Capitalism is sustainable and self-correcting. Profits, income, savings, and productivity are all trending upwards, and public investment ensures adaptability.

The first question which the authors have been asked to address is: what has gone wrong? But that presupposes that something has gone wrong, which is far from evident. On the contrary, according to many traditional metrics capitalism is behaving exactly the way it is supposed to.

The classical economists, from Smith to Marx, as well as later theorists such as Weber, believed that what defined capitalism above all else was its ceaseless pursuit of accumulation for its own sake. High savings rates were the engine propelling capitalism forward. Readers from Britain (where the gross adjusted savings rate in 2018 was just 13.5 per cent) or the United States (where it was 18.3 per cent) will be well aware that their countries are not saving as much as they once did, but the Anglosphere is not the world, and the global savings rate has been trending upwards since the 1990s (Figure 1): there is no sign of any crisis on this score.

Writing in 1942, Joseph Schumpeter felt that the classical writers had exaggerated the role of savings and accumulation. For him, the engine of capitalism was ‘the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates’ (Schumpeter, 2010, pp. 67, 73). New products, globalization, the shift to new forms of producing, retailing, or working: innovation is what defined capitalism in Schumpeter’s view. Despite the economic catastrophe of the 1930s, he expressed no great concerns about the ability of capitalism to deliver innovation, and in retrospect he was right: the decade was one of the most technologically progressive on record (Field, 2003).

It is true that US productivity growth fell sharply in the 1970s (Figure 2), and this matters since the US is commonly conceptualized as the world’s technological frontier.1 But the US is not the world, and Schumpeter included what we would today label ‘globalization’ in his definition of innovation. Even if all that today’s entrepreneurs were doing was deploying existing technology in new environments that would constitute innovation, boosting global TFP and living standards, and so would reconfiguring production chains via outsourcing and other means. Figure 3 shows that prior to the Great Recession TFP was booming: global TFP growth accelerated from 4.3 per cent p.a. in the late 1990s to 6.6 per cent p.a. in 2005–7. When the focus is not on total TFP growth, which includes the more efficient allocation of factors of production within and across countries, but on weighted averages of TFP growth in particular industries in particular countries (labelled ‘country-industry TFP growth’ in the figure), TFP growth almost doubled over the same period. The Great Recession led to a sharp decline in global TFP growth, as would be expected, but by 2011 it was recovering. And the past year’s innovations in medicine, telecommunications, and workplace organization surely suggest that if innovation is the essence of capitalism, then the latter is in good shape.

Schumpeter worried that capitalism would eventually lose its vitality, as ownership became separated from management, and innovation became routinized within bureaucratic corporations. Kodak, which invented the digital camera but was so rigidly run that it was ultimately destroyed by it, might be a case in point (Lucas and Goh, 2009). But new technologies create new corporations, and today’s digital giants are headed by larger than life entrepreneurs with as much name recognition as their counterparts in the age of the trusts. Schumpeter would have been reassured. Alternatively, a more bloodless view of capitalism now largely prevails, in which its main function is to maximize shareholder value. Despite the dramatic fluctuations in share prices which have characterized the past 25 years or so, the news here is good as well. The global market value of listed domestic companies has been on a steady upward trend since 1980, even if the rate of increase has declined since the turn of the millennium. As a share of GDP, the value tripled from roughly 30 per cent in 1980 to around 90 per cent in 2018 (Figure 4).

Ultimately capitalism’s claim is that it delivers economic growth. It is true that growth has slowed since the Golden Age of the 1950s and 1960s, but those were exceptional decades. As Figure 5 shows, there has been no downward trend in world GDP growth following the step decline in the 1970s, whether growth is measured in aggregate or per capita terms. Aggregate growth has averaged 2.9 per cent p.a. since 1980; per capita growth has averaged 1.5 per cent p.a.2 Growth at this rate would suffice to double world income per capita within a half-century.

