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America Is Violating The 4 Conditions Under Which Democracy Can Survive.

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Democracy is not foreordained to survive forever, or even for very much longer.

In his book Capitalism Socialism and Democracy, economist Joseph Schumpeter surveyed a vast swathe of history and the prevailing political and governmental institutions, and he identified 4 conditions for democracy to flourish.

Condition 1: High Quality Politicians.

The first condition is that the human material of politics – the people who staff the party machines, are elected to serve in parliament, rise to cabinet office and high positions in the bureaucracies – should be of sufficiently high quality.

American democracy clearly flunks this first condition. Just look objectively at the low levels of integrity exhibited by James Comey or of probity by Adam Schiff or of fidelity by Mark Sanford. Or consider this tweet from Representative Eric Swalwell.

 

Swalwell’s childish, middle school playground level expression was condemned by observers (such as @jeffdeist) on twitter as “embarrassing”. When citizens find their democratic representatives embarrassing, we have gone beyond Schumpeter’s condition of high quality for the human material of politics.

And, as Patricia McCarthy observed about the current crop of Democratic candidates for President:

One thing was made clear: these are the most hate-filled and, at the same time, the most ignorant group of people ever to grace a stage.

Condition 2: Limited Government.

The second condition for the success of democracy is that the effective range of political decision should not be extended too far.

Here, Schumpeter refers to the nature of limited government It was a part of the concept of the Founding Fathers and the first (unamended) American Constitution. Article 1, Section 8 of the original document listed what government had the power to do. James Madison and Alexander Hamilton told citizens that if a power was not enumerated, the government had no authority to execute it. That smokescreen lasted until the second year of the Washington Administration, when the first US Bank was set up in violation of the list of enumerated powers. In other words, Madison and Hamilton lied. Or, more important, pieces of paper with words on them indicating that there is a limit to the size and scope of government are worthless. Government will grow and expand indefinitely in a democracy. Not only can democracy not stop this expansion, it feeds it. Seeking votes via promises of government handouts gets politicians elected and expands government.

Condition 3: Bureaucrats With A Strong Sense Of Duty.

As a third condition, Schumpeter declared that democratic government in modern industrial society must be able to command the services of a well-trained bureaucracy of good standing and tradition, endowed with a strong sense of duty and a no less strong esprit de corps.

There is no doubt that in America, we have a large government bureaucracy, or, rather, a large collection of large government bureaucracies. We are a bureaucratic state with a bureaucratic government. Do these bureaucracies have a strong sense of duty? No. Think of the EPA, whose duty should be to the welfare of the American people but is now viewed internally as some kind of “save the planet” mandate executed by limiting industry and construction and recreation in defiance of what people actually want. Or think of the CIA which appears to conduct wars abroad, wars within its own ranks, and wars with other government departments and personnel. Is there a strong esprit de corps? How can there be when internal political rivalries within the bureaucracy’s own ranks are pervasive and dominant? Bureaucrats often give the impression that they hate each other and hate the citizenry.

Condition 4: Democratic Self-Control.

The fourth set of conditions “may be summed up in the phrase Democratic Self-control”. In his definition, Schumpeter included:

  • All groups that count in a nation are willing to accept any legislative measure on the statute book;
  • The same groups must be willing to accept all executive orders issued by legally competent authorities;
  • All electorates and legislative bodies must be on an intellectual and moral level high enough to be proof against the offerings of the crook and the crank.
  • Politicians in the legislature must resist the temptation to embarrass the government each time they can do so.

We are currently consumed in a constant battle of the legislature and interest groups against presidential executive orders, immigration legislation, budgeting and military operations. Embarrassing the government is not only the full-time activity of the political opposition, but also of their media allies. The intellectual and moral level has sunk to what must be all-time lows.

Finally, says Schumpeter about democratic self-control, effective competition for leadership requires a large measure of tolerance for difference of opinion. Would anyone claim today that there is a large measure of tolerance for difference of opinion amongst American politicians. Analysis tells us that the partisan ideological divide is greater than ever. Partisan division does not tolerate difference of opinion. The political opponent is irredeemably wrong and quite possibly evil.

The Outcome.

Schumpeter’s 4 conditions are all thoroughly violated. He predicted an inevitable descent towards authoritarian socialism. Democratic candidate debates, anyone?

Why Does Capitalism Educate Its Own Enemies, And Then Give In To Them?

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Can capitalism survive?

No, I do not think it can.

So wrote economist Joseph Schumpeter, in Capitalism, Socialism, and Democracy. His argument in support of this opinion is complex and multi-layered, and in this post we will concentrate on just one of its elements: capitalism’s self-destructive embrace of its intellectual enemies.

Capitalism Delivers All The Benefits Of Modern Civilization.

Schumpeter points out that all the features and achievements of modern civilization are, directly or indirectly, the products of the capitalist process. Capitalism is the rationalization of human behavior, producing the mental attitude of modern science (the kinds of questions we ask and how we go about answering them) and a suite of rewards to give the best brains the will to apply themselves towards success by following the scientific method of economics.

