How Capitalism Survived The Twentieth Century


There is no doubt that decision making in a market, as opposed to decision making by plan, offers one continuing and eventually overwhelming advantage: People find out when they are wrong, in ways that cannot be gainsaid. Greed is the cleanest of the vices, because it is the most simply rebuked by reality. The bureaucrat can cover his rear, the leader can send dissidents to the psychiatric ward, the lecher can look for another girl on another street, the Oblomov can roll over and go back to sleep—but the merchant loses his stake and is, in the old English phrase, wound up. The incentive structure is in every way rational and useful. As Norton Long discovered, when you order the electrical-equipment makers to make fractional-horsepower motors, you get what they make; when you raise the price, you draw newcomers into the business of making fractional-horsepower motors. The price information created in a market offers business people recurring chances to become winners. Its unique and indispensable value, however, is in changing the behavior of losers. For what really kills enterprise—and ultimately societies—is the inability to learn from mistakes and to cut losses.

Winston Churchill in a famous aside once said that democracy was the worst system of government except for all the others, and the spread of a similar attitude toward the market as a form of economic organization has given the word capitalism a more positive aura than it has ever enjoyed. For generations the defense of capitalism rested upon the notion that the system threw up its own ameliorations: labor unions and social security, wages and hours legislation, pensions, medical benefits, workers’ compensation, and the like. The economist Joseph Schumpeter, looking at the world from Harvard with clear, sardonic vision, doubted that these kindnesses were in fact a benefit; eventually, he thought, they would overload the system with political demands for freebies. And indeed, several of the better advertised “welfare states” of the pre-war period, notably Uruguay and New Zealand, have fallen into serious decline in recent years, probably to be joined in the near future by Denmark and the Netherlands, which are in process of exhausting their credit and natural gas reserves, respectively, to provide unnecessarily generous support for the unproductive.

The new defense for capitalism—in the United States, in Britain, and especially in France, where intellectual fashion has swung 180 degrees—is a libertarian attack on planning, a return to Adam Smith’s eighteenth-century “invisible hand,” which assures that a community of people all asserting their own self-interest will achieve the optimum result for the group. No one who looks around the world can seriously doubt the recent assertion in The Economist “not just that the market economies have achieved, over a period, higher living standards, but also that they run much more smoothly....Markets are much better than bureaucrats at finding out what people want, and then providing it.”

The attack has, inevitably, gone to excess. There can be no capitalism (or any other economic society) without what Milton Katz of the Harvard Law School has called a “legal order.” Someone has to establish uniform weights and measures, the measuring instrument of money, and courts for the enforcement of contracts. For such services the government is entitled to be paid, and there are many reasons the price should be more than just taxes. The function of law, McGeorge Bundy told a convocation of law professors while he was still dean of the faculty of arts and sciences at Harvard, is “to prevent the natural unfairness of human society from becoming intolerable.” The excellence of the markets at delivering information that allows producers to find and satisfy the desires of consumers does not mean that the decisions of the market must be allowed to determine how grandly the winners win and how desperately the losers lose. Consumer sovereignty is not worth much to the polity in a poor country where the top 2 percent of the income distribution has all the votes.


In a period when capitalism rides high, moreover, the most active players begin to believe that the game exists for its own sake. “All nations with a capitalist mode of production,” Marx wrote in 1864, “are seized periodically by a feverish attempt to make money without the mediation of the process of production.” Like the 1920s, the 1980s have seen feeding frenzies in the stock markets (and now in the commodities markets too), and quite apart from all the other unlovely thoughts this spectacle inspires, the activity is wasteful. Market capitalism has repeatedly demonstrated itself as more efficient than the known alternatives, but the business cycles it creates cause misallocation of resources and losses in production as well as human pain. Like the South, the enemies of capitalism will rise again.