Figure 6 gives a longer-run perspective, based on the most recent Maddison Project data (Bolt and van Zanden, 2020). The exceptional nature of the Golden Age stands out even more clearly from this graph, but what is also clear is that even since 1980, aggregate global GDP growth has far exceeded anything experienced prior to the Second World War. (Growth prior to 1820 was extremely slow by modern standards, whether measured in aggregate or per capita terms.) The 1980s saw relatively slow per capita growth, of just 1.3 per cent p.a.: this was no higher than the growth of the late nineteenth century, and lower than interwar growth. But global growth has accelerated since then: even the 2010s saw per capita growth higher than anything recorded before 1950.

Not only has capitalism been performing well according to the standard metrics; it has become the dominant economic form worldwide. In so doing it has shown itself to be institutionally adaptable, a considerable advantage for any social institution. China is now one of the most successful capitalist economies in the world, and what Branko Milanović (2019) calls ‘political capitalism’, as opposed to the liberal democratic capitalism that we are more familiar with in the West, is now flourishing in several jurisdictions. There is no historical reason to think that this dependence on undemocratic regimes will damage the vitality of capitalism: the breakthrough to modern economic growth of the late seventeenth to early nineteenth centuries occurred in countries that were highly corrupt and undemocratic, if not downright autocratic. Consider Schumpeter’s (2010, p. 121) description of life under Louis XIV:

On principle, the monarchy managed everything, from consciences to the patterns of the silk fabrics of Lyons, and financially it aimed at a maximum of revenue. Though the king was never really absolute, public authority was all-comprehensive. . . . The king, the court, the army, the church and the bureaucracy lived to an increasing extent on revenue created by the capitalist process, even purely feudal sources of income being swelled in consequence of contemporaneous capitalist developments. To an increasing extent also, domestic and foreign policies and institutional changes were shaped to suit and propel that development. . . . The steel frame of that structure still consisted of the human material of feudal society and this material still behaved according to precapitalist patterns. It filled the offices of state, officered the army, devised policies—it functioned as a classe dirigente and, though taking account of bourgeois interests, it took care to distance itself from the bourgeoisie. The centerpiece, the king, was king by the grace of God, and the root of his position was feudal, not only in the historical but also in the sociological sense, however much he availed himself of the economic possibilities offered by capitalism.

Was there ever a better description of today’s Communist China? Nor should we allow the new Whig tendency in recent economic history to blind us to the corrupt, undemocratic, and bellicose nature of eighteenth century Britain. Schumpeter believed that this mutual dependence between extra-capitalist elites and capitalists provided protection for the latter, who were in any case unsuited to government, unheroic and rational as they were.

So one answer to the question posed to the authors is that there is nothing wrong with capitalism: on the contrary, the patient is alive and well, and delivering the goods on a planetary scale. So what, if anything, is the problem?

III. Secular stagnation?3

To each of the traditional engines of capitalism there corresponds a worry about the long-run viability of the institution. As we have seen, Schumpeter worried that entrepreneurship would be drained of its vitality. To classical economists focused on savings and accumulation, the danger was diminishing returns, as a greater capital stock pressed against fixed land supplies. Profits would eventually fall to the point where accumulation came to a standstill. The stationary state was not necessarily something to be feared: while Smith believed that wages could only be kept above subsistence when the capital stock was growing, later writers argued that moral restraint in a Malthusian world could potentially maintain living standards at a respectable level. And Say’s Law ensured that everything that was produced would be sold.

But economists’ worries about the future of capitalism follow a long swing, being predictably related to the underlying state of the economy around them. The immediate aftermath of the Napoleonic Wars saw British per capita GDP falling by 11 per cent between 1815 and 1819; unemployment in industry and transport reached 17 per cent in 1816 (Feinstein, 1998, pp. 646–7; Broadberry et al., 2015). Slow growth, stagnant wages, and political unrest remained the order of the day until mid-century. In this context, theorists such as Malthus, Chalmers, Lauderdale, and Wakefield worried that excessive accumulation would lead to gluts of unused capital and unsold commodities. Their arguments were still classical, in the sense that they assumed that excessive savings would be channelled into excessive investment. (While a modern economist might object that this hardly seems rational, Weber would reply that an irrational propensity to accumulate is what capitalism is all about.)

