The economist Joseph Schumpeter is one the most fascinating and, it is probably fair to say, underappreciated figures of the 20th century. He was a product of a remarkable multi generational school of economic thought in the last decades of the Habsburg Empire.
The period between 2008 and 2020 marks more than a decade of difficulties for the global economy. In 2008, the Great Recession struck, leaving a destructive trail of losses worth trillions of dollars and economic growths. In 2020, Covid-19 delivered another powerful jolt to the global economic order.
Swiss bank UBS reported that at the height of Covid-19, from April to July 2020, the world’s richest saw their wealth climb by 27%. At the same time, the World Bank’s estimates show that for the first time since 1998, extreme poverty is set to rise with 115 million more people falling into that category. Additionally, the share of labor in global income has been falling since at least the 1970s.
The industrialized world had been lifted out of the Great Depression by the requirements of war production. The demands of military manufacturing transformed state and economic structures in all the major participants in the conflict.
For thousands of years, since the earliest civilizations, it was ‘commercial capitalism’ that drove the workings of economies. Commerce flourished with the advent of civilization and empires, giving birth to innovative ideas for carrying out trade. Greek city states, for example, had insurance for ships carrying goods to other parts.
Around the 9th century, paper money appeared as an instrument for facilitating trade between different parts of China. Similarly, the early signs of industrial capitalism coincided with the rise of stock exchanges in places like Amsterdam.
But the 20th century saw the rise of financial capitalism with financial firms at its core. The products and their trade are based on complex computations and formulas underlying assets valuation. The main issue, however, with this particular evolution of capitalism is that not many understand the working. While commerce and trade have always been in the grasp of even the poorest, financial capitalism can be hard to grasp for even the brightest.
There was, at least to some degree, a structural convergence between liberal capitalist and fascist states, with planning and centralized direction of production becoming the norm in many segments of the economy, particularly (but not exclusively) those characterized by factory production.
But even before the major transformations of the war economies, there was a visible change in the structure of capitalism. Schumpeter had made his reputation in his Theory of Economic Development (1911).
There had sung the praises of the entrepreneur, a sort of economic knight errant whose social role was to provide a dynamism that would revolutionize sectors of the economy that had grown stagnant. By the late 1930s it was less clear that the classically conceived role of the entrepreneur could be maintained in the era of massive vertically integrated productive units.
Something is rotten at the heart of global capitalism’s working, a system that has worked wonders for humanity’s progress over time. The gains are accruing disproportionately, more than at any time in the recorded statistics of earnings and wealth.
Historically, pandemics have proven to be great levelers. They’ve lowered the gap in terms of rich and poor wealth. For example, the Black Death that ravaged Europe in the Middle Ages led to lower income inequality. But now, even a pandemic as brutal as Covid-19 has failed to lower the striking gap between the rich and poor. Pope Francis voiced his concern about the new tyranny of unfettered capitalism, attacking the idolatry of money, and decrying the absence of economic equality, high joblessness and increasing misery.
Overall, though, the process was such that growth in the fortunes of the top tiers somehow found a way to filter to the bottom lot. This was acknowledged by none other than Adam Smith, widely regarded as the father of modern economics.
In his relatively lesser known Theory of Moral Sentiments not the well-known Wealth of Nations, Smith opines that “The rich consume little more than the poor, and in spite of their natural selfishness and rapacity, they divide with the poor the produce of all their improvements.”
But let’s also realize that when it comes to prosperity and growth, there is no alternative. Those who disagree may want to revisit the USSR’s collapse or Venezuela’s plight in recent times to realize that alternative ventures could have a frightening cost.