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Why Do People Say Bad Things About The Capitalist System That Delivers Superabundance?

Consider this chart. It appears in a book entitled A Farewell To Arms: A Brief Economic History Of The World and illustrates the worldwide change in personal income over 3000 years.

We can think of increased personal income per person as pleasurable progress for all. Increased income is a proxy for many life improvements: better food and beverages, better shelter from heat and cold, better health and better healthcare, better education, better jobs, better transportation, better entertainment, expanded knowledge, greater freedom, and many more in a long list that covers all of life.

As the chart shows, the progress is recent. There was no progress in income per person for the first 2800 years or so depicted in this chart, and then a high energy surge of almost exponential growth in the most recent 200 years. The pivot point is the invention and introduction of capitalism. 

The pivot is often labeled “the Industrial Revolution” (as it is in our chart), referring to new forms of physical capital such as steam engines and factories that proved capable of producing more and better goods at lower and lower prices and creating the jobs that paid the wages that increased income per person and gave individuals the opportunity to become consumers. It was a technological revolution, a knowledge revolution, and, most importantly, an economic system revolution, the switch to capitalism.

Over the 200 years since the switch, capitalism has delivered more than personal income growth; it has delivered superabundance. That’s the term employed by researchers Marian Tupy and Gaye Pooley in their book of that title. Superabundance is defined by the phenomenon of us each needing to spend less and less time working to purchase more and more goods and services. It’s a new economics, not of scarcity but of abundance.

A similar story is told by Hans Rosling and Anna Rosling Rönnlund in their 2018 book, Factfulness. They provide us with long lists of “good things that are getting better, and bad things that are decreasing”. The former list includes child cancer survival, access to education, women’s rights, clean water, literacy and democracy. The latter list includes child labor, hunger, smallpox, oil spills, and many more.

These and many similar books and papers provide extensive data compilations regarding the improved lives we all enjoy as a result of capitalism. So why do so many people – students, intellectuals, democratic politicians, writers, celebrities, and cultural influencers in general – speak so badly of capitalism?

The authors of the books we’ve quoted put it down to human psychology, that we are wired to be apprehensive, skeptical, and negative even in the face of incontrovertible evidence to the contrary. Our negative affect comes from our time roaming around prehistoric forests in constant fear of being attacked by some predator. The Roslings point to psychology research that indicates that humans have a gap instinct. We are prone to divide the world in two (e.g. developed economies versus underdeveloped economies, or rich versus poor) and focus on the gap between the two extremes of perception we have just created. We don’t see a continuum and we don’t see continued progress for everyone.

It’s a little hard to accept this psychological perspective in the 21st Century, when there is so much data to refute it, but if we are looking to psychology for an explanation, we can certainly look at envy. According to Helmut Schoeck (in Envy: A Theory Of Social Behavior), envy is universal among humans.

Envy is a drive which lies at the core of man’s life as a social being, and which occurs as soon as two individuals become capable of mutual comparison.

From a perspective of envy, the absolute gains that capitalism brings are ignored and the perception that some gain more than others prevails. Envy itself is an individual emotion – a lonely one since it’s a rejection of relationships – but the great danger occurs when a culture of envy is cultivated. That’s exactly what happens in our educational institutions, both universities and high schools and even elementary and middle schools. A class of educators, resentful because they feel underpaid and underappreciated in the capitalist system that rewards innovative value-creating entrepreneurship more highly than institutional maintenance, teach our children that capitalism is unfair, extractive, and exploitative. 

The teachers are reinforced by the communicators in the media, the writers, influencers, and talking heads who find that anti-capitalist content is amenable to their customers who have passed through the channels of education and become permanently misguided by the perspective they absorbed there. The media continuously reinforce the disaffected envy of their audience, deepening it, extending it, and distorting reality even further. The negativity instinct in the media leads to selective reporting and downright distortion of facts.

