Capitalism as Creative Destruction

Writing in The Wall Street Journal, economic historian Amity Shlaes reviews H.W. Brands' American Colossus: The Triumph of Capitalism 1865-1900, arguing that "the lesson of the late 19th century is that genuine capitalism is a force of creative destruction":

One capitalist idea (the railroad, say) brutally supplants another (the shipping canal). Within a few generations—and in thoroughly democratic fashion—this supplanting knocks some families out of the top tier and elevates others to it. Some poor families vault to the middle class, others drop out. If Mr. Brands were right, and the "triumph of capitalism" had deadened democracy and created a permanent overclass, Forbes's 2010 list of billionaires would today be populated by Rockefellers, Morgans and Carnegies. The main legacy of titans, former or current, is that the innovations they support will produce social benefits, from the steel-making to the Internet.

Read the whole thing here. Shlaes discusses Franklin Roosevelt's economic legacy and the death of classical liberalism with Reason's Nick Gillespie right here.

Comments

[Flex Nasty B.I.G.]

Yes, of course, but try talking to the shrieking masses about this and see how far you get.

I've pretty much given up on advocacy. My hopes now lie in competitive governance - the idea that there is a market-like process in which capital and people flow to countries with good policies, and away from countries with bad policies. See the excellent blog Let a Thousand Nations Bloom.

[Citizen Nothing]

Isn't this just the Free State idea writ large?

[Pro Libertate]

The concept of all of the states being "laboratories" for various laws and policies is an old one and, back when we had a truly federalist system, was part of the reason the states had autonomy in most areas.

[IceTrey]

That's why we need to repeal the 17th amendment.

[Flex Nasty B.I.G.]

Right, except that's pretty much over in the U.S. since the federal government has essentially subsumed the states. I was talking about global competition between countries.

[ph]

actually, the states as laboratories idea was a product of the progressive era that had nothing to do with restraining the federal government. rather, the idea was that the states should embark on grand projects in scientific socialism in order to find out which top-down policies worked the best. then, those policies could be imposed on the backwards states.

[heller]

Except that the political market-ness of a country is retarded by the power of its state, just like real markets are. History has proven that statist systems can't be stopped from the inside, usually external revolt is the only way to bring them down.

[P Brooks]

Oddly enough, I was just reading a Bob Herbert excretion, a "review" of a book by a couple of academics about how a shadowy cabal of billionaires has skewed the conduct of the nation in order to guarantee their nefarious wealthocracy.

Apparently, Herbert is wholly unfamiliar with the notion of "regulatory capture".

[Old Mexican]

It was Joseph Schumpeter who coined the phrase "Creative Destruction."

[buddha]

Yes, that's mentioned in the review

[BakedPenguin]

There is no more creative destruction. Destruction is too disruptive and antisocial. Now, we're going to give crappy businesses tax money taken from efficient businesses so nobody loses jobs that are no longer useful.

GM is starting to remind me of the Eastern bloc automotive plants, ca. 1992.

[IceTrey]

Unless of course the destruction is through eminent domain.

[Mr Whipple]

I keep hearing people, mostly on CNBC, say how we need stability in the markets. We don't need stability, we need integrity. People are losing faith in the markets. The "best" investors seem to be the ones that can accurately predict what the Fed is going to do. I suppose since Jamie Dimon is on the Board of the FRBNY, he gets a "heads-up".

[P Brooks]

Destruction is too disruptive and antisocial.

And totally not fair.

[JP Morgan]

Pay no attention to my too big to have been destructed bank.

[Old Mexican]

One capitalist idea (the railroad, say) brutally supplants another (the shipping canal). Within a few generations ? and in thoroughly democratic fashion ? this supplanting knocks some families out of the top tier and elevates others to it. Some poor families vault to the middle class, others drop out.

I don't subscribe to this zero-sum game scenario the author has posited. In the case of the canals vs rail struggle, the fact is that the few investors/owners of the canals would stop receiving the income from shipping, but that does not mean they would suddenly slip into penury.

The advantages of rail would actually be felt much quicker than "a few generations" as goods travel distances much quicker and cheaper. Even displaced canal workers would quickly find work as railyard handlers and loaders.

