One of the strangest experiences of recent years has been the presence of endless articles in The Financial Times and The Economist discussing crises in capitalism. They realized that markets do not function perfectly, but need social and political foundations—which they fail to specify. Our book, What Capitalism Needs, spells out what capitalism needs, drawing on the ideas of great but unduly neglected economists of the past including Friedrich List, Joseph Schumpeter, Maynard Keynes and Albert Hirschman—but with most attention being paid to Adam Smith and Karl Polanyi.
Smith did not love capitalism, often criticizing the idiocies of frivolous consumption, but he supported this form of society because it had the capacity to provide a form of social stability that would replace the power systems of the past. What mattered was that everyone was on a societal escalator, desperately trying to catch up with those above. For this to work everyone had to feel that they had a place on the escalator. To that end he encouraged states to provide equalizing policies. He advocated a world of high wages and low profits, arguing that the opposite—one in which capitalists gained monopolistic advantages at the expense of workers—would lead to ruin. States had to protect capitalist society from capitalists.
Polanyi’s rather pessimistic views add to Smith’s and speak to us now with special clarity. His central insight is contained in a phrase: capitalism can demand so much change that sooner or later “society will seek to protect itself.” The organic nationalism of fascism was one such form; it nearly destroyed the world.
The postwar world did much better. Capital and labor reached a historic class compromise. Thanks to war and depression wiping out vast amounts of wealth the capitalist world witnessed “the great compression”—a marked lessening of income and wealth inequality. The result was the greatest period of prosperity and peace in the history of the advanced world. But history is on the move again. Capitalist power has increased, leading to the world of high profits and low wages that scared Smith. The great compression was never inherent to capitalist society. It has gone now. The rich have learned how to protect themselves, making it harder for people to imagine that the escalator is still working for them. Crucially, globalization has changed the structure of opportunities. Some can swim in larger worlds, but others are now nationally caged. Those left behind blame the cosmopolitans. This is the social base for populism. The problems are real, though the politics that follow—directed against immigrants—are dangerous, self-defeating and repulsive. Such populism would not be doing so well without leadership from above, as Brexit so clearly demonstrated. Furthermore, the belief that less government is always good for capitalism has hurt the capacities of states to compensate for the problems that capitalism faces—the financial crisis and the Covid-19 pandemic, cybersecurity threats and climate change. We lack the intelligent state that Smith felt to be necessary.