Mark Carney on “Capitalism in America”

Nov 29, 2018

Thank you very much Dean and you’re absolutely right, I am very much relieved to not be answering questions this evening, asking them instead. Just in case anyone is tempted otherwise I’m in policy purdah, so I’m unable – even more so than usual – to say anything of practical significance. But I’m here because, as Dean just said, this promises to be a very vibrant and fascinating conversation or presentation from Adrian and Alan on their new book ‘Capitalism in America’. What they were describing in the book, when they describe the 1970s, the disappointments of the 1970s, they describe how and I quote “the political system began to generate antibodies to the virus of malaise.” And what our authors were speaking of at that time was the growth of a new type of institution designed to bridge the gap between policy thinking and political practice. And Policy Exchange is exactly that type of institution: multidisciplinary, highly influential, a productive force at the heart of Westminster and our political system. And it’s at events like this where radical thoughts challenge orthodoxy, and a culture of cross-disciplinary thinking fosters the creation of new ideas. Challenge, destruction, creation, and tonight we have just the catalyst.

Adrian Wooldridge is the political editor of The Economist. He served as Washington Bureau Chief as well as the West Coast correspondent for that magazine – that newspaper, I should say. He has a profound knowledge of many things including the US political system. He’s not known to us officially as the author of the Bagehot column (although those of us in the know, know that he is!). But he is known to us as author of nine previous books ranging across economics, America, world history and beyond.

Alan Greenspan of course is a titan of economic policy. His career has been grounded in an encyclopaedic knowledge of economic data on which he built amongst other things a highly successful private consulting business. His views have been consistently sought not only by the giants of business, but also the leaders of the free world. He was an advisor to Richard Nixon during his presidential campaign, of course served three years as Chairman of the Council of Economic Advisors under Gerald Ford. He was appointed Chairman of the Federal Reserve in 1987 by Ronald Reagan. He would go on to serve under George H.W. Bush, through Bill Clinton’s two terms and six years into George W. Bush’s Presidency. He presided over one of the most prosperous periods in American history, and he’s rightly celebrated by policy-makers across geographical borders and political persuasions, and I had the great privilege when I was a G7 deputy of overlapping with him at the G7 for three years, and I can attest that every word he spoke was given the highest consideration as they will be this evening.

So let me say a few words about the book before getting into some questions. And the book begins with a small thought experiment, and I quote, “Imagine a version of the World Economic Forum was held in Davos in 1620. Cold, bad food, too many breakouts, that sort of thing (laughter). And the question that comes up for debate at the 1620 Davos is “Who will dominate the world in the coming centuries?” So of the many candidates, few of those present would have looked to North America. It would have seemed then like – I quote – “an empty space on the map without prospects”. Of course that empty space is now the world’s largest economy in market terms. It’s an economy that is as huge as it is diverse, and its success has afforded its citizens the highest standard of living. And the book charts the history of this land, rich in resources and bubbling with ideas, to tell the story of US development up to the modern day in order to answer the question: what is the source of America’s success? Of course, there is a vast literature on the success of economies. Some emphasise the land, citing a favourable environment that’s navigable, habitable, and conducive to free trade. Others laud institutions, good governance ensuring property rights are protected, and inclusive democratic institutions that build the social capital the political economists from Adam Smith to Hayek see as the foundation of successful market economies.

Our authors see America as a special case. A favourable environment, yes. Good governance, mostly. But they see America’s success as a result of something more. Its unique appreciation for the power of creative destruction. Advances in productivity that allow us to get ever greater output from a set of inputs. Productivity’s ability to rapidly improve living standards makes it arguably the single biggest measure of economic success. But what drives productivity growth, and how can it continue? And in the book, Alan and Adrian use one of Joseph Schumpeter’s core insights, and they argue that the key is creative destruction. In other words to allow creation, we must accept destruction. In the maelstrom of progress as new ideas, methods, and processes replace the old, there will inevitably be winners and losers. And it’s the role of politics to determine how to deal with the individuals that lose as society as a whole grows richer. Politics for our authors defines the government’s reach into the space in which creative destruction takes place.

America’s philosophy has been to resist the temptation to interfere with the remorseless logic of creative destruction. The ethos of entrepreneurialism and business means productivity is facilitated, not frustrated, with benefits that can span decades. In the book the cite the post-Civil War laissez-faire decade of the 1880s which gave rise to more than 10% of today’s Fortune 500 Companies – more than any other decade until the Reagan era. Now today, some argue that America’s growth model is at a crossroads. Looking more like other advanced economies, America’s dynamism is being held back. Geographical mobility has been falling steadily since the 1980s, and social mobility, the very heart of the American Dream, has stalled and begun to go into reverse. Falling productivity and rising inequality of opportunity could have important social consequences. For those no better off than their parents, living in a society where real wages have flattened for decades, frustrations are vented in what Alan and Adrian term “an increasingly paralysed and dysfunctional political space”. They also warn that another financial crisis could destroy the faith in American capitalism. And perhaps most perniciously, American public and private savings rates have been in steady decline. Not unrelatedly – and this was a key point in the book – entitlement spending has tripled as a proportion of GDP over Adrian’s lifetime, driving up Federal Debt in a process known as – and I quote –“Adamantine and inescapable as far as the eye can see, with the potential to crowd out risk taking, until American exceptionalism is a distant memory”.

As well, these days, monopoly and mercantilism are ascendant, the perennial gale of competition and international commerce under pressure. And if I may as an aside, point out that Schumpeter warned exactly against such tendencies, towards fettered capitalism. To the creator of the term “creative destruction” was driven in the quest for the profits of a quiet life to monopoly. But once the monopoly is achieved, and to be clear, that’s achieved that’s through hard work, innovation and dynamism, great efforts can be spent to lobby government policies in order to entrench advantage. If these efforts are successful, corporate bureaucracies will stifle entrepreneurial spirit from within, and what Schumpeter called ‘the treason of the intellectuals’ would attack it from without.

So having diagnosed the malaise, our authors prescribe two remedies. First and most forcefully, they argue for a smaller state, focussing on reducing social security spending, cutting back burdensome regulation, thereby ensuring the time and wealth of America is put to productive use. Second, our authors recognise the paramount importance of financial stability, arguing for a substantial increase in bank capital to ensure that the financial system serves its function while helping to restore public faith in a system that has brought so much prosperity.

So to conclude, Capitalism in America raises many of today’s most pertinent economic questions. The wither of fiscal discipline. How important is foreign competition to the process of creative destruction? How do we ensure the energy of an innovative financial sector is put towards increasing prosperity, and also should finance be the one sector to which creative destruction does not apply. How to help those livelihoods that are destroyed by the creative process? And finally from me, what is the role of institutions during the next technological revolution? Is Alan Greenspan’s high school contemporary Henry Kissinger correct when he suggests that artificial intelligence is how the enlightenment ends, and will it take with it laissez-faire economics? I’m sure we’ll see a flash of creative spark this evening when discussing these and many other important issues. Thank you for your attention, I’m now going to sit down, Alan is going to appear on our screen, and I’ll ask a few questions before turning to the audience. Thank you.

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