In the late 1970s and early 1980s, the American economy was in
crisis after years of stagflation. Mortgage rates were 17%, business
loans carried 20% interest rates and productivity had collapsed. On
April 21, 1980, Time magazine ran a cover story that asked
the question: Is Capitalism Working? Today, the crisis that the
American economic system faces is greater than that during the darkest
days of stagflation. In this opinion piece, George M. Taber, former business editor of Time magazine and author of the 1980 cover story, asks and answers the same question -- 29 years later.
The April 21, 1980, cover of Time magazine carried the
stark headline: Is Capitalism Working? The American economy was in
crisis after years of stagflation. The story recounted the ills:
Mortgage rates were 17%, business loans carried 20% interest rates and
productivity had collapsed. The article quoted Robert Lekachman, a
left-leaning City University of New York economist, as saying, The
central economic fact of our day is the declining vitality and élan of
capitalism and capitalists. On the opposite side of the political
spectrum, Chrysler Chairman Lee Iacocca was quoted as saying, Free
enterprise has gone to hell.
I wrote that cover article, which set out the troubles facing
capitalism in a crisis that shook the American economy to its roots.
The 12-page story, twice the size of a normal cover piece at the time,
outlined the history of capitalism and the case for it and against it.
There was no doubt about my conclusion, and I still agree with the
story's final sentence: For all its obvious blemishes and needed
reforms, capitalism alone holds out the most creative and dynamic force
that any civilization has ever discovered: the power of the free,
Today, the attacks on the American economic system are even greater
than in the darkest days of stagflation, and even fewer people are now
willing to stand up in defense of the economic philosophy that has its
roots in Adam Smith's Wealth of Nations, published in 1776.
Perhaps ironically, the period between the last and present crises
of capitalism was a two-decade long golden age of capitalism. The U.S.
enjoyed an unprecedented period of strong growth, minimal inflation,
low unemployment and great innovation. During that time, many other
countries also turned to freer economies. China in 1978 opened its
state-controlled economy to a greater role for the private sector,
while India took the same path starting in the mid-1980s. The collapse
of the Soviet Union in the late 1980s led to freer economies throughout
Every country brings to capitalism its own culture and history, and
the mix of state direction and private initiative varies from nation to
nation. The American model of capitalism is different from the Japanese
one, and the French or Russian ones are unique in their own way and
similar to none of the others.
Schumpeter's Creative Destruction
Stripped down to its core and at its best, American capitalism is
ideologically close to the theories espoused by Joseph Schumpeter, an
economist born in 1883 in what is now the Czech Republic and educated
in Austria. He taught at Harvard from the 1920s to the 1940s.
Schumpeter's most important work was Capitalism, Socialism and Democracy,
which was first published in 1942. The centerpiece of his thinking is
the concept of creative destruction, a theory based on earlier work
by the Russian Mikhail Bakunin as well as the Germans Friedrich
Nietzsche and Werner Sombart. Schumpeter, though, popularized it.
Creative destruction means that old established companies under
capitalism tend to lose their dynamism with time and atrophy under a
layer of corporate bureaucracy and complacency. Then entrepreneurs, who
usually have few links to the past, introduce bold and fresh ideas for
new products, manufacturing techniques, or distribution and displace
the old order. The process is often destructive, but also creative.
This corporate lifecycle has repeated itself again and again in
numerous fields: Ford Motor Company was innovative in the early 20th
century, but Japanese auto companies passed Ford and other American
auto makers in the 1970s; Sears Roebuck dominated U.S. retailing in the
1950s, but Wal-Mart has now eclipsed it; IBM in the 1960s reigned
supreme over mainframe computers, yet Apple and Dell ushered in
personal computers in the 1980s.
According to Schumpeter, innovation and entrepreneurs are the
driving force of economic vitality and growth. The implication for
American public policy is that government should foster policies --
such as low capital gains taxes and few barriers to starting new
companies -- that encourage entrepreneurs to practice their craft.