The Great Depression years saw the theoretical foundations of this worry being developed in two key ways. First, the Keynesian theory of effective demand implied that it was investment that drove savings, rather than vice versa, and that as a result involuntary unemployment could be an equilibrium outcome. Second, the Keynesian argument was embedded in a dynamic framework in which insufficient investment demand could arise in the long run, even though technological change and population growth were constantly offsetting the impact of diminishing returns on the return to capital. The 1930s was a time of fears about slowing population growth: in 1937 Keynes argued that if the sum of population growth and technological progress were too low, relative to the savings rate, then investment demand would be insufficient to absorb those savings (Keynes, 1937).4 Those fears were developed in a series of publications by Hansen, who is generally associated with what became known as the theory of secular stagnation (e.g. Hansen, 1938, 1939, 1941). In contrast to the classical economists, and perhaps to the Hansen we think we know, Hansen did not predict that the world would fall into secular stagnation for ever: for him it was a (long-run) cyclical problem. When technical change accelerated, this would call forth increased investment demand and savings; when it decelerated, however, savings rates would not fall as easily as they had previously increased. At such points in the cycle government needed to step in to boost demand (Hansen, 1938, pp. 301–12). The 1930s were such a period, in his view, due not only to falling population growth, but to the closing of the new world frontier on which he had grown up, and to the decreasingly capital-using nature of technological change.

It is not surprising that fears of secular stagnation should have been resurrected in 2013 by Larry Summers, at a time when the world economy was still recovering from the Great Recession and Europe was in deep crisis. Thanks to a robust and historically-informed policy response in 2009, the Great Recession was much shorter-lived than the Depression, but recovery was slower also, as the Eurozone embraced a brutal and premature contractionary fiscal policy (Figure 7). And the world seemed to be entering a prolonged phase of historically unprecedented low real interest rates, indicating that there might indeed be a structural imbalance between savings and investment demand.

Schumpeter devoted an entire chapter of Capitalism, Socialism and Democracy to arguing that secular stagnation was nothing to worry about, since the innovative spirit would always find an outlet for its creativity. The argument comes across as essentially faith-based, but as it happened technological progress remained healthy in the US after the war, while the baby boom more than doubled the population growth rate. It seems plausible to this author that the world has been undergoing a difficult period of structurally deficient demand since the turn of the millennium, but what about the future? World population growth is falling rapidly, and the United Nations projects that this will continue for the foreseeable future until population growth comes to a halt altogether. On the other hand: world TFP growth remains strong; as we have seen over the past year, innovation can still happen remarkably quickly; there is huge potential for catch-up in sub-Saharan Africa, where population is still growing rapidly; and the energy transition will require massive investment in new energy production, storage, and transmission infrastructures. So maybe a lack of investment demand will not be a problem going forward after all.

That is not to suggest that the market on its own will suffice to spend our savings, but since capitalism is not ‘the market’, being rooted in particular national, regional, and global institutional frameworks, that is not a problem for capitalism per se. Investment will not flow to sub-Saharan Africa in an institutional vacuum, and given the network nature of many of the new energy technologies we will need, there will surely be a role for government involvement there as well. If the Biden stimulus plan is a sign that the political pendulum is shifting, this may be exactly what capitalism needs today. In the 1930s Hansen thought that the stock market was increasingly unsuited to the role of mediating between savers and investors, and that government would have to take on this role: ‘The government is becoming an investment banker’ (Hansen, 1938, p. 318). Schumpeter, it’s worth noting, was entirely sanguine about the prospect. Investment might indeed be increasingly funded by government, either because it was unsuited to ‘cost-profit calculation, such as expenditure on the beautification of cities, on public health and so on’, or because the industries concerned were ‘increasingly amenable to public administration’, such as ‘means of communication, docks, power production, insurance and so on’. ‘National and municipal investment could thus be expected to expand, absolutely and relatively, even in a thoroughly capitalist society, just as other forms of public planning would. But that is all’ (Schumpeter, 2010, pp. 105–6).

The experience of the past year, when capitalism has delivered new vaccines astonishingly quickly in cooperation with governments, suggests that the Hansen vision of government as investment banker may become increasingly relevant in the years ahead. If this helps capitalism to deliver the goods, boosting investment demand in the process, that will strengthen capitalism, not weaken it.