Can Capitalism Survive?
Drug Companies' Shares of the Diuretic Market, 1951-1960
Letter = company
Digit = trade name product
|Source: Marketing Division, Eli Lilly Company, Indianapolis, Indiana|
All of this Schumpeter would label as nonsense. Why? Because the investigator would be examining "each year—taken separately" rather than the never-ending game of leapfrog that the data reveal and that represents the true nature of the competitive process.
To the textbook economist, both the size of the firms relative to the market and the high profits on individual products would be evidence of market imperfection, implying "corrective" action (e.g. breaking up the larger firms). To Schumpeter, not only are size and profits not anticompetitive per se; both are natural and desirable features of the competitive process, when viewed as a dynamic process operating through the course of time. The size is often needed to assure innovative efficiency, and the profits are needed to keep the challengers trying. (In fact, says Schumpeter, when the losses of the failures are combined with the profits of the successes, the net cost to the consumer of all this may be zero—or less.)
Neither the Yankees nor IBM nor General Motors need be dismembered; time and tide and "creative destruction" will operate on each and bring a demotion in rank—unless they behave as if they face immediate and equal rivals, i.e. unless they behave "competitively." And, of course, unless they receive governmental assistance in maintaining their market positions.
Schumpeter concludes his work in this area by saying that "long-run cases of pure monopoly must be of the rarest occurrence.... The power to exploit at pleasure a given pattern of demand ... can under the conditions of intact capitalism hardly persist for a period long enough to matter ... unless buttressed by public authority."*7
My own conviction, deriving largely from Schumpeter, is that competition does not have to be created or protected; it inheres in the very nature of man. It can be reduced or eliminated only by coercive acts of governments. All that a government need do to encourage competition is not to get in its way.
I agree with Schumpeter's words in his preface to the second edition of Capitalism, Socialism and Democracy, when he writes, "I believe that most of the current talk about monopoly is nothing but radical ideology...."
In my opinion the antitrust laws of this country are anticapitalist in intent and in effect and, in addition, constitute one of the major sources of confusion and unwarranted guilt feelings on the part of the businessman. These laws brand as antisocial precisely those achievements by which the businessman evaluates his performance—growth in size, superiority over rivals, increasing market share, profits above average, etc.
They also produce such absurdities as the case brought a few years ago against Topps Chewing Gum for monopolizing the baseball picture card industry. In the words of the FTC examiner, Topps had been "hustling around getting the players' signatures, pretty well cornering the major league players." He added, in a dramatic after-climax, that "players were paid $5.00 for a five-year contract." Who could possibly compete with a company that was willing to throw money around like that? (That was ten years ago; today, under the influence of potential rivals, the figure has gone up to no less than $250 a year!)
(4) Schumpeter's case for capitalism is now complete and it is impressive indeed. Why does this not assure the public and political acceptance of the system? Because, says Schumpeter, "it is an error to believe that political attack arises primarily from grievance and that it can be turned by justification.... In no case is [rational argument] a match for the extra-rational determinants of conduct."*8
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. We can best see Schumpeter's analysis of this by examining the impact of capitalism on each of the groups in society that might serve as a bulwark against the system.
(5) We begin with the principal beneficiaries of capitalism—the masses. Why do they not defend the system that has made them the most affluent people in the history of man? Because 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.
This same point is eloquently made by another distinguished social observer, Ortega y Gasset. In Revolt of the Masses, he writes:
The common man, finding himself in a world so excellent, technically and socially, believes it has been produced by nature, and never thinks of the personal efforts of highly endowed individuals which the creation of this new world presupposed. Still less will he admit the notion that all these facilities still require the support of certain difficult human virtues, the least failure of which would cause the rapid disappearance of the whole magnificent edifice.*9
(6) The traditional aristocratic element in society that in the nineteenth century tended to protect the liberal capitalist system from its radical critics is itself a victim of the capitalist success. Capitalism is rationalistic in nature and creates an unfriendly climate for the tradition-based class system of the precapitalist society.
(7) But why does any of this matter? Can't the businessman be his own defender? Why must he rely on others? Why indeed. The response is that even 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. In the words of Schumpeter,
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. The stock exchange is a poor substitute for the Holy Grail.*10
But this is not all. 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. Most importantly (to Schumpeter), with the growth of the large organization so essential to economic efficiency, the role of the individual entrepreneur is replaced by the work of the team, and innovation itself is reduced to routine. Personality is blotted out and with it the gut sense of ownership of the means of production that characterized the self-made man of early capitalism. Capitalism creates the organization man—and the organization man is indifferent to the fate of capitalism. He eventually comes to care little whether he reports to the anonymous stockholders or the anonymous citizen-owners of socialism.