In Northern California during the golden age of capitalism, venture
capitalists and entrepreneurs combined to set off an explosion of
innovation. Business people with great ideas found capital and started
breakthrough companies. Naturally all of the new corporations did not
succeed, but enough did that it was worth the risk. People such as
Microsoft's Bill Gates, a Harvard dropout, and Apple's Steve Jobs, a
Reed College dropout, were the epitome of creative destruction at work
and helped start the information age. Both became billionaires along
the way, and American society gained an inestimable benefit.
Silicon Valley also attracted ambitious foreigners such as Sequoia
Capital's Michael Moritz, a venture capitalist born in Wales and now
another billionaire. I remember the first time I went to Silicon Valley
in 1982 as the Time business editor. I was trying to figure
out what made this the real Magic Kingdom and was astounded, among
other things, by the large number of Asians and Europeans starting
companies there. When I asked the founders why, they invariably told me
it was because it was so much easier to start a company there than it
would have been at home in South Korea or France. During the last
decade, foreigners have started more than half of all new Silicon
Valley companies. This gives the U.S. a valuable influx of talent that
continues to benefit its economy.
The Weakest Link
The Achilles heel of capitalism, though, has always been the
business cycle of boom and bust, or put another way, greed and fear.
The problem has been growing more severe in recent times because of
increasing national or international financial crises. A study by Barry
Eichengreen of the University of California Berkeley and Michael Bordo
of Rutgers found 139 such crises between 1973 and 1997, while only 39
between 1945 and 1973. This appears to be the unexpected, and perhaps
inevitable, downside to the globalization of international capital
markets, a development that on the whole has been good.
No doubt many mistakes were made in the U.S. during the past two
decades. Financial regulation was too lax and was often not enforced.
The relationship among government regulators, companies being watched,
and legislative oversight committees was much too cozy. Salaries in the
financial sector were shameful. It is now painfully obvious that
bankers and other financial players had little or no understanding of
the risk of investment derivatives that have been the centerpiece of
the crisis. Perhaps the wisest statement to come out of the walkup to
this mess was Warren Buffett's warning that derivatives were financial
weapons of mass destruction.
No government anywhere can just ignore what is now happening to the
economy. The public demands action. Policymakers today, however, just
as Roosevelt's brain trust during the New Deal, are operating without a
playbook. Lots of sometimes-contradictory stimulus measures are being
tried, and some may do more harm than good. The basic problem with the
U.S. economy at present is a lack of public confidence, and that will
only be solved with a tincture of time. The experiences of the long
Great Depression and Japan's Lost Decade show that problems of
confidence are solved only slowly. Well-intentioned, but unwise,
changes in the nature of American capitalism could do damage that will
be felt for decades.
Public officials searching for solutions are likely to look abroad
at other free-economy models and try to adapt them in this country
without sufficient appreciation for the historical and cultural
differences between the countries. The most attractive model may be the
French one. In the French version of capitalism, the commanding heights
of both the public and private sector are in the hands of an elite
group of officials who have attended the country's Grandes écoles
and often know each other very well. Why not let a nation's economy be
ruled by the best and brightest, while slightly reducing business
freedom in order to tame the business cycle?
I worked in France as a journalist for three and a half years in the
mid-1970s and saw its capitalism up close and personal. I have never
seen a more talented group of top civil servants. Many are brilliant.
The nation's academic elite strives to get top civil service jobs and
rarely goes into the private sector. That system, though, has been part
of French culture and society for hundreds of years, going back at
least to Jean-Baptiste Colbert, Louis XIV's finance minister.
The situation in the U.S. is totally different. Few of America's
best students seek lifetime jobs in government, although many may go to
Washington for a few years. You can't run the French system in the U.S.
without the French education and class infrastructure plus its mores.
In the same way, it would be hard to glue America's creative
destruction onto French culture. I recall many conversations with young
French people three decades ago when they complained about how
difficult their government made it for them to start or run a private
business. The country that coined the term entrepreneur actually does a
bad job of fostering them.
As Washington policymakers search for ways to solve the current
economic crisis, it is crucial that they keep in mind their country's
heritage and tradition. The American brand of capitalism rests on
creative destruction, innovation and, ultimately, entrepreneurs. It is
impossible to rebuild the superstructure of U.S. prosperity by
destroying its foundation.