I believe in free markets. I think they remain the most effective mechanism for organizing voluntary exchange, and I believe capitalism has produced extraordinary increases in prosperity. At the same time, command economies have repeatedly demonstrated a tendency toward inefficiency and toward concentrating power and privilege in relatively few hands.
All of that notwithstanding John Gordon Steele’s recent op-ed in the Wall Street Journal on the history of capitalism left a sour taste in my mouth. Here’s his opening paragraph:
The grandeur of the Roman Empire was built on the aggregation of wealth. Using its superior military organization, Rome conquered its neighbors, took their gold and silver and sold their populations into slavery. When the empire ran out of neighbors, the Roman economy began to falter.
The Roman economy was not primarily a plunder economy. It rested on agriculture, taxation, and commerce. The Rhine-Danube frontier roughly marked the limits of the Mediterranean-style agriculture and urbanized populations that Rome knew how to administer and tax.
The populations of conquered lands remained free provincials who paid taxes to the Romans. The Romans rarely enslaved whole populations. Enslaving their populations was, however, a typical punishment for cities that resisted them.
Furthermore, Rome persisted for hundreds of years after it had reached the limits of its conquests.
Having disposed of Rome in a few sweeping sentences, Steele turns to the Industrial Revolution and modern capitalism, where his account becomes more persuasive but also more selective. Much of the balance of his op-ed consists of a list of notable Britons and Americans over the last 150 years and their contributions to the English and American peoples. Jay Gould and Cornelius Vanderbilt and their railroads. Isaac Singer’s invention of the sewing machine that reduced the amount of time necessary to make a shirt from 16 hours to 2. Steel. Computers. Microprocessors.
Consider this passage:
When the PC was wedded to the Internet, the world changed profoundly in only a couple of decades. Jeff Bezos saw how the new technology could revolutionize retailing again.
I was immediately reminded of Matt Yglesias’s wisecrack to the effect that Amazon was “a charitable organization being run by elements of the investment community for the benefit of consumers”. Now it wouldn’t be unreasonable to say that Amazon was a web services company with a near-break-even retail adjunct.
Which brings me to the core of my objection. Mr. Steele invokes the Forbes 400, a list of the wealthiest individuals. Of the Forbes 400 at least a third derived their fortunes from finance, real estate, or insurance. Their contribution lies primarily in allocating existing capital rather than expanding productive capacity directly. Railroads, steel mills, sewing machines, computers, and microprocessors increased society’s productive capacity. By contrast, much of modern finance specializes in allocating capital, pricing risk, and trading existing assets. Those services are valuable, but the connection between their profits and broad increases in productivity is often less obvious. And I wonder how many of those fortunes would have reached their present scale absent what market participants came to call the “Greenspan put”—the expectation that the Federal Reserve would intervene aggressively to cushion major declines in financial asset prices.
The modern financial system excels at pricing, trading, leveraging, and repricing existing assets. It is less obvious that it channels a correspondingly large share of national wealth into new productive investment. If investors expect monetary policy to cushion major declines in financial asset prices, the incentives may increasingly favor holding and trading appreciating assets over financing new productive enterprises. Mr. Steele celebrates capitalism because it rewarded those who dramatically increased society’s productive capacity. I share that admiration. My concern is that an increasing share of modern wealth derives not from creating new productive capacity but from owning, financing, and trading existing assets. If that is true, then the incentives of modern capitalism have shifted in ways that deserve far more attention than Mr. Steele gives them.