And then the politicians and government bureaucrats pile on. Politicians have no interest in progress and improvement. Their stock in trade is to point out how the opposition is failing – undermining or destroying prosperity. They also feed on the idea of the gap – that their constituency suffers by comparison to whomever the politicians decide to compare them to: women to men, non-whites to whites, Southerners to Northerners, less-educated to more-educated, my constituents to your constituents. It’s always about the gap for politicians. And the notion of the gap leads them to anti-capitalist rhetoric: capitalism is responsible for these gaps, that wouldn’t otherwise occur. There’d be equality under alternative systems. 

Government bureaucrats can claim to fix the gap problem in a different system that they run. Call it socialism, call it public-private, call it interventionism or regulationism, call it the entrepreneurial state. Governments are anti-capitalist because capitalism gives no role to government. Government can divide the pie, but only after capitalism has created the recipe for the pie, assembled the pie ingredients, baked the pie, served the pie, accepted and incorporated the feedback of the consumers of the pie, and nurtured the broad and deep market for pies that generates the commercial revenues that governments can then tax and redistribute. Politicians and bureaucrats must condemn capitalism so that they can offer their so-called solutions to the problems they claim capitalism causes.

We have a deep and wide circle of groups willing to say bad things about capitalism: educators, intellectuals; the students and others whom they influence; the media who act as their cheerleaders; and politicians and bureaucrats whose professional incentives are to undermine the popularity of capitalism in order to justify their own anti-capitalist ends and means. Together, they represent a formidable array.

There isn’t a word for fans of capitalism. If we use the word “capitalist”, it’s perceived as derogatory. Whatever the name for fans of capitalism, we need them to be confident, vocal, well-armed with data, and positive and persuasive in its presentation. We need to strengthen the pro-capitalist mentality.

Can Capitalism Survive Beyond 2021? Yes! A New Generation Of Entrepreneurs Will Keep It Refreshed.

Economist Joseph Schumpeter famously asked, “Can capitalism survive?” 

His next sentence: “No, I do not think it can.”

This was back in 1942, and socialism was in the ascendancy. It feels somewhat similar in 2021, given the economic policies of the Biden administration, and the money-printing activities of the Federal Reserve, the ECB and Central Banks worldwide. 

Yet the problem Schumpeter identified was not one of economics, but one of people. He thought that capitalism depends on broad popular support, but saw that it would breed its own enemies, and that its beneficiaries would fail miserably in defending the system that brought them wealth and comfort.

The most visible enemies of capitalism, in Schumpeter’s analysis, are intellectuals. Although he was an intellectual himself – employed as a university professor – he took an extremely dim view of the intellectual class. Intellectuals are a nuisance for capitalism. In Schumpeter’s phraseology, they lack the “firsthand knowledge” that only “actual experience” can bring, and so they are envious onlookers, purveyors of uninformed criticism.

The man who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.… All those who are unemployed or unsatisfactorily employed or unsatisfactorily unemployable drift into the vocations in which standards are least definite or in which aptitudes and acquirements of a different order count. They swell the host of intellectuals … whose numbers increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment. And it often rationalizes itself into … social criticism … [and] moral disapproval of the capitalist order. 

Capitalism, Socialism and Democracy, Joseph A Schumpeter

Capitalism creates sufficient wealth for the economy to support positions for intellectuals who do not produce, merely comment, and, as a result, the system comes under attack from those whose very occupations are made possible by the efforts of the entrepreneurs and capitalists who drive the economy in a ceaseless process of innovation, improvement and wealth creation.

But Schumpeter’s analysis goes beyond the commonplace observation that intellectuals are anti-capitalist. His argument is more complex: that capitalism’s success undermines the social institutions that protect it, creating “conditions in which it will not be able to live”.

Capitalism operates not primarily for the wealthy, but in the interests of the average person. Capitalism shortens their workweek, delivers leisure, excellent affordable and fashionable clothing, appliances of every kind, entertainment and education. This progress, in Schumpeter’s analysis, is the work of a minority: creative entrepreneurs who convert scientific discovery into items of pleasurable experience and valued benefits for customers. Capitalism enlists these entrepreneurial individuals of unusual talent and energy.

