T.K.McCraw, Growth needs entrepreneurial spirit and personal freedom

Only in the last half of the twentieth century did it become clear that the spectacular success of mixed economies in Europe, the United States, and Japan was going to continue for a long time. Their success showed that capitalism is a more flexible economic and social system than even Schumpeter had thought, with many possible blends between the public and private sectors. As early as 1911 Schumpeter had flatly asserted in The Theory of Economic Development that individual entrepreneurship held the key to economic growth in any country. And he recognized that the freer a system became—the more rights a government guaranteed to individuals—then the greater the opportunity for unfettered entrepreneurship and therefore the higher the potential for economic growth. In this sense he was an early messenger of the connection between capitalism and personal freedom.

As might have been predicted for a prophet of innovation, he developed a special fascination with the United States. In an article published in 1919 he wrote that in nineteenth-century America, unlike other countries, the best brains had flocked to business. But he might well have gone back further in time. In large measure, the United States achieved its position as the world’s leading economy because it had a strong entrepreneurial spirit from the start.

As the historian Carl Degler once put it, “Capitalism came in the first ships.” The colonies that later made up the United States were settled mostly by entrepreneurial Europeans in the seventeenth and eighteenth centuries—the precise moment in history when modern capitalism was beginning to sweep aside traditional systems.

Schumpeter argued that once a full-fledged capitalist system did arrive, it improved primarily not the lives of kings, warlords, and aristocrats but those of ordinary people. He went on to say that it helped some far more than others, because it distributed its fruits unequally, both within the same country and among different countries. In this assertion, he and many others who came to the same conclusion were correct, however unjust the result might be. Even in the twenty-first century, the so-called rich countries are getting richer, though they contain only 15 percent of the world’s population. (Of the approximately 190 countries now in existence, only about 25 are classified by the World Bank and other agencies as rich.) The 15 percent of the earth’s people who live in the rich countries enjoy incomes about six times those of the other 85 percent. The full list of reasons why these variations exist is long, and it begins with the characteristics of traditional systems… It includes not only economic factors but also cultural, religious, and social mores. The number of sayings and proverbs warning against change has been legion, in many languages. As late as the nineteenth century, the Spanish adage, “Let no new thing arise” (Que no haya novedad) was used as an everyday valedictory between friends.

Most people have been inherently fearful of uncertainty, and not quick to embrace the risks that accompany capitalism’s creative destruction. Nor, generally, have those who benefit most from capitalism’s bounties been notably eager to share their good fortune with the disadvantaged, either at home or abroad. Again, there are conspicuous exceptions: Andrew Carnegie, Henry Ford, Bill and Melinda Gates, and Warren Buffet. But the generalization still holds. Schumpeter spent the rest of his career explaining the elements necessary for a full understanding of capitalism—as an economic, social, political, and even psychological system.