The Instabilities Of Capitalism

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Excerpted from What Capitalism Needs: Forgotten Lessons of Great Economists by John L. Campbell and John A. Hall, on sale September 2, 2021. © Cambridge University Press 2021 and reprinted with permission. All rights reserved.

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The Instabilities Of Capitalism

Conventional economics assumes that markets tend toward equilibrium – that is, that problems such as slack demand, unemployment, or even financial crises such as that of 2008 will eventually resolve themselves. We do not share that assumption, which is why we believe that state capacities and social cohesion are necessary for capitalism’s well-being. Nor was that assumption shared by two of the great economists, Joseph Schumpeter and Karl Polanyi.

Schumpeter disagreed with most economists of his day because he saw capitalism as a process of continuous disruption, not equilibrium. He insisted in Capitalism, Socialism and Democracy that the hallmark of capitalism is inevitable change as entrepreneurs develop new products, technologies, and production methods that replace the old ones. He called this the process of “creative destruction” and viewed it as the routine essence of capitalism.31 He also believed that, as capitalism evolved, the process of creative destruction would shift from the hands of individual entrepreneurs to those of large, centralized corporations. So, for instance, Alexander Graham Bell invented the telephone, which begat the very innovative Bell Telephone Company (now AT&T) and Bell Labs, its phenomenally creative technology incubator.

As Schumpeter saw it, there were two problems here. First, with the development of larger, more bureaucratized firms, economic decision making would become routinized and rationalized, slowly extinguishing the creativity required for entrepreneurial breakthroughs. But the second and far more serious problem was that the growing dominance of ever larger corporations would eliminate small and medium sized businesses, and eventually the innovative bourgeoisie, as a class. Their demise would pave the way for intellectuals advocating socialism. So creative destruction had revolutionary, as well as routine, implications for capitalism. His prediction that centralization would lead to socialism has proved to be essentially inaccurate. But the point that capitalism involves continual disruption has gained in salience since his death.

The thinker who most fully realized what the societal consequences of continual economic disturbance would mean was Karl Polanyi, who had also experienced the disruption of the First World War and the chaos of the interwar period. In The Great Transformation, published at the end of the Second World War, Polanyi argued that the development of capitalism involved a “double movement,” whereby the problems created by liberal capitalism, particularly for the working class, would create counter-movements to alleviate them. One such counter movement was Soviet-style socialism, rooted in an antidemocratic Marxist-Leninist ideology. An alternative and wholly repulsive countermovement on which the book concentrated most was fascism, as seen in Italy, Germany, and Japan.35 This involved the state cracking down on labor unions, intervening in the economy in harsh ways, and excluding religious and ethnic groups from politics and society. Fascism was thus firmly linked to nationalism of the worst kind, infused with deep distrust of other nations and international institutions. For Polanyi, “[f]ascism, like socialism, was rooted in a market society that refused to function.”36 He sought for a different type of counter-movement – one akin to what we would call social democracy. His hope was that a more benevolent type of capitalism would prevail, with democratic politics holding sway over the economy and mitigating its worst effects. In such a society, all social groups would be included in the political system, their voices heard and respected by elites.

Mitigating The Instabilities Of Market Society

The state would respond to problems caused by the market by providing legal protections for workers and social welfare programs for the poor. President Franklin Roosevelt’s New Deal was one inspiration for his vision, but so was the democratic socialist movement he had seen in the 1920s in Vienna.

Polanyi argued that two things were required to mitigate the instabilities of market society: One was a state with the capacity to disarm capitalism’s self-destructive potential; the other was the sort of social cohesion afforded nations by institutions that provided voice for its many stakeholders and by the possibility for social mobility and economic prosperity. In this regard, Polanyi had a clearer reading of Smith than conventional economists – a reading that appreciated Smith’s recognition that the success of capitalism depended on more than the invisible hand of the market.37 Polanyi’s Jewish background certainly sensitized him to questions of inclusion and exclusion. In short, he recognized that the state was necessary for saving capitalism from itself and for facilitating social cohesion. Through institutionalized voice, the forces of social cohesion could help to ensure that the state did what was necessary to sustain capitalism and distribute its benefits widely throughout the population. This was the essence of what we would call his social democratic vision.

We must note that no book on the instabilities of capitalism could be complete without mentioning Karl Marx. No thinker exposed the cruelties of exploitation more graphically, while his emphasis on class structure remains at the core of any sociology of capitalism. But we do not base our argument on his work for several reasons. First, he refused to accept that state power can affect capitalist dynamics. He believed that capitalism always dominated the state, never the other way around. In this regard, he was simply wrong. Second, the experience of two world wars has made it obvious that peace among nation-states is a necessary condition for capitalist prosperity. Marx was silent on this issue. Third, Marx’s belief that capitalism was doomed and prone to revolution has also been proven to be wrong. The system can be and has been subject to reforms that have allowed it to survive for well over two centuries, albeit in different forms. In particular, the crucial problem of overproduction and underconsumption that Marx worried about can be counteracted in various ways, not least by the creation of new “needs” – that is, the creation of goods designed to achieve the status distinctions of the societal escalator.