The Commercial Republic - "Capitalism in America" Review

The Wall Street Journal
By Edward Glaeser

Does today’s economy foster the dynamism needed to create new capitalist heroes?

Advocates of economic freedom are losing a battle for the minds of American millennials. A recent YouGov poll found that the share of 18-to-29 year olds with a favorable view of capitalism slipped to 30% in 2018 from 39% in 2015. Socialism fairs equally well among the young, as shown by Sen. Bernie Sanders’s remarkable 2016 presidential run. Can anything convince future Americans of the superiority of free markets?

With “Capitalism in America” a towering figure of modern policymaking, former Federal Reserve chairman Alan Greenspan, is giving it a shot. He and the Economist’s Adrian Wooldridge have authored a sweeping tome that takes us from the Founders to the election of Donald Trump. Their work is an accessible overview of American business history, but also presents a case for capitalism.

The book starts with a charming thought experiment: “Imagine that a version of the World Economic Forum was held in Davos in 1620.” (I envisioned sessions about the Battle of the White Mountain’s effect on long-term government debt, or what the Little Ice Age meant for beaver-pelt prices.) Messrs. Greenspan and Wooldridge daydream about a forum focused on the question: “Who will dominate the world in the coming centuries?”

Many nations would have been candidates. China was by far the world’s largest economy. The Ottomans seemed about to burst through Vienna’s walls and smash into Western Europe. The Dutch and English were beginning to rule the oceans, and France, Europe’s largest economy, was emerging from the chaotic wars of religion and into the reliable hands of Henry IV and Cardinal Richelieu. By contrast North America would have seemed, at least to the panjandrums at Davos in 1620, like “an empty space on the map.” It had no prospects. Yet the United States would eventually become “the world’s biggest economy,” one that still “dominates the industries that are inventing the future.”

Geography and natural resources help explain America’s success. In 1800 Americans lived on the edge of an enormous continent, but the wealth of that continent was virtually unreachable. Capitalism helped bridge the gap. Messrs. Greenspan and Wooldridge highlight not only the well-known canal and railroad entrepreneurs who “added more than thirteen miles of track every day for forty years from 1870 onward,” but also the entrepreneurs of horseflesh, who “practiced horse eugenics with an enthusiasm that would have dazzled Francis Galton.” Entrepreneurs of the soil, including Eli Whitney, Cyrus McCormick and John Deere, ensured that ever-greater agricultural surpluses would fill the railroad cars and canal holds.

Above all, the authors celebrate America’s pragmatic human capital—those who built new technologies atop the ruins of old technologies. The book is replete with sketches of characters like Samuel Morse, Thomas Alva Edison and Henry Ford. They emphasize organizational geniuses such as J.P. Morgan, who assembled trusts and “twice saved the U.S. government from default.” Alfred Sloan enjoys the authors’ encomiums for promoting individual choice by giving “high-flying managers responsibility for operating” distinct General Motors’ divisions, from Cadillac to Chevrolet, while holding the managers of each group “responsible for their overall performance.”

The authors argue that our political institutions helped give birth to our capitalist economy. America’s “luckiest break” was that our country “was born in the age of the Enlightenment,” they write. We were “conceived in a revolt against a mercantilist regime” and the Constitution that went into effect in 1789 established a “unified common market with no internal tariffs.” The Scottish enlightenment, with its profound skepticism about unchecked state power, infused our Constitutional Convention and helped create “a fledgling democratic society that set strict limits on what the majority could do.”

The spirit of Adam Smith won a second victory after the Civil War, the authors assert, when “a modern commercial nation” triumphed over a “system of coerced labor” that “rested on foundations of unfathomable cruelty.” During the Progressive Era, our capitalist institutions survived a “revolt against laissez-faire,” partially because the Founders gave us an independent Supreme Court that “acted as a vigilant guardian of the rights of property and freedom of contract.” The Great Depression did generate an enormous shift, as “FDR inherited a highly decentralized political economy committed to flexible markets and transformed it into a Washington-dominated political economy committed to demand management, national welfare programs, and compulsory collective bargaining.” Yet despite those changes America enjoyed two economically magical decades after World War II.

This revisiting of America’s rise to greatness illustrates the power of unfettered capitalism, but many readers will be more interested in Alan Greenspan’s take on our own age, when pessimism is on the rise. Some argue that shared economic prosperity began to unravel in the 1970s, when manufacturers stopped employing as many less-educated men. According to this view, the asset-market booms of the quarter century between 1982 and 2007 distracted America from ominous trends like wage stagnation and the upward march of male underemployment.

Messrs. Greenspan and Wooldridge push the more positive view of a Reagan-era rebirth. Despite President Reagan’s “big failure” of “creating more national debt than all the presidents who preceded him,” they point to three big successes: “he broke the power of the unions,” he “built on Gerald Ford’s initiatives . . . to move the economy in a more pro-market direction” and he signed the Tax Reform Act of 1986. These reforms and other public innovations helped elevate a “new generation of entrepreneurs,” from Microsoft’s Bill Gates to Starbucks’s Howard Schultz.

Yet for more than a decade younger Americans have endured an economy that seems to be living in the past, taking better care of their parents’ generation than their own. That sour economic experience informs the enthusiasm for socialism among the young, and in the book’s penultimate chapter the authors finally address “America’s Fading Dynamism.” They broadly endorse the common “human capital” explanation for American economic weakness: “while the positive features of America’s education system have been eroded, the negative features have become more pronounced,” citing tests that rank American 15-year-olds at 17th in reading, 20th in science and 27th in math. Is it reasonable for Americans to expect to be richer than better-educated peers in South Korea and Germany?

The authors’ believe the best explanation for American stagnation is “the growth of productivity-suppressing entitlements” including Social Security, Medicare and Medicaid. Perhaps. I share their enthusiasm for reforming poorly designed entitlements, including raising the starting age for Social Security and Medicare. But I am not confident that entitlement reform will radically boost the rate at which new businesses are formed, or bring back jobs for millions of nonworking prime-aged men.

Messrs. Greenspan and Wooldridge seem skeptical about the view that “the IT revolution is disappointing compared with previous technology-driven revolutions.” In their view, “the IT revolution provides a chance of extending to the service sector the sort of productivity gains that we are used to in the manufacturing sector.” True, but the IT revolution also threatens to eliminate low-skill jobs in the service sector, just as previous revolutions eliminated less-skilled manufacturing jobs. This technological shifter offers almost as much peril as promise, unless a new class of entrepreneurs dreams up new ways of employing less-skilled labor.

Readers who already believe our future depends on a dynamic, free market will have their beliefs bolstered by “Capitalism in America.” Yet I suspect few millennial supporters of Sen. Sanders will read these pages, feel the scales drop from their eyes and suddenly believe that the answer is less government. Such conversions will require a new set of entrepreneurial heroes, whose careers could help make the case for human freedom—even to those who think that social inclusion is a higher goal than economic growth.

Alan Greenspan & Adrian Wooldridge
Capitalism in America