A case in point from my own experience: As a college student, I was employed one summer by the privately owned gas distribution system in Hastings, Nebraska, to try to persuade the citizens of the city that it would be a most unwise action for them to vote yes on a referendum proposal for the city to take over that system. Each Monday morning we "customer relations" men were given an impassioned lecture by the manager of the system on the evils of socialism. In spite of our eloquence (or because of it), the good burghers voted four to one to take over the system. One week later the manager of the now socialized enterprise was appointed, and who was it? Old God-how-I-hate-socialism himself! (This illustrates a point I have long argued: the kind of aggressive, ambitious, effective person who succeeds under capitalism is also likely to rise to power under most other economic arrangements. It is only under capitalism that his drive is harnessed in service to the interests of the consumers.)
(8) The result of all this is to make of capitalism a virtually undefended fortress, but this alone would not mean its destruction. What is needed is an enemy force—and this too capitalism provides, in the form of the intellectuals.
How is the intellectual defined?
Intellectuals are people who wield the power of the spoken and written word, and one of the touches that distinguishes them from other people who do the same is the absence of direct responsibility for practical affairs.... The critical attitude [arises] no less from the intellectual's situation as an onlooker—in most cases, also an outsider—than from the fact that his main chance of asserting himself lies in his actual or potential nuisance value.*11
The intellectual tends always to be a critic of the system, of the establishment, whether he is in Russia or the U.S. In Russia he is not tolerated—or is attuned solely to serving the current rulers and their ideology. But the businessman is by nature tolerant. He wants to sell people something—not send them to Siberia.
The growing affluence of a mature capitalist society permits a continuing expansion in systems of higher education and hence in the ranks of the intellectuals. In fact, in 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."
One group that the intellectuals will seek to identify with and to stimulate to greater anticapitalist activity will be the workers. Schumpeter describes the advances of the intellectuals to them in words that would seem truly prophetic to anyone who has recently seen pictures of the adulatory groups around a Cesar Chavez. "Having no genuine authority and feeling always in danger of being unceremoniously told to mind his own business, he must flatter, promise and incite, nurse left wings and scowling minorities, sponsor doubtful or submarginal cases, appeal to fringe ends, profess himself ready to obey."*12
A second group with which the intellectuals will feel a natural alliance will be the governmental bureaucrats, with whom they share a common educational background. In addition, of course, the bureaucrats will be increasingly involved in administering anticapitalist legislative policies. I might note that, to the intellectuals, these anticapitalist legislative creations will have a second happy feature—employment opportunities for themselves and their friends, carrying with them both decent pay and indecent amounts of power over others.
(9) The enemy and his allies are now at the gates of the capitalist fortress. Is there any hope that the businessman will finally sense the danger to himself and the system of which he is a part and rise to meet the challenge? As Schumpeter sees it, quite the contrary. Here are his words:
Perhaps the most striking feature of the picture is the extent to which the bourgeoisie, besides educating its own enemies, allows itself in turn to be educated by them. It absorbs the slogans of current radicalism and seems quite willing to undergo a process of conversion to a creed hostile to its very existence. Haltingly and grudgingly it concedes in part the implications of that creed. This would be most astonishing and indeed very hard to explain were it not for the fact that the typical bourgeois is rapidly losing faith in his own creed.
This is verified by the very characteristic manner in which particular capitalist interests and bourgeoisie as a whole behave when facing direct attack. They talk and plead—or hire people to do it for them; they snatch at every chance of compromise; they are ever ready to give in; they never put up a fight under the flag of their own ideals and interests—in this country there was no real resistance anywhere against the imposition of crushing financial burdens during the last decade or against labor legislation incompatible with the effective management of industry.... Means of defense were not entirely lacking and history is full of examples of the success of small groups who, believing in their cause, were resolved to stand by their guns. The only explanation for the meekness we observe is that the bourgeois order no longer makes any sense to the bourgeoisie itself and that, when all is said and nothing is done, it does not really care.*13
We now have in front of us Schumpeter's 1942 prediction of things to come—and a most unpleasing prospect it is indeed (at least to those who think even tolerably well of capitalism). What can we say of this prophecy in 1974? Is Schumpeter's analysis even now being validated by the course of events or is it not? I take no pleasure in reporting to you my own conviction that the course of events is lending ever greater credibility to the Schumpeter thesis. I do not propose to repeat here each piece of evidence that leads me to that conclusion. But here are some samples.
