T.K.McCraw, Recognizing the cumulative power of capitalism

Recall how quickly Japan and West Germany recovered from the chaos of World War II—vivid examples of innovation driven by local entrepreneurship and national growth policies. The United States helped because the Americans wanted both Japan and Germany to become strong allies in the Cold War against the Soviet Union.

Another example: the Czech Republic, the land of Schumpeter’s birth, lies between Germany and Austria, two countries where he also lived before he moved to the United States.

The Czechs have a lengthy history of prosperous industrialization. But when the Nazis and then the Soviets imposed their political and economic systems, they inflicted grievous damage that lasted long after the advent of democracy in 1990.

In 1995 the per capita income of Czechs was only one half that of Germans and Austrians. By 2005 it had risen to two thirds. Most of these numbers reflect the cumulative power of capitalism.

In the very long term—say, the thousand years preceding the eighteenth century— personal incomes in Western Europe doubled at the rate of once every 630 years. But after the spread of modern capitalism, they began to double every fifty or sixty years.

They doubled every forty years in the United States, and every twenty-five in Japan, which got a later start and profited from the European and American examples.

Even Karl Marx and Friedrich Engels conceded in The Communist Manifesto that a scant hundred years of capitalism had “created more massive and more colossal productive forces than have all preceding generations together.”

And when The Communist Manifesto first appeared in 1848, the “capitalist engine,” as Schumpeter called it, was just warming up. Marx and his followers were the first to use the word capitalism, which they invented as an antonym for socialism.

But it took Schumpeter to tell us what the word really meant.

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