He explores a long list of applications of the scientific method, starting with airplanes, refrigerators, television “and that sort of thing”. But also hospitals (even if “not for profit”) and the medical profession, pursuing victories over disease.

There is also, says Schumpeter, capitalist art and the capitalist style of life. He talks about painting and about democracy and social legislation. Feminism, he also avers, is “an essentially capitalist phenomenon”. Pacifism and modern international morality are products of capitalism.

Capitalism educates its own anti-capitalist intellectuals.

Yet, says Schumpeter, capitalism, unlike any other type of society, creates, educates and subsidizes a vested interest in social unrest. This vested interest is The Intellectuals.

Intellectuals are people who wield the power of the spoken and written word, and they do so with an absence of direct responsibility for practical affairs, and of first-hand knowledge of them that only experience can give. Over history, societies have not been able to bring them to heel or to discipline them effectively or even significantly.

Capitalism produced institutions that are uncongenial to the required control. The intellectual group lives on criticism that stings, and, without constraint, where nothing is sacrosanct, will eventually issue criticisms of the very foundations of capitalism.

What forces produce these intellectuals? Higher education increases the supply of people who see themselves as intellectuals, and, since many of them are effectively unemployable, they become disgruntled about their place in society. When they do find employment, they may feel that the conditions are sub-standard, in terms of the wages and rewards they receive compared to the most successful entrepreneurs. The intellectuals acquire a discontented frame of mind, and become resentful. Resentment rationalizes itself into the social criticism of the economic spectator. This, in turn, creates a hostile atmosphere surrounding the engine of capitalism, even while that engine is raising the quality of life for everyone.

What makes the situation worse is that the intellectuals “staff political bureaus, write party pamphlets and speeches, act as secretaries and advisers, (and) make the individual politician’s ..reputation”. By so doing, they “impress their mentality on almost everything” in politics.

Moreover, “in times of rapid expansion of…public administration”, staffing comes directly from the intellectual group.

Capitalism Fails To Defend Itself.

Why does capitalism fail so badly in defending itself from these intellectual enemies, and in making the positive case for the system that has raised the levels of affluence worldwide so effectively – and in so unprecedented a manner – over the last 250 years?

It is the fault, says, Schumpeter, of the modern executive class. In the early days of capitalism, the leaders were true entrepreneurs: intense, energetic, committed, heroic. The Rockefellers and the Fords had no misgivings about capitalism. They brought the benefits of science, technology and engineering to the masses in the form of light and transportation, and delighted at the transformation of human opportunities. They did not second-guess themselves, or the capitalist system which made their innovations possible.

Now, says Schumpeter, the modern business person, whether entrepreneur or manager, is of the executive type. He or she has the logic of the salaried employee working in a bureaucratic organization. The will to succeed, to fight and to win “is not and cannot be what it was to the individual who knew ownership and its responsibilities in the full-blooded sense of those words”. The modern corporation “relentlessly narrows the scope of capitalist innovation” and will eventually kill it.

The manager also loses the capitalist ethic of working for the future, “whether or not one is going to harvest the crop for oneself”. Entrepreneurial capitalists like Rockefeller and Ford thought deeply about the long-run interests of society, and defended those interests. The managerial business person of today shrinks the time horizon to his or her life expectation.

Schumpeter talks about the anti-saving theories that are “indicative of a short-run philosophy”. He did not anticipate negative interest rates, but he was prescient about the hedonistic mindset that can conceive of them.

Capitalism Gives In To Its Enemies.

The most striking feature of the picture for Schumpeter is the extent to which the citizenry of capitalism, besides educating its own enemies, “allows itself in turn to be educated by them”. They absorb the slogans of radicalism, they seem willing to undergo a conversion to a creed hostile to their own existence. They concede the implications of the creed. They have insufficient faith in their own creed. “They snatch at compromise; they are ever ready to give in; they never put up a fight under the flag of their own ideals and interests.”

Schumpeter concludes: “there is inherent in the capitalist system a tendency towards self-destruction”. In the early stages, it may show itself as retardation of progress, but will end in the destruction of the capitalist and of capitalism.

Shall We Regulate Google, Facebook, Amazon & Twitter? No. Market-Based Creative Destruction Will Do The Job.

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A bipartisan anti-tech fever has taken hold in Washington with Left and Right alike calling for greater regulation of America’s digital giants such as Google, Facebook, Amazon, Twitter, and others. This so-called “techlash” threatens to undermine the massive benefits associated with the rise of the Internet and the Digital Revolution by putting antitrust lawyers and regulatory bureaucrats in control of fast-moving tech companies, whose apparent crime is giving the world affordable, high-quality services.

Worse yet, some tech companies appear ready to cut deals and cozy up to regulators here and abroad. For example, Facebook’s Mark Zuckerberg recently penned an essay inviting increased oversight of his sector, which is easy to say once you’ve made your billions and want to close the door on new competition with the help of expensive new mandates.

