Friday, May 29, 2009

Why capitalism works

We continue to be in the middle of a frightening economic drama, one that is putting the core tenets of modern capitalism at the center of the global debate.

Is this the moment the Austrian economist Joseph Schumpeter had envisaged when he spoke of "creative destruction"? After all, it was Schumpeter who worried more than any other modern economist about what might be called the fragile condition of capitalism. . . His life's work concentrated on entrepreneurs renewing the economy through what he called "creative destruction."

Schumpeter embraced capitalism not as a reaction or as the second-best solution to the unproductive reality of utopian economic planning. Rather, he saw capitalism as the foundation of two complementary forces. The first was economic expansion. The second was its role in protecting individual freedom.

For Schumpeter, to sacrifice one was to imperil the other. More starkly, he would remind us in no uncertain terms that, whatever our present doubts, the only way freedom is secure for any individual is within a growing economy. In other words, political freedom depends on economic expansion.

As a general rule, only capitalism can create wealth and liberty at the same time. And, of course, capitalism can expand welfare faster than any other social or economic order has ever done.

From Schumpeter's vantage point, capitalism's very success allows rich societies to use government to relax the impersonal rules that govern markets, creating new rules that buffer citizens from the rigors of risk-taking and failure. In that sense, government invents for itself the task of mediating market outcomes.

No doubt, in the face of the continuing financial crisis, entrepreneurial capitalism is threatened. All over the world, people are giving greater emphasis to personal security. Their taste for assuming personal risk may be chastened, at least for the moment. This is an altogether rational and expected response.

Where that becomes troublesome, however, is the moment when government comes to be seen as the sole source of security. What we, the public, need to understand is that the best guarantor of security is not government. It's economic growth. While we want to believe otherwise, the cold fact is that government can't guarantee economic permanency. Nobody, and nothing, can.

Pragmatically speaking, we must figure out how to increase people's sense of security without making government itself bigger or more powerful.

Whatever road we choose, entrepreneurial capitalism cannot be revived or flourish if new government security programs end up attenuating the individual's ultimate responsibility to attend to his or her own welfare.

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