But these bold spirits become submerged. As capitalist corporations become bigger due to their success, they add layers of salaried employees – the “organization men” of capitalism – and the spirit of capitalism withers because these employees do not have the entrepreneurial spirit of founders and owners. These are the individuals who benefit from the system but fail to defend it from the intellectuals’ attack. These are the middle managers and bureaucrats within firms, accountants, engineers, systems wizards, marketing analysts, media manipulators, laboratory, technicians and associated technical experts who are paid and rewarded directly with the fruits of capitalism, yet don’t think sufficiently deeply about the system to develop an appreciation for the benefits it provides them.

Built-in Self-Destruction?

The self-destruction is built-in to capitalism in Schumpeter’s view. The system depends on general popular approval, which you’d think it would receive, given that capitalism improves the life of everyone who participates. However, there is a transitional element to the progress that capitalism brings, and it’s one with a detrimental effect. As the large corporations grow, they hire more and more administrators, drawing from a pool of individuals who, in the past, would have been entrepreneurial proprietors of smaller capitalist enterprises, what today we disparagingly call small business. Capitalism is, in this way, making progress that is self-destructive. Capitalism declines into administrative routine.

The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and “expropriates” its owners, but in the end, it also ousts the entrepreneur and “expropriates” the bourgeoisie as a class which in the process stands to lose not only its income, but also what is infinitely more important, its function.

Ibid

And what about the leaders of the large corporations who perpetrate this “expropriation”? They come to believe that, in the era of big government, the best way to protect their interests is cronyism, a sort of business-controlled socialism in which the profits of the big companies are preserved, while the risks are socialized via legislative and regulatory “protections” enacted by the state.

A New Entrepreneurial Resurgence.

Schumpeter’s pessimism can be quite persuasive as one observes the decline of capitalism today into bureaucratic corporations integrated with an even more bureaucratic welfare state that promotes dependency over initiative, creativity and hard work. 

But his analysis is too one-directional and does not accommodate feedback loops. The corporate administrators and technocrats will become unfulfilled, bored and alienated. They will not accept that all they can expect is the wage that is paid to them for their labor hours. They will observe that the entrepreneur can obtain market rewards from many other sources, including capital from investors or loans from banks, and eventually returns on equity and on creativity. Entrepreneurship also opens up new streams of psychic and life rewards, from a sense of achievement to purpose and meaning, and the comradeship of working in highly motivated entrepreneurial teams. Life is better for entrepreneurs.

Capitalism has recently made new advances that reverse the trends that Schumpeter observed – what he called “automatizing progress”, i.e. taking the vibrantly creative entrepreneur out of the process of economic progress and substituting routinized work methods. Now, new forms of productive capital enable more individuals to choose the entrepreneurial route, by harnessing the tools of the internet, including open source and low cost software, networking systems to organize decentralized innovation, and newly capable ecosystems such as IoT. Entrepreneurs can become designers of new consumer experiences and of new markets. They can innovate by connecting things rather than building or inventing them. They can connect devices and sensors and software and data streams to personalize experiences for customers. It does not require the resources of a giant corporation, and it often does not even require a lot of financial capital (and, when it does, there are a myriad of new sources).

Today, it is far easier to seize the emotionally fulfilling high ground of entrepreneurship, and to reject the stultifying bureaucracy of corporate process and routine and hierarchy. People can substitute the joy of creativity and initiative for the alienation and insecurity of the cubicle and the spirit-draining scheduled meeting on Microsoft Teams. 

A new generation of entrepreneurs and their firms is arising and will defy the decay of the capitalist spirit that Schumpeter anticipated. 

66. John Tamny On America’s Uniquely Productive Entrepreneurial Flywheel

The flywheel is a robust and powerful mechanism so long as restrictive regulation by government and failures of imagination by capitalists do not slow it down.

