"A Great Deal of Ruin"

On alternating days, it seems, a piece of economic news emerges that either gives the optimists cause for joy or reinforces the gloom of the pessimists.

Truth be told, our reality lies somewhere in the middle.  One remarkable aspect of our economy (and by extension, our society) is its resilience.  In the teeth of recession, new businesses open.  Almost defying the headlines, new investments are made, risks are taken, and plans are made.

Scottish economist Adam Smith recognized the phenomenon more than two centuries ago.  When a young man decried the alleged decline of the age, "If we go on at this rate, the nation must be ruined," Smith replied: “Be assured, my young friend, that there is a great deal of ruin in a nation.”[1]

In the perpetually forthcoming book, we speculate on just how much more ruin our nation can withstand.

An economic crisis is not by itself a sign of decline.  Unfortunately, the current economic crisis (more accurately, the political class’ reaction to it) quite probably is hastening the decline of the American way of life and of America’s power to shape events.  The causes of this decline have origins which are hard to discern because they date back over a century.  

On the one hand, Adam Smith tells why it has taken so long for the symptoms of decline to become obvious: there is a lot of ruin in a nation—meaning that something as strong as America can withstand much damage before it begins to crumble.

On the other hand, capitalist economies are notoriously cyclical.  Economic bubbles—in everything from dot.com companies (1999) to housing (2008)—come and go.  Although not pretty, but over our history it has worked remarkably well in building enduring wealth.  Some individual investors may get outsized gains (for a time), other investors may lose their shirts, but overall, society gets richer and the American economy had grown at a pace never before seen in human history.  But this system, which economist Joseph Schumpeter described as “creative destruction,” offends many in our intellectual class.

Sometime in the 19^th century, America became the embodiment of promise of economic and political freedom leading to not just a better—but a fundamentally different kind of place.  A place where anybody, no matter how low born or economically disadvantaged, could succeed, given hard work and a bit of luck.

Where capitalists pursue irrational exuberance and rapid expansion, intellectuals and technocrats see waste and inefficiency.  Creative destruction—innovation replacing old industries with newer, more efficient and vibrant ones—produces a desire in policy makers to regulate the ups and downs to reduce “unnecessary” friction and the shear messiness of it all.

This more “Keynesian” version of economics—with its industrial policies, tax credits, subsidies, and intrusive regulations—is intended civilize the “wild west” nature of capitalism.

For more than a century, our cultural and political elite have worked to tame capitalist society.  First, income and corporate taxes were added to capture outsized chunks of growing enterprises; next, regulations were put in place to direct and shape economic growth; then subsidies were instituted to encourage those industries and companies not sharing in the economic boom; and, finally, social programs were created to cushion the blow for individuals left behind.

It is exactly this accumulation of “solutions”—the redistributive taxes, the comprehensive regulatory state, the costly subsidies and social programs—that cause many to think that this recession will be different.  In particular the rise of the regulatory state has reached a point where it no longer just smoothes the rough edges of the capitalist economy—it now is engaged in strangling its vitality.  The economic and political elite have finally become the enemy of innovation and growth, in pursuing a preference for predictability and control.

The greatest achievements of the political and economic elite were the rebuilding of Europe and creating a relatively stable world order after World War II.  Success bred self-confidence and power, and the elite began to exert influence over areas beyond foreign affairs.  The failure of the ruling elite to overcome the Great Depression in the 1930’s was forgotten, while winning the war and managing the aftermath left the elite with enormous political and economic prestige.  The thinking became, ‘If they can defeat the Nazis and Imperial Japan, and hold the Soviet Union in check, then surely they can maintain prosperity at home.’

Since its apogee in the late 1940’s and 1950’s, the political class has gradually become—less a source of stability—but more a drag on the wealth of our country and the health of our civil society.  America’s rise to wealth and power was driven by the rough and tumble of a free economy and the unleashing of the creative energy of millions of Americans and immigrants, whose rough edges were more than matched by the drive to succeed.  The economic and political elite, however, have never been ones to build wealth from nothing.  Rather they are managers, fixers, string pullers.  The story of America is one of creation:  the coaxing of vast wealth from an inhospitable wilderness, a story where the entrepreneur is the hero, while the bureaucrat usually plays the heavy.

It is exactly triumph of the manager and the ruler over the builder and the inventor that we suffer from.  The economic crisis of today has its roots in money management, financial engineering, and failed social engineering; Americans are not suffering from a lack of productive ability, but from a failure of the political and economic elite who have mismanaged our economy.

In our darkest hours, we fear that science fiction writer Robert A. Heinlein may have been correct when he wrote in 1973,

Throughout history, poverty is the normal condition of man.  Advances which permit this norm to be exceeded—here and there, now and then—are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people.  Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.  This is known as "bad luck."[2]

The Wall Street Journal, in conjunction with the Heritage Foundation, publishes an annual “Index of Economic Freedom.”  The 2012 rankings list the USA at No. 10, with Hong Kong and Singapore taking the top two spots.[3]  Our current ranking of 10th is down considerably from our 1995 ranking of 4^th.[4]  In contrast, Canada now ranks ahead of us in 6^th place, up from a low of 27^th in 1998.

As our slide in the economic freedom rankings reflects, there is nothing permanent about the American Dream.  Throughout world history, and even into the 20^th century, the American Dream was unique.  At no other time and in no other place has anything like it existed.  Power and privilege had always and everywhere trumped hard work and ingenuity—except in 19^th and 20^th century America.

Unfortunately, the American Dream is in danger of dying off.  And not because of our current economic crisis—America and its Dream have weathered bigger calamities.  No, the danger we face arises from the growing dominance of an elite, technocratic class who have come to run our major institutions, including government, large-scale media, academia, and America’s largest corporations.  

Having the best of both worlds, the wealth creation of capitalism without the gyrations, is an appealing vision, and would be nice if it worked in practice.  But time and again this approach has proven its inability to achieve both long-term economic growth and predictability.

Instead, we need to work on what comes next.

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[1] Quoted in Correspondence of Adam Smith, 1977, page 262, note 3, from Sinclair, Corr., i. 390-1.

[2] Time Enough for Love, 1973.

[3] http://www.heritage.org/index/ranking

[4] See http://en.wikipedia.org/wiki/Index_of_Economic_Freedom