Capitalism in America: A History

“Capitalism in America is an unabashed, detailed defense of capitalism.”

Alan Greenspan was the widely-celebrated chairman of the Federal Reserve Board from his initial appointment by President Reagan in 1987 to his retirement in 2006. Although that celebration quieted a bit with the onset of Great Recession in 2008, it is rare to have a living legend state his views on how the U.S. economy works and that is reason enough to read Capitalism in America: A History. Having Adrian Wooldridge from the Economist as the co-author only strengthens the book.

Capitalism in America is an unabashed, detailed defense of capitalism. Does capitalism need to be defended? Yes. For example, a 2018 Gallup poll found that “Fewer Than Half of Young Americans View Capitalism Positively.” Among Americans ages 18 to 29, the poll found that 51 percent had a positive view of socialism while just 45 percent had a positive view of capitalism. Gallup noted that this result “represents a 12-point decline in young adults’ positive views of capitalism in just the past two years and a marked shift since 2010, when 68% viewed it positively.”

Greenspan argues that the best evidence that capitalism is the right economic system for the future is its great success in the past, and he uses the actual economic history of America as evidence. Greenspan writes that his book could have been subtitled “a history of progress” because “America’s economic history has been overwhelmingly a history of improvement. More Americans live better lives than ever before.”

As to the core reason for the success of capitalism, Greenspan boldly points to a commitment to “creative destruction.” Greenspan writes that “America’s greatest comparative advantage has been its talent for creative destruction. America was colonized by pioneers and forged by adventurers who were willing to take unusual risks in pursuit of a better life.”

Creative destruction is a term coined in 1942 by Joseph A. Schumpeter in his famous book Capitalism, Socialism, and Democracy. It was written in a time in which the fear of communism and socialism was quite real. It refers to the fact that wealth is created, and poverty is defeated, by stripping away the old ways of producing things and replacing them with better ways. Only through productivity growth can our standard of living be raised.

Most importantly, Greenspan argues that creative destruction brought about democratization; that is, the big changes in technology made new, inventive products available to and affordable by all. 

Electricity is a great example. After the science and technology for the alternating current system was discovered and developed by Nikola Tesla and George Westinghouse, Greenspan finds that “the amount of electricity that Americans used increased tenfold—from 6 billion kilowatt-hours in 1902 (or 79 kilowatt-hours per person) to 118 billion kilowatt-hours in 1929 (or 960 [kilowatt-hours] per person). Over the same period, the cost of that electricity declined by 80 percent.”

Comparable cost declines were enjoyed for many of the other new technologies of the times: “Ford reduced the price of the Model T from $950 in 1910 to $269 in 1923, even as he improved the quality.” The cost of steel produced with the Bessemer process also “fell sharply, reducing its wholesale price from 1867 to 1901 by 83.5 percent.”

This book, however, is more than a history of creative destruction. For example, Greenspan offers a history of the federal government’s increased role in the American economy which surged in the Great Depression. He is in the camp of those who say the New Deal failed to get the economy back on track. He points to the fact that unemployment was just as high in 1939 (17.2 percent) during the “Roosevelt recession” as it was in 1932 (16.3 percent) at the depth of the Great Depression.

As do many others, Greenspan argues that it was the Second World War that sparked economic recovery. The difference in outcomes of the Great Depression and Second World War is not, however, a guide to the correct level of government intervention. Rather, it points to the importance of the tone and nature of the federal government’s role in the American economy; Roosevelt actually turned his politics to the right so he could work in partnership with business to win the war.

Greenspan also reveals that the past era of creative destruction is a not-too-distant mirror for today. He reminds us that as the 20th century began America dominated the cutting-edge businesses of that day: cars, steel, oil, and electricity.

Today American business has done the same. America dominates, says Greenspan, in artificial intelligence, robotics, autonomous vehicles, and finance. He also highlights that five of the top ten firms in terms of market value are American: Apple, Google, Microsoft, Amazon, and Facebook.

Despite these strengths, America faces challenges because there are reasons that capitalism and, therefore, America’s continued progress, are at risk. Greenspan writes that “The most important reason is the growth of productivity-suppressing entitlements—the collection of social benefits (primarily Social Security, Medicare, and Medicaid) that Americans enjoy simply by right of being Americans.” 

He continues with the claim that “federal entitlements are crowding out domestic savings.” His concern is that government spending on entitlements will crowd out investment in new technology, which is crucial for the creative destruction that creates wealth and wellbeing.

The second reason capitalism is at risk is over-regulation which “leads to the bureaucratization of capitalism—and thereby kills the spirit of entrepreneurial innovation.” Chief among his concerns is the attempt at financial reform in the 2010 Dodd Frank legislation which he would like to see “retired” so that “government would no longer have to interfere with the banks’ primary economic function: to assist in the directing of the nation’s scarce savings to fund our most potentially productive investments.” That “function” is to fund the investments for creative destruction.

Entitlement reform has received ample debate over the years, and the repeal of Dodd Frank has gotten its share of attention from the current Congress, too.  Without offering new ideas on how to move the debate forward—without suggestions for compromise—the book leads the reader to a policy dead end.

While Greenspan does not ignore the harmful side of creative destruction, some readers will want more about the labor strife, worker safety, poverty, and pollution of the era. Moreover, for the book as a whole, do not expect the full case against capitalism, including issues of inequality, to be stated and rebutted therein.

Still, Greenspan has accomplished a great deal because, by showing what capitalism has achieved for America in the past, he has made the best case possible for keeping and improving capitalism for the future.