Blog Post

AEIdeas

Two cheers for JPMorgan boss Jamie Dimon for saying he thinks “capitalism is the greatest thing that ever happened to mankind.” It kind of is. A secular miracle, really. Capitalism is why people in today’s advanced economies make $200 a day rather than $2 a day or less as they did back in 1800. It’s why there are even such things as advanced economies.

But for a third cheer, Dimon would have needed to add a qualifier to the term. “Market” would have been a good one. Or “entrepreneurial.” Can’t go wrong with “innovative” or “technologically driven.” And I will admit a soft spot for “Schumpeterian.”

Of course, some economists have a problem with “capitalism” itself, no matter any additional qualifier. Economist Deirdre McCloskey is a fan of “innovism.” For a more comprehensive description, she suggests “technological and institutional betterment at a frenetic pace, tested by unforced exchange among all the parties involved.” Or “fantastically successful liberalism, in the old European sense, applied to trade and politics, as it was applied also to science and music and painting in literature.” Maybe “trade-tested progress” is a good compromise.

See, basic capitalism of a sort has been around for nearly forever. And almost everyone has been poor during that time. Then something changed. Capitalism evolved. And in the process became globally transformative. As economic historian Joel Mokyr has written:

The most dramatic transformation of capitalism, which definitely qualifies as a transition from capitalism 1.0 to 2.0 occurred during the Industrial Revolution. Before 1750, roughly speaking, capitalist entrepreneurs made money primarily by exploiting commercial opportunities (buying low and selling high) and by taking advantage of underexploited resources.

The Industrial Revolution opened a different window: technical innovation. In this new form of capitalism, entrepreneurs could make profits by venturing into something that had never been done before. They did so by taking advantage of the growth of useful knowledge, whether driven by the progress of science or by the sheer ingenuity of clever inventors. Technology, rather than finance or international trade, became the primum movens of capitalism. Economists as different as Karl Marx and Joseph Schumpeter realized that industrial capitalism was different from commercial capitalism (though the two forms complemented each other nicely). The industrial economy could expand indefinitely as long as technology could keep expanding.

And it has continued to evolve, Mokyr adds, with “capitalism” now meaning the combo of a modern regulatory welfare state and free-market capitalism. While critics say rich countries are now experiencing “late capitalism” — an absurdist final stage marked by miserable, dystopian inequality and excess — the rest of us aren’t so sure: