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Introduction
We’re kicking off a mini-series of selected studies on American capitalism. This week, it was announced that the US economy unexpectedly contracted in the first quarter of 2022. This comes as supply chain issues, inflation and other economic headwinds were already leading many to predict a recession in the second half of the year. If GDP growth ends up being negative for the second quarter as well, the recession will have snuck up on us ahead of schedule. We therefore thought it a fitting time to revisit some key topics in American economic history.
As a primer in this process, we selected Capitalism in America. This ambitious one-volume economic history of the USA weaves an entertaining story from the War of Independence to the early years of Donald Trump’s presidency. This post is about the book and not its authors, but it’s worth briefly noting that the authors are Alan Greenspan and Adrian Wooldridge. Greenspan is an economist who served as chairman of the Federal Reserve for four presidents from 1987 to 2006; he is therefore not just a historian of American capitalism but someone who actively shaped it, often controversially.
We think of him as a key voice of the post-Cold War Western economic mainstream, with added libertarian flavors from having followed Ayn Rand as a young man. At the time of the book’s writing, Greenspan’s co-author Adrian Wooldridge was a senior editor at The Economist, perhaps the leading journal of Western elite mainstream thought. In the case of Capitalism in America, the reader who knows about Alan Greenspan and The Economist can come to terms with their implied biases and move on to appreciating the work itself.
People of Plenty
The authors, as card-carrying members of the Western elite, begin the book by envisioning a version of the World Economic Forum being held in Davos in 1620. A theoretical debate about which of 1620’s great powers would dominate the world in coming centuries would ignore North America completely. The authors set out to explain why history took a different direction through today’s United States of America by focusing on the rise of its economic power. They tell a very entertaining story in which each portion of the story seamlessly ties in to the next.
Throughout this sweeping narrative, the authors stick to three key organizing themes:
Productivity: describes society’s ability to get more output from a given input
Creative Destruction: defines the process that drives productivity growth
Politics: deals with the fallout of creative destruction
As the authors view it, the territory of the USA has been blessed with an abundance of the three great factors of production: capital, land and labor. The geography is favorable to mobility and security, and the land is blessed with arable swaths and natural resources. Enterprising foreigners flocked and continue to arrive in huge numbers to man farms, factories, construction sites and offices. A wise constitutional order set up from the beginning secures stability and freedom, an important mix to facilitate economic risk-taking. Generation after generation, the reigning culture and conditions generated entrepreneurs who drove Creative Destruction as Joseph Schumpeter, who heavily influenced the authors, viewed the term.
In this context, Creative Destruction is viewed as the principal driving force of economic progress; existing businesses and practices are uprooted and productivity is increased by shifting society’s resources to areas that produce the highest returns (like new technologies). While the overall gains from this process outweigh the losses, especially for poorer members of society, the losses tend to be more visibly concentrated among groups or regions. In the authors’ view, this is when the realm of politics can get involved to stifle or offset Creative Destruction with tools like welfare programs or regulations.
In our time of political polarization and increasing radicalism of left and right, this economic framework is almost numbingly vanilla. We admit that it became a guilty pleasure to ingest this view of history as told by people whose worldview was crystallized before the twenty-first century. It was as if the old K-12 history curriculum was blown up to a graduate school level of data sourcing and analysis, but with an editorial view that would be unwelcome in almost every American institution of higher learning. The result is a highly entertaining story that follows the familiar steps:
Highly educated and affluent colonial society throws off colonial overlords in tax revolt but partially retains institution of slavery
Constitutional political order and tension between Hamiltonian / Jeffersonian economic vision puts country on trajectory of boom-bust growth
Civil War settles question of slavery and character of country as free-market capitalist and industrialist
Post-Civil War immigration waves of manpower and rise of high industrial society
Progressive Era and rise of government power by World War I
Brief respite of free market policies in 1920’s before Great Depression opens door to New Deal and forever changed relationship between citizen, government and markets
World War II revives economy and creates confident, homogeneous post-war order
More familiar post-war fluctuations between economic confidence and despair leading up to present day
Greenspan’s role from 1980’s on leads to titillating apologetics and unique takes in the storytelling
Throughout the familiar steps, the authors return to shifting balances between their three organizing themes to explain why events developed as they did. Almost every malaise is broken by the unleashing of striving entrepreneurs.
The Present and Future of Capitalism in America
We’ve already fessed up to the guilty pleasure we took in reading this out-of-fashion take on American economic history. We should stress that this pleasure was experienced in spite of criticisms we would apply to the analysis from both the left and right. For example, we think economics are important in the study of history. However, scholars like Greenspan can sometimes overemphasize economic considerations compared to geopolitical, social or cultural ones. In our view, a cohesive moral fabric and a self-sustaining national defense apparatus are just as important to the good life as a strong economic engine; they can also be a casualty of unfettered capitalism if left to the decision-making of purist libertarians.
In spite of this and other objections, we think it’s an extremely helpful exercise to ingest this coherent and highly factual view of American economic history. The authors try to be as objective and data-based as possible and to state their bias nakedly for the discerning reader to see. The narrative is also a great foundational platform that we can then zoom in on specific aspects of, which we will do with subsequent editions of our mini-series on American capitalism.
Finally, the book’s policy recommendations for the economic challenges of 2018 are still relevant today. The authors were concerned about overregulation and the country beginning to drown under the federal government’s debt due to the weight of entitlement spending. These concerns have only been exacerbated by huge government spending in response to the pandemic, supply chain breakdowns, rampant inflation and threats to the US dollar’s reserve currency status. The authors’ emphasis on sober fiscal responsibility and the empowerment of visionary entrepreneurs presents one possible route out of impending economic woes. Given the increasingly authoritarian and corporatist lean of mainstream elite opinion, these ideas may soon be more radical than they would have been when Greenspan was at the height of his powers. We live in turbulent but interesting times, and this mini-series on American capitalism will capture many such elements of the ongoing societal debate!
All the best,
The Citizen Scholar Team
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Discussion #38: Capitalism in America: A History, by Alan Greenspan & Adrian Wooldridge