Identity crisis for American capitalism
By Steven Pearlstein
BENEATH ALL THE folderol about job creation and destruction at Bain
Capital or President Obama’s alleged war against success and free
enterprise, there’s actually a legitimate debate to be had about what
kind of capitalism we want in the United States.
It turns out that capitalism, like ice cream, comes in many flavors.
These different capitalisms can be combined, in the same way chocolate
and coffee produce mocha. There are also all sorts of mix-ins and swirls
that add to the variety. And while there is a natural instinct to
arrange these different forms of capitalism along a left-right axis,
that is hardly the most interesting way to think about them.
The first kind of modern capitalism was of the robber baron variety. As
the name suggests, this was a period when the economy fell increasingly
under the control of a handful of clever entrepreneurs and financiers
who ruthlessly used their economic power to enhance their political
power, and vice versa. It was an era generally characterized by rapid
technological progress, big booms and big busts with widening
disparities in income and wealth.
Following the Great Depression, robber baron capitalism gave way to a
golden era of “corporate” or “managerial” capitalism, during which
growth and innovation were driven by large national and international
firms run by trained executives. Competition tended to be gentlemanly
and the power of big business was held in check by the federal
government (big government) and unions (big labor). Business cycles
tended to be relatively tame, and the gap between rich and poor shrank
as more Americans joined the middle class. It all seemed to work pretty
well until government and labor unions began to squeeze the competitive
vitality out of the U.S. economy.
Outside the United States, most other countries had long since embraced
some form of “state capitalism,” in which government played an even
bigger role, not just as regulator but in many instances as owner of
major corporations, many of which were government monopolies. State
capitalism worked particularly well for countries recovering from the
destruction of World War II, or those like Japan and Korea making the
transition from developing economies to developed. But by the 1990s,
state capitalism had often given way to crony capitalism — and
over-regulated labor and product and financial markets became barriers
to innovation and productivity growth.
Back in the United States, state capitalism never really caught on, but
there were three new models vying to replace the old corporate capitalism.
“Entrepreneurial capitalism” took seed along Boston’s Route 128, in
Silicon Valley outside of San Francisco and before long in places like
Seattle, Austin, Boulder and North Carolina’s Research Triangle. While
drawing its inspiration from tech companies started in garages by young
geeks, entrepreneurial capitalism soon become much more than that. In
industry after industry — airlines, package delivery, long distance
telephones, restaurants, grocery stores, for-profit education,
pharmaceuticals — upstart companies used new products and new business
models to upend long-established corporate incumbents.
The mythology surrounding entrepreneurial capitalism is that it creates
great wealth for risk-taking entrepreneurs, great numbers of new jobs
and great numbers of new products that dramatically enhance the quality
of life and the productivity of the rest of the economy. But as the
economist Joseph Schumpeter understood, there is an irreducible amount
of destruction that comes along with all that creativity—destruction of
existing companies, jobs, wealth and in a few instances, communities.
While Americans admire and celebrate entrepreneurial success, we tend to
forget and ignore the losers from this dynamic process.
Although today it sounds rather quaint, “worker capitalism” was
something of a fad in the 1980s. In its purest form, worker capitalism
meant employee-owned firms that were either bought from a retiring
entrepreneur or brought out of bankruptcy by workers looking to save
their jobs. The same spirit, however, was taken up by an even larger
number of public and private companies whose executives subscribed to
enlightened management strategies such as profit-sharing, employee
empowerment, high performance work teams, open-book management,
continuous process improvement. Whatever the name, all involved pushing
responsibility and accountability to front line workers, on the theory
that it was their hard work, commitment and ingenuity that made for
Coming from the opposite direction, however, was “shareholder
capitalism,” which was based on the theory that workers were largely
interchangeable and expendable and that companies should be managed
solely to maximize short-term profits and share prices for owners and
investors. In many ways, shareholder capitalism was an effort to
overcome the self-interested complacency of managerial capitalism that,
in the view of many, had allowed the American economy to fall behind
Germany, Japan and the other Asian “tigers.”
The driving force behind shareholder capitalism came not from Wall
Street’s traditional investors but from upstart financiers known as
“corporate raiders” who were the first to use a new financing mechanism,
the “junk bond,” to launch hostile takeovers of under-performing public
Although corporate executives decried the trend, the threat of having
their companies bought out from under them led to a fundamental shift in
corporate management in which the interests of customers and employees
have been subordinated to the interests of shareholders. To reinforce
this new orientation, top executives were loaded up with stock and stock
options that would better align their own economic fortunes with those
of other shareholders.
From there, it was only a short hop and a skip to capitalism’s newest
incarnation, “financial capitalism,” where the focus has shifted from
running companies to simply buying and selling them for profit. More and
more of the country’s capital and talent was diverted toward trading and
financial engineering, with more and more of the economy’s profits and
the nation’s income captured by a relatively small number of investment
bankers and the managers of hedge funds and private-equity funds.
What should be obvious from all this is that our notions about American
capitalism – what it is and what it ought to be—are constantly changing.
Given that he made his fortune in private equity, it is not surprising
that what Mitt Romney now offers the country is a mix of shareholder and
financial capitalism. Romney rejects the managerial capitalism of his
auto executive father, considers all forms of state capitalism to be
illegitimate and dismisses worker capitalism as naïve and unsustainable.
And while he is not the robber baron capitalist the Obama campaign would
have you believe, neither is he the entrepreneurial capitalist he
pretends to be. For Romney, it is not the desire to create great
products or enduring employment that really animates the entrepreneurial
spirit, but the prospect of making a big score by going public or
selling out to Bain Capital. In Romney capitalism, it is the financier
who ultimately makes the successful entrepreneur, not the other way around.
Obama, too, would like to wrap himself in the flag of entrepreneurial
capitalism, but not in the dislocation it sometimes causes or the
“anything goes” regulatory and tax regime that entrepreneurs crave.
Ultimately, the president is drawn to the equality and stability of
managerial capitalism, perhaps with a swirl of worker capitalism and the
occasional sprinkle of state capitalism mixed in. He views shareholder
capitalism as morally cramped and financial capitalism as both
economically and socially destructive.
We would all surely welcome an intelligent presidential debate on what
kind of capitalism we want to have. Only please spare us the
self-serving nonsense about who created or destroyed how many jobs. In
almost any form of capitalism, running the government is not the same as
running the economy, and neither is like running Bain Capital.