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Restoring American Capitalism

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books and culture

Restoring American Capitalism

A new book argues that the modern American economy has strayed far from its entrepreneurial roots. December 29, 2022
Economy, finance, and budgets

The Next American Economy: Nation, State, and Markets in an Uncertain World, by Samuel Gregg (Encounter Books, 336 pp., $30.99)

Reading Samuel Gregg’s The Next American Economy, I couldn’t help but think of the fast-paced and comprehensive prose of Henry Steele Commager’s The American Mind and Paul Johnson’s The Birth of the Modern. Both authors displayed encyclopedic grasps of vast literatures, combining synoptic skill and an impassioned effort to enlighten readers, without showy erudition.

Commager, writing in 1950, argued that America had been from its inception a cauldron of ideas, with mostly European roots, that influenced but did not warp the nation’s quest to create a unique political philosophy and culture. He gave Frederick Jackson Turner’s frontier hypothesis another hearing, even as historians already considered it an idea that resonated with the “melting pot” hypothesis—too descriptive and too simple an intellectual insight to be left alone by academics.

Johnson, writing in 1991, attempted to explain the moment that Western civilization managed the turn from the very late Middle Ages, in which both cultural and governmental mindsets were geared to the ancient institutions of landed aristocrats keeping time with the religious precepts of the church. He had to explain a world in which incessant war tested the balance of power, slowing the evolution of civil society as we know it. Moreover, he takes on the task of interpreting the impossible—the emergence of America and the unavoidable shift to a global perspective. This required Johnson to delve into economics, especially the elusive forces of entrepreneurial capitalism. Johnson does all this masterfully, continuously surprising the reader with the scope of his scholarship and ability to show the symbiosis of ideas.

Gregg’s The Next American Economy is a similarly comprehensive account of the forces and counterforces that have shaped today’s economy. Distinguished Fellow in Political Economy and Senior Research Faculty at the American Institute for Economic Research, Gregg writes with an exceptional comprehension of historic facts, much like Commager and Johnson, but he is more than an intellectual historian. His purpose is to argue for a directional change in capitalism itself. In this regard, he sees today’s economy as a system that once reflected the conscious choices of the nation’s Founders, but no longer does.

To Gregg, when Franklin and Hamilton bested Jefferson’s design of an agrarian idyll, they cleared the way for the grand experiment of bottom-up democracy. To achieve its potential, this new system of self-governance had to be accompanied by a new kind of economy, one where everyone understood the rules, and everyone had a shot at winning. Not only would the new country’s political system dispense with absolute rulers, it would also embrace what must have seemed to many like a chaotic approach to constructing an economy—one geared to what we would recognize today as dynamic entrepreneurial action. For this system to work, individuals had to be free to pursue any innovative idea they could discover, testing it in the cauldron of a free market. The new nation’s rule of law was designed to make this system flourish: private property was absolute, and ideas with commercial value were, remarkably, defined in the Constitution as private property. (In England, the Crown was the presumptive owner of new ideas.)

The first half of Gregg’s book tells of how both federal and state governments rather quickly intruded into the operation of the market to arrange advantages for companies favored by successive political regimes. The primary lens he uses is the story of how central economic planning, always a force attempting to dominate public policy, steadily gained ground. Gregg presents an informed account of the monopolies and trusts that managed to capture American government in the nineteenth century. At the time, this bending of government to the will of monopolists was called corporatism. From the time of Teddy Roosevelt onward, reformers have attempted to mold government as a protector of small business and entrepreneurs. But efforts to collar big business took the form of regulatory interference. Consistent with Gregg’s critique of central planning, federal regulations, such as those engendered by the Occupational Safety and Health Act of 1970, proved more damaging to the interests of entrepreneurs and small businesses than they did to major corporate actors.

By the later twentieth century, Gregg argues, America’s fabled free market economy effectively had been lost. The bond between politically favored companies and the federal regime was too tight to be broken. Gregg recalls Milton Friedman’s 1977 statement: “The two greatest enemies of free enterprise in the United States . . . have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.” Crony capitalism was in place. Perhaps because we know that America’s market economy is supposed to operate without the government rigging outcomes for politically connected companies and unions, we continue to be shocked by examples of it. With its intimate relationship with the FBI, pre-Elon Musk Twitter built a bond with its progressive users. That this cozy relationship may have tipped a presidential election is hard to deny.

