Capitalism

Capitalism is a system of largely private ownership that is open to new ideas, new firms and new owners—in short, to new capital. Capitalism’s rationale to proponents and critics alike has long been recognized to be its dynamism, that is, its innovations and, more subtly, its selectiveness in the innovations it tries out. At the same time, capitalism is also known for its tendency to generate instability, often associated with the existence of financial crises, job insecurity and failures to include the disadvantaged.

There are basic questions about capitalism that have hardly begun to be studied.  

1. What economic and social institutions engender innovation in the more capitalist of today’s advanced economies, and what institutions function badly in this regard? 
2. How large are the benefits of this system both in productivity and more broadly in the rewards to its participants? 
3. How much worse (if at all) is this system with respect to stability and inclusion - compared with corporatist systems found in continental western Europe and east Asia? 
4. What changes or additions to those institutions and policies could be hoped to improve its dynamism, stability or inclusiveness? 
5. Are capitalists systems more or less prone to financial crises than corporate ones? 

The mandate of Columbia’s Center on Capitalism and Society is to advance our scholarly understanding of capitalism’s workings, its social benefits and costs, and its place in a democracy.

The Debate Over Capitalism
The claims for capitalism differ from the classical case for a competitive market economy. Adam Smith’s thesis two centuries ago was that the presence of many buyers and many sellers competing with one another in the marketplace would weed out wasteful resource allocations “as if by an invisible hand.” (So, in equilibrium conditions, one person’s earnings could not be further increased except at the expense of another’s.) This valuable ability of unimpeded markets could not be matched by a central government bureau, as Ludwig von Mises warned the socialists in the 1920s. But Smith’s insights left it unclear how or whether economic change might be generated. Would competition among firms suffice to generate change, with or without private ownership?

A few central European economies twice became laboratories in recent decades for testing competition without private ownership. From the late 1960s to the late 1980s they allowed each state-owned firm to set their own prices, outputs, wages and workforce in competition with the others. Whether or not efficiency improved, it was clear that economic dynamism did not ensue. It was said in defense of these state firms that their managers’ plans for them were often blocked by the state and that the managers knew they could get their losses covered by the state so they didn’t need to take chances. In the 1990s, the state firms were put on their own. This time, with their backs to the wall, they began innovating like mad, hoping that with luck it would be their ticket to survival. But these state firms were not able to innovate successfully.1 Competition, it appears, is not sufficient for economic dynamism.

More recently, it has come to be argued that the corporatist economies of east Asia, which had achieved wonders when there was a yawning gap with the West, ran into trouble in the 1990s because state intervention in the corporate sector through permissions, subsidies and guarantees led ultimately to mass overinvestment and insolvency.2 On this thesis, private ownership is not sufficient for dynamism either: capitalism, in which capital is free to go in new directions without a green light from the state, becomes necessary at some point in economic development if dynamism is to continue.  READ MORE...