innovative than startups if given the right incentives. But today’s incentives favour stasis. Many big firms thrive because of government and regulation. The cost per employee of red tape—endless form-filling and dealing with health-and-safety rules—is multiples higher for companies that have a few dozen staff than for those with hundreds or thousands. Schumpeter called for owner-entrepreneurs to lend dynamism to economies. Today capitalism exists without capitalists—companies are “owned” by millions of shareholders who act through institutions that employ professional managers whose chief aim is to search for safe returns, not risky opportunities.
Some light flickers on the horizon. America’s economy is beginning to stretch its limbs. High-tech companies are overhauling an ever wider slice of the economy, including shopping and transport, which should be good for growth (though it also means power is being concentrated in the hands of fewer big firms). But these are mere flashes in the advancing darkness. The rate of productivity growth across the rich world has been disappointing since the early 1970s, with only a brief respite in 1996-2004 in the case of America. There, and in other rich countries, populations are ageing fast. Meanwhile, the fruits of what growth there is get captured by an ever narrower section of society. And those who succeed on the basis of merit are marrying other winners and hoarding the best educational opportunities.
At the same time democracy is becoming more dysfunctional. Plato’s great worry about representative government was that citizens would “live from day to day, indulging the pleasure of the moment”. He was right: most democracies overspend to give citizens what they want in the short run (whether tax cuts or enhanced entitlements) and neglect long-term investments. On top of that, lobbyists and other vested interests have by now made a science of gaming the system to produce private benefits.
Storm clouds gather
The result of this toxic brew is a wave of populism that is rapidly destroying the foundations of the post-war international order and producing a far more unstable world. One of its many dangers is that it is self-reinforcing. It contains just enough truth to be plausible. It may be nonsense that “the people” are infallible repositories of common sense, but there is no doubt that liberal elites have been smug and self-serving. And populism feeds on its own failures. The more that business copes with uncertainty by delaying investment or moving money abroad, the more politicians will bully or bribe them into doing “the right thing”. As economic stagnation breeds populism, so excessive regard for the popular will reinforces stagnation.