By the end of the twentieth century, the U.S. had effectively adopted central planning, argues Gregg. Unlike European nations, where a formal government plan guided economic policy, America’s less formal planning achieved the same end—protecting big firms from the challenges that entrepreneurs present. Gregg helpfully illuminates the role that tariff policy plays in helping domestic regulatory agencies protect incumbent firms. Trade gets substantial attention, mostly as an example of how influential businesses control government policy. Notably, Gregg argues that trying to adjust international trade—whether to resist entry of foreign goods or to make U.S. products more attractive in foreign markets—often produces results that tariff proponents neither foresaw nor supported.

Gregg calls the American version of central planning “state capitalism.” This label operates as the foil for the book’s second half, which offers a road map to a new political and economic model that he calls, with a nod to the Founders’ thinking, a “commercial republic.” His vision hinges on stimulating entrepreneurship.

Gregg notes that the U.S. is suffering a two decade-long decline in startups. He provides a sobering perspective on the folly of government efforts to stimulate innovation. He has little confidence that propagating the DARPA (Defense Advanced Research Projects Agency) model throughout federal agencies—an idea currently in vogue inside the beltway—will result in more innovation. Similarly, his discussion of Japan’s failed MITI (Ministry of International Trade and Industry) approach to innovation in the 1970s is a helpful reminder that America was gearing up to copy the “Japanese miracle” before China’s centralized planning model arose to frighten us away from that idea.

Gregg’s prescriptions echo Friedrich Hayek, who was content to believe that markets are operating well when others see only chaos. Gregg is never far from connecting central planning to the loss of individual freedom and makes the case that its appeal to China—and to some in the U.S. promoting a brand of state capitalism—is as much about controlling a population chronically unsatisfied with the choices government elites make on its behalf as about anything else.

Gregg references all the proper authorities in citing regulation as the principal impediment to entrepreneurship. He is right also to point out that public venture funds are far less likely to support successful startups. (The reason, again, is corruption: the management of these funds is commonly entrusted to politically connected individuals with little experience in venture investing.) He cites the well-remembered example of Solyndra, now bankrupt, a venture backed by the Obama Department of Energy on the promise that it could speed the nation’s conversion to solar power.

To overcome state capitalism, Gregg writes, we must remodel our economy to look more as it did from 1950 to 1970, when the nation enjoyed a burst of creativity and birthed more new firms per year per capita than at any other time in our history. This golden period of startups was perhaps the last free market era before the regulatory storm. To recapture the energy of this period, Gregg revisits some familiar arguments, all meant to make the American domestic market more competitive.

For Gregg, competition stimulates innovation, more startups, and collectively leads to a healthier national economy that is competitive in global markets. Gregg sees international trade as playing a critical role in the recovery of growth in the U.S. economy. His argumentation can be diffuse here, asking the reader to connect too many dots within just a few pages. For example, he makes too much of an item of economic research—namely, that fewer people changing their residence in a given period suggests a systemic weakness in the economy. But with domestic migration suddenly at all-time highs, are we to conclude that the U.S. economy is somehow stronger?

But these are small problems in a book that ends with its author claiming a debt to Catholic philosophers Jacques Maritain and Michael Novak, both of whom saw how civic and personal virtue could result from lives spent working in our “commercial republic.” Novak and Maritain saw businesses as special institutions evolved to advance human welfare through capitalism. And like McCloskey, each saw the individual’s engagement in the economy as a means of pursuing personal virtue.

The Next American Economy is especially relevant in the present moment, when too many people remain enamored of socialism, despite its demonstrable failures. Today, attacks on commerce include claims that economic expansion always degrades the environment, and that corporations exist to advance the interests of the patriarchy—a voguish construct that holds that businesses are necessarily racist, sexist, and homophobic.

Seeing corporations in this light allows progressives to propose radical readjustments of private ownership. The vehicle du jour of this effort is the notion of “stakeholder capitalism,” where self-appointed guardians, not equity holders in the corporation, seek the power to describe and protect the interests of parties having little to no nexus with the company. The idea is closely related to the Davos Manifesto, a Mister Rogers’ Neighborhood idea of capitalism. To pursue this end, capitalism must be made redistributive. Only more powerful central governments, controlled by unelected elites pursuing undefinable and unmeasurable notions of “social justice,” can achieve this outcome. Never mind that, as more countries embraced free-market models over the past 50 years, the portion of the global population living in poverty was cut in half.

The Next American Economy is filled with the wisdom and insights that one might expect from such a thoughtful and productive scholar. It can serve any reader as a guide to the competing views of how America should meet its future. The central-planning model of state capitalism will never achieve the productivity, wealth creation, and improved human welfare that the model of a commercial republic can secure. And given the commercial republic model’s close correlation with expanded human freedom, arguments in its favor must prevail.

Photo by a C. Shelton/ClassicStock/Getty Images

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