Joseph Schumpeter must be rolling in his grave at the sound of all of this. Writing over 75 years ago, the Austrian-born economist laid out a vision for how dynamic competition and innovative economies develop. In doing so he gave us a model for how to think about public policy in fast-moving tech markets—and how to get all new markets and technologies.

Two Lessons

If Schumpeter were alive today, he’d have two important lessons to teach us about the techlash and why we should be wary of misguided interventions into the Digital Economy.

First, Schumpeter would remind us that textbook theories of static “equilibrium” and “perfect competition” do not represent reality. Economic change is instead “an organic process” that “never can be stationary.” What really matters, he argued in his 1942 book, Capitalism, Socialism and Democracy, is “competition from the new commodity, the new technology, the new source of supply, the new type of organization,” because it is that sort of innovation, “which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”

This was Schumpeter’s now-famous model of “creative destruction,” and it perfectly explains much of the intense competition we see at work in the modern Digital Economy. “This kind of competition is much more effective than the other,” he argued, because the “ever-present threat” of dynamic, disruptive change, “disciplines before it attacks.”

We can summarize Schumpeter’s first lesson in two words: Change happens. But disruptive change only happens in the right policy environment. Which gets to the second great lesson that Schumpeter can still teach us today, and which can also be summarized in two words: Incentives matter. Entrepreneurs will continuously drive dynamic, disruptive change, but only if public policy allows it.

Schumpeter explained how entrepreneurs are in a sort of quest for a prize. The primary prize he identified was profits, of course.  Entrepreneurial gains—even supranormal short-term profits—need to be tolerated if innovation is to occur. Innovators will only take risks if they can expect the potential for gains from it. But there are other “prizes” entrepreneurs are in the game to “win”—novelty and notoriety are two other big drivers. Other times entrepreneurs dream of changing the world to advance an important cause or personal desire.

Regardless of the prize, public policy must not discourage these races or else fewer innovators will be willing to risk everything in an attempt to unseat dominant market players. Instead, regulatory attempts to micromanage markets and limit entrepreneurial rewards will give us stasis and retard market change by undermining what Schumpeter referred to as “the most powerful engine of that progress,” i.e., profits. Denying those in the race for the potential for profits or other rewards means that society will be stuck with yesterday’s technologies and industries when what we really need is all new players and innovations.

Constant, Unexpected Change

This is the formula that helped power the Digital Revolution and topple Analog Era giants in the process. Think back just 15 years ago and consider the markets for video rentals and cell phones. In 2005, the Federal Trade Commission pressured video rental firms Blockbuster and Hollywood Video to call off a proposed merger. Antitrust officials were defining markets so narrowly that they didn’t even see the coming online video tsunami, which would wipe local video stores off the map thanks to Netflix and other innovators.

Around the same time, regulatory pundits were worried about the growing power of firms like Motorola, Nokia, Palm, and Blackberry in the mobile phone market. The idea that computer or Internet companies like Apple and Google could displace those giants was unthinkable at the time.  Today we laugh about ever being concerned about those old players.

Similarly, starting around 2010, upstarts Uber and Airbnb rolled the dice on risky gambits to enter local transportation and hotel markets respectively to square off against dominant incumbents who benefited from decades of special rules. Few people gave these Sharing Economy innovators much of a chance, but they are now firmly in the race and offering consumers new choices we previously never enjoyed and will never relinquish.

These case studies represent Schumpeter’s “creative destruction” in action. Moreover, those disruptors inspired countless other innovators who used these new digital platforms and capabilities to give us a growing constellation of “apps” and other corresponding services. Again, this all happened over the course of just 10-15 years.

Change is Still Possible

Critics always have the same response: But this time it’s different! They again take their static snapshots of current market conditions and tell us we have settled into an unassailable monopoly situation. Oh sure we foolishly thought AOL-Time Warner and MySpace were social networking monopolies a short time ago, but this time Facebook really has conquered the world! At least that’s what the pessimists want us to believe.

Again, Schumpeter had an answer for the skeptics: there is no discernable end point to the process of entrepreneur-driven change—so long as creative destruction is not replaced with cronyist public utility-style regulation. If Washington really wants to see challenges to today’s tech giants, then policymakers should not be cutting deals with them or crafting policies in a backward-looking fashion to preserve the old markets those firms dominate.

Instead, policymakers should be clearing away regulatory barriers and tax obstacles so that entrepreneurs can usher in the next wave of innovation, competition, and job opportunities. For example, every convoluted federal, state, and local licensing regime represents a potential barrier to competition and innovation.

Meanwhile, new data collection regulations will limit the ability of new digital ventures to take on tech incumbents. Big incumbents can bear the cost of complying with all that red tape; upstarts cannot.

America’s seemingly inexhaustible supply of entrepreneurial spirit will surprise us with better alternatives than any regulatory wrecking ball Washington devises to demolish existing players or markets. Heed Schumpeter’s lessons and let change happen by getting incentives right such that another wave of creative destruction can work its magic.

Adam Thierer is Research Fellow at the American Institute for Economic Research and a Senior Research Fellow at the Mercatus Center at George Mason University.

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