What Capitalism Needs: The Forgotten Lessons of Great Economists


Have the financial crisis, the Covid-19 pandemic and climate change revealed fundamental weaknesses of capitalism? John L. Campbell and John A. Hall write that while contemporary economists and policymakers tend to ignore the political and social dimensions of capitalism, some of the great economists of the past did not make the same mistake. Building on these ideas, they outline what capitalism needs to meet the challenges of the future.

One of the strangest, if not thrilling, experiences of the past fifteen years has been the presence of endless articles in the Financial Time and the Economist discuss the crises of capitalism. The authors of these articles realized that markets do not work seamlessly and flawlessly, but need social and political foundations – which they fail to spell out. In a new book, we explain what capitalism needs, drawing on the ideas of great economists of the past, but unduly neglected, including Friedrich List, Joseph Schumpeter, John Maynard Keynes and Albert Hirschman – but with the utmost attention to Adam Smith and Karl Polanyi.

Smith disliked capitalism, often criticizing even the nonsense of frivolous consumption, but he supported this form of society because it had the ability 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, running and running until they died.

For this to work, everyone had to feel like they belonged on the escalator, no matter how humble. To this end, he encouraged states to put in place all kinds of equalization policies, mainly because he believed that wealth came from lower class industry, that is, from human capital. He advocated a world of high wages and low profits, arguing that the reverse – a world in which capitalists obtain monopoly advantages at the expense of workers – would lead to ruin. States had to protect capitalist society from capitalists; states needed autonomy and intelligence.

Polanyi came from a very different Central European world, but his rather pessimistic views add to those of Smith and speak to us now with particular clarity. His central overview is contained in one sentence: capitalism can demand so many changes, cause such disturbances, that sooner or later “society will seek to protect itself”. The organic nationalism of fascism was one of those forms he dreaded; he almost destroyed the world.

The post-war world has done much better. Capital and labor have reached a historic class compromise. The world has witnessed the emergence of entrenched liberalism, where markets thrived under political constraints. Thanks to the war and depression that destroyed vast amounts of wealth, the capitalist world has witnessed great squeeze – levels of income inequality and wealth lower than they had since been. many decades. The escalator worked as the middle class grew in many countries. The result was the greatest period of prosperity and peace in the history of the advanced world.

Globalization has changed the structure of opportunities. Some can swim in bigger worlds, but others are now caged nationwide.

But history is on the move again, and it is only fair to be concerned about the social and political foundations of the world we live in. Capitalist power grew, especially in the United States, leading to a world of high profits and low wages that frightened Smith. The great squeeze has never been inherent in capitalist society. It’s gone now. The rich have learned to protect themselves, which makes it harder for people to imagine that the escalator is still working, at least for themselves.

More importantly, globalization has changed the structure of opportunities. Some can swim in bigger worlds, but others are now caged nationwide. Those who remain blame the cosmopolitans, especially the super-rich who seem unobstructed by national borders and have no particular allegiance to their homeland. It is the social basis of populism. The problems are real, although the ensuing policies – directed against immigrants and other minorities – are often dangerous, doomed and disgusting.

Such populism would not fare as well without leadership from above, as Brexit has so clearly demonstrated. It speaks to something else. Thanks to the rise of neoliberalism and the belief that less government is always good for capitalism, the capacities of states to compensate for the problems that capitalism generates and confronts – not just the financial crisis but the Covid-19 pandemic, the cybersecurity threats and, most importantly, all climate change – have eroded. We certainly lack the self-governing state that Smith deemed necessary.

We are in the world Polanyi feared. These are not just problems for the United States. Nationalist parties have won significant victories in recent national elections across much of Europe, further undermining social cohesion and politicizing social divisions. Denmark is particularly interesting because it retains high levels of well-being for Danes but much less for immigrants, if they can enter. The same goes for the other Scandinavian countries as well as those of the continent.

Capitalism now needs higher levels of social cohesion and increased state capacity. This is also what we want. But we’re not naive: The Rolling Stones saying – “you can’t always get what you want but sometimes you get what you need” – doesn’t apply now. What is needed does not seem to be on the agenda, which is why our book presents several scenarios for the future.

For more information, see the new authors’ book, What Capitalism Needs: The Forgotten Lessons of Great Economists (Cambridge University Press, 2021)


Note: This article gives the author’s point of view, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured Image: Go To Work By LS Lowry (Public domain)



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