The "creative destruction" is actually a process of economic improvement. What actually causes poverty and economic stagnation is the "destructive creativity" of government sages and wisemen. You know, the kind of people Tony and Chad venerate.

[doomboy]

The railroads in the 19th century . . . pure, unfettered free-market capitalism there. No government involvement in right-of-way acquisition at all. No abuse of government-protected monopolies either.

I imagine the canal makers were just as bad, but it would be great if the celebration of free-market capitalism could use examples of actual, free-market capitalism.

[Barry D]

Yeah, the companies building the locomotives, cars and equipment used by the railroads were essentially operating in a real market. The railroads themselves were rent seekers, even if they did move goods from place to place.

[Old Mexican]

Re: Doomboy,

I imagine the canal makers were just as bad, but it would be great if the celebration of free-market capitalism could use examples of actual, free-market capitalism.

It would be better if you actually commented on the point being made rather than making these tangential responses.

[GHrtasuy]

Whoever provides your adverts has a busted algorithm. No one who visits your site carrying cookies from Volokh, WSJ, Mankiw, Cato@liberty (with Jeffry Miron & PJ O'Rourke side trips) and Tim Marchman is interested in a No on 23 ad blasting oil companies.

[BenDU99]

I believe "creative maintenance" is the policy advocated by the current regime.

[Max]

Touting the wonders capitalism ad nauseam to morons as a meal ticket. Donate now!

[heller]

Max rejects capitalism. He exists solely by coercing others.

[Old Mexican]

Re: Max,

Max, H&R's pet yorkie.

Here, boy! Go fetch! That's a good boy! Yeah!

[R C Dean]

If Mr. Brands were right, and the "triumph of capitalism" had deadened democracy and created a permanent overclass,

Here we see Mr. Brands falling into the typical lefty black hole, believing that, without the egalitarian power of the state in full flower, dynamism will fail and wealth will not be created.

Which is kind of the opposite of, you know, reality.

[ChrisO]

I'm curious to read the book. If Mr. Brands relies on Marxist class conflict crapola, then I think he's all wet. Ms. Shlaes is exactly right in condemning the use of class theory to describe a USA that was socially and economically fluid, and largely still is.

More interesting is Jefferson's notion of a nation of yeoman farmers as being the perfect form of democracy. I believe he was worried about concentrations of power in an industrial/commercial nation, to the extent such nations actually existed in his time. Mr. Brands might have a better point with that.

[JoshINHB]

I think Jefferson was more worried about the possibility of a permanent underclass, that had no property of their own, but would have numbers sufficient to vote themselves a living off of "the rich".

[Old Mexican]

The second failing of "Colossus" is its perpetuation of the robber-baron myth. Years ago, historian Burton Folsom noted the difference between what he labeled political entrepreneurs and market entrepreneurs. The political entrepreneur tends to compete over finite assets ? or even to steal them ? and therefore deserves the "robber baron" moniker. An example that Mr. Folsom provided: the ferry magnate Robert Fulton, who operated successfully on the Hudson thanks to a 30-year exclusive concession from the New York state legislature. Russia's petrocrats nowadays enjoy similar protections. Neither Fulton nor the petrocrats qualify as true capitalists.

Market entrepreneurs, by contrast, vanquish the competition by overtaking it. On some days Cornelius Vanderbilt was a political entrepreneur?perhaps when he ruined those traitorous partners, for instance. But most days Vanderbilt typified the market entrepreneur, ruining Fulton's monopoly in the 1820s with lower fares, the innovative and cost-saving tubular boiler and a splendid advertising logo: "New Jersey Must Be Free." With market entrepreneurship, a third party also wins: the consumer. Market entrepreneurs are not true robbers, for their ruining serves the common good.

Mr. Brands appreciates the distinction between political entrepreneurs and market entrepreneurs, but he chooses not to highlight it. Thus he misses an opportunity to emphasize a truth about the late 19th century that rings down to our own rocky times: The best growth is spurred by the right kind of ruin.

He chooses not to highlight it because it would not fit his "capitalism vs democracy" narrative.