John Tamny speaks articulately with Hunter Hastings about the uniquely American entrepreneurial flywheel in Economics For Entrepreneurs podcast #66.

Key Takeaways and Actionable Insights

A growth business is what John Rossman, in episode #50, termed a flywheel. Using amazon.com as an example, he gave us this simple image.

Flywheel Economy Diagram

The flywheel looks simple, but in reality it’s quite nuanced. Lower prices and a great customer experience will bring customers in, Bezos reasoned. High traffic will lead to higher sales numbers, which will draw in more third-party, commission-paying sellers. Each additional seller will allow Amazon to get more out of fixed costs like fulfillment centers and the servers needed to run the website. This greater efficiency will then enable it to lower prices further. More sellers will also lead to better selection. All of these effects will come full circle back to a better customer experience.

John Tamny sees the American entrepreneurial economy as a beautiful and productive flywheel.

Why are Americans so entrepreneurially focused? We descend from “the crazies” – the other thinkers who came from around the world, dissatisfied with their lives, and willing to cross oceans and borders to get to a place that offers no security but offers freedom. They took the ultimate entrepreneurial leap. We got the nut cases. Steve Jobs, for example, was of Syrian descent. Could he have started Apple in Syria? No.

John Tamny's Entrepreneurial Flywheel

Click on the image to Download the PDF

Entrepreneurs lead us to a better place.

John’s definition of an entrepreneur is someone who has a vision that everyone else thinks is ridiculous, yet they follow it anyway. They have no time for the way things are done today. They want something different. And to win consumer acceptance, what’s different must also be better. So they quite literally lead us to a better place. Horse-drawn carriages weren’t enough, so Henry Ford gave people something different. Everyone wanted Blackberry phones when Steve Jobs brought out the iPhone, and he quickly demonstrated its superiority. Every entrepreneurial act is speculation – there is never certainty that people are going to want the new product. That’s what is so important about entrepreneurs.

Entrepreneurs need to attract intrepid finance and intrepid financiers.

Silicon Valley is littered with VC’s who turned down Facebook, and turned down Amazon. Founding entrepreneurs think differently and have a vision that is far out of the norm, and they need to be matched with financiers who can be strong supporters and collaborators on the path to a better place. Irrespective of whether it is from Wall Street or Sand Hill Road, or from visionary friends and family, it’s critically important that we figure out a way to get financing to brilliant people. Government restrictions on entrepreneurial activity are certainly barriers to growth, but so is failure of imagination on the part of capitalists.

Intrepid lending takes place far away from banks. Unspent wealth is the source, and the more unspent wealth one person has, the more risks they can take.

We tend to complain about the antiquated and sclerotic banking system, but it has nothing to do with entrepreneurs and innovation. Banks make loans to entities they know will pay them back. Entrepreneurs fail 90% of the time. Banks want nothing to do with innovation.

Those with unspent wealth are the most crucial people in the economy when they match their unspent wealth with entrepreneurial talent and vision. The more unspent wealth they have – and the less the government takes away from them in taxes – the more intrepid they can be in investing it. When we tax away the wealth if the richest, we tax away the most important wealth of all. – that which has the highest odds of being directed towards new ideas that, while they look promising, have high odds of failure.

More and more of us have the opportunity to become entrepreneurs, if we harness the flywheel of original ideas that attract intrepid capital.

One of John’s many books, The End Of Work, describes how we are all now so enabled with interconnectivity to resources that we have the chance to make money by doing what we love. Our passion can become our job. If we are able to imagine a future place that is better – that improves the lives of individuals – we can create a growing business. The more of us who can do this, the more we grow the whole economy – which, after all, is made up of individuals. If we can also attract that intrepid capital that John refers to, growth becomes faster and higher.

Besides The End Of Work: Why Your Passion Can Become Your Job, John’s books include Popular Economics: What The Rolling Stones, Downton Abbey and LeBron James Can Teach You About Economics, and Who Needs The Fed: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America’s Central Bank.

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