Do we or do we not have a surplus of intellectuals (as defined by Schumpeter)? Are they or are they not, by and large, critical of the American businessman and of the system of which he is a part? Do they or do they not "nurse left wings and scowling minorities, sponsor doubtful or submarginal cases" (such as the lettuce boycott)? Do not these critics of capitalism largely control the world of the academy? of the media? of the pulpit? When did you last see a businessman treated sympathetically in a novel or a play? Whose name is better known to the American people: Ralph Nader or the president of General Motors or General Electric?
Can we find in the masses of the people any real understanding of the system that has heaped riches upon them or any instinct to defend from attack the central figure in that system, the businessman? Are they not, as Ortega has put it, the spoiled beneficiaries of a process they neither understand nor appreciate?
But neither of these would be of first importance if the businessman himself were even occasionally interested in the survival of the system, aware of what that really means, and willing to work for it. That he is not, in the typical case, any of these, most of the time, is more or less clear.
I offer in evidence the following examples: first, the tendency of the corporate leadership of this country to parrot the talk about the social responsibility of the businessman. With Adam Smith, I have never known much good done by a man who affected to trade for the public good. And, as Professor Milton Friedman has put it so many times, the way in which the businessman can best serve society is to try to maximize his profits within the law. Nothing is more clearly anticapitalist than the notion that the profit-directed activities of the businessman are antisocial, and the related notion that he can serve society only by eschewing that goal and directing his activities according to his (or some intellectual's) idea of the public good.
A second example is the response of the business community to the imposition of wage and price controls in the summer of 1971. For several years prior to that time, I had been collecting a folder of statements by leading businessmen demanding that such controls be established, and I have now added to that folder all of the statements from the same men (and their principal organizations) congratulating the President on his wisdom in imposing controls.
(It is of some interest to note that the first economist of note to congratulate President Nixon on his wisdom in imposing controls was John Kenneth Galbraith. Of course this compliment was a little backhanded; he noted that Nixon had opposed such controls throughout his political life but, as he put it, "fortunately the President is a man without principle or scruple, willing to do what is expedient and necessary." The fact is that Nixon took over a ship under heavy inflationary stress, induced by the unwise fiscal and monetary policies of his predecessors. It was as if the captain of the Titanic, immediately after his ship hit the iceberg, had turned to his second in command and said, "Now you've always wanted a ship of your own. Take over.")
Direct controls do not and cannot stop inflation (only an end to new-money-financed deficits can do that); they destroy the sensitive signal system that is at the center of a market economy; they are an economic absurdity and a moral monstrosity—yet we find them supported by some substantial part of the American business community. In fact, the response of the businessman to the general encroachment of government in his affairs has been similar to that predicted by Schumpeter and similar to the response of the native girl to Lord Jim's advances, described by Conrad as follows: "He would have ravished her, but for her timely compliance."
John Kenneth Galbraith and his friends have indeed taught the businessman well, and what they have taught him is to repeat the phrases that must eventually sound his own death knell. The capitalist fortress is indeed almost naked of defenders and is encompassed round with a host of enemies.
Are there no signs pointing in the other direction? Are there no bright spots anywhere? Must the Schumpeterian process work its way to its appointed end? Is there nothing that can be done? Is mine not a defeatist message?
I begin my reply with a statement by Schumpeter in the preface to the second edition:
This leads to the charge of "defeatism." I deny entirely that this term is applicable to a piece of analysis. Defeatism denotes a certain psychic state that has meaning only in reference to action. Facts in themselves and inferences from them can never be defeatist or the opposite whatever that might be. The report that a given ship is sinking is not defeatist. Only the spirit in which this report is received can be defeatist: The crew can sit down and drink. But it can also rush to the pumps.*14
As you would guess, I am suggesting that such as are inclined rush to the pumps. But is the situation really all that desperate? Are there any hopeful signs? The flow of human experience is always disturbed by eddies and cross currents and the cutting of new channels, and is always complex. There are some businessmen who are aware of and attempting to do something about the problem. Not all the intellectuals are critics of capitalism. But the flood tide is still close to what Schumpeter predicted it would be, and the outlook is anything but reassuring.
My self-assigned task here has been one of diagnosis, not prescription. I offer you in closing the only possible assurance of my presentation. It comes from that master student of human affairs, Adam Smith, and it was penned at a time when the outlook for capitalism was less bright than it is today. Here is what he had to say:
This frugality and good conduct, however, is upon most occasions, it appears from experience, sufficient to compensate, not only the private prodigality and misconduct of individuals, but the public extravagance of government. The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.*15
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