Foreword: What Happened to Capitalism?
What has happened to capitalism in America? Businesses still pursue profit, yes, but not in ways that advance the public interest. Over the past 50 years, corporate profits rose by 185%. Wages rose by 1%. American industry lost its technological edge, from semiconductors to commercial aerospace to robotics. Investment stalled, so much so that the entire corporate sector became a net lender, handing money back to financial markets faster than it tapped those markets for capital to invest. As American Affairs editor Julius Krein has observed, if $1 trillion in annual stock buybacks are to be taken at face value and “there are in fact no better investments to be made, … it calls into question the viability of the free market capitalist system itself.”
Managers are supposed to be accountable to owners, but the latter’s identity is no longer discernible. Most shares are held by passive funds, often on behalf of pension plans on behalf of retirees and taxpayers, or else overseas, often in sovereign wealth funds. Comparative advantage is supposed to allow a developed economy like America’s to focus on the most advanced technologies, but the U.S. trade balance in advanced technology products has swung from a $60 billion surplus in 1992 to a $190 billion deficit in 2020. Innovation is supposed to drive productivity but, in the manufacturing sector, productivity growth has turned negative, with factories producing less per worker in the early 2020s than the early 2010s.
The economic system’s malfunction has dire human consequences. Whereas 40 weeks of the typical male worker’s income in 1985 could provide the middle-class essentials for a family of four, by 2022 he needed 62 weeks of income—a problem, there being only 52 weeks in a year. Nearly half of Americans report having fewer children than they want and, outside the most highly educated and compensated households, affordability is the most frequently cited obstacle. The average American can no longer expect to earn more than his father did at the same age. Poorer regions can no longer expect to catch up with wealthier ones. The bottom 50% of households had less wealth in 2019 than in 1989, though the top 10% added $29 trillion. Life expectancy is falling.
In The Wealth of Nations, Adam Smith described conditions under which the private pursuit of profit advances the public interest. “By preferring the support of domestic to that of foreign industry” and “directing that industry in such a manner as its produce may be of the greatest value,” the capitalist “promote[s] an end which was no part of his intention.” That is, if capitalists see the expansion of domestic value creation as their best route to profit, then the nation will benefit.
The “invisible hand” is an explanation of how capitalism can work, not a promise that it will. If the hard, capital- and labor-intensive work of extracting natural resources, raising agriculture, building infrastructure, and manufacturing products consistently offers a less attractive investment profile than developing a cloud-based application that might scale to millions of users in just a few years with just a few employees, capitalism does not work. If firms facing pressure to raise wages or improve conditions or otherwise invest in American workers can instead offshore production to foreign labor or bring that labor into America for “jobs Americans won’t do,” capitalism does not work. If top business talent finds it can earn more money trading piles of assets in circles than making productive investments in the real economy, capitalism will not work. The market will deliver the profits, as America has learned, but also national decay.
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Rebuilding American capitalism is a quintessentially conservative task. Libertarians cannot understand the many supports that capitalism requires or countenance a role for government in supplying them. Progressives are disdainful of a system that leaves so much to private ordering and are eager to use public programs to provide whatever the market does not. Only conservatives have the necessary gratitude for what has worked before, preference for a free enterprise system that both grants liberty and imposes obligations, and comprehension of the need for institutions to shape market actors and constraints to channel productively their ambition.
Conservatives value the unique ability of the free market to allocate resources efficiently and empower people to meet one another’s needs, to limit the power of a central government and place it instead in the hands of those best positioned to take care of their own interests, and to evolve over time in response to real-world conditions rather than at a bureaucrat’s whim. Markets are themselves institutions through which people develop informal codes and formal rules for cooperating and transacting more effectively. But conservatives also recognize that markets have drawbacks and limitations. The free market can reduce people to consumers and relationships to transactions. It prioritizes efficiency over resilience, and individual self-interest over the common good.
Unfortunately, conservative economics was supplanted on the American right-of-center for the past 40 years by a market fundamentalism that saw capitalism as “just another word for economic freedom,” in former Senator Pat Toomey’s words. The task for policymakers, then, was simple. To quote Jack Spencer, vice president of the Heritage Foundation’s Institute for Economic Freedom and Opportunity, “Why don’t we look at a policy and just ask, does it expand economic freedom?”
Conservatives relinquished any right to advance a positive vision beyond free individuals exercising free choice in the market, each presumably able to optimize his own life. The failure of families to form reflected merely a preference for other pastimes. “Americans have voted with their wallets,” according to Scott Winship, director of the American Enterprise Institute’s Center on Opportunity and Social Mobility, “for more stuff, smaller families, and less time devoted to housework, raising kids, and investing in communities.”
Underlying this blind faith in the market was an assumption stated most clearly by Professor Glenn Hubbard, chairman of President George W. Bush’s Council of Economic Advisors: “The goal of the economic system [is] optimizing consumption.” Thus, what Americans made, or whether America could make anything at all, did not matter. Michael Boskin, chairman of the elder Bush’s Council of Economic Advisors, famously quipped, “Computer chips, potato chips, what’s the difference?” Michael Strain, director of economic policy studies at the American Enterprise Institute, said of America becoming a manufacturing center again, “we cannot, and we should not want to be.”
The accompanying agenda of tax cuts, deregulation, and free trade was well suited to an ideology of freedom disconnected from any conception of flourishing, but as economic policy it was a disaster for the nation. Globalization crushed domestic industry and employment, leaving collapsed communities in its wake. Financialization shifted the economy’s center of gravity from Main Street to Wall Street, fueling an explosion in corporate profits alongside stagnating wages and declining investment. The decline of unions cost workers power in the market, voice in the workplace, and access to a vital source of communal support. These trends, actively cheered on the Right, contributed to rising inequality, slowing innovation, narrowing of opportunity, and loss of middle-class security.
As with any fundamentalism, this reality was reframed to fit a happy and coherent narrative. Any market outcome, no matter how socially corrosive, was the right one: Broad regions of the country experiencing economic decline was natural and beneficial “creative destruction,” and a cue for left-behind residents to “move to opportunity” in a coastal city. Business talent flocking to hedge fund and private equity paydays was “efficient” and reflected the “enormous social value” created by financial engineering and trading assets in circles. If China’s state-owned enterprises dump cheap products into the American market, pulling investment and expertise and supply chains across the Pacific in the process, American consumers could enjoy the bounty at the Chinese Communist Party’s centrally planned expense.
The American Dream was not dead—cars, after all, now had seat warmers. Televisions were larger and cheaper than ever. And anyway, if economic freedom were the only goal, what else could be done? Watching a global pandemic bring the American economy to a standstill, former South Carolina Governor Nikki Haley remarked, “As we are dealing with changes in our economy, tax cuts are always a good idea.”
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Conservative economics, unlike the fundamentalism that supplanted it for a time, begins with a confident assertion of what the market is for and then considers the public policies necessary for shaping markets toward that end. The conservative conception of the common good requires a free-market economy in which all people can choose their own life course and through their own efforts contribute productively to their communities, support their families, and raise children prepared for the same. This is a richer notion of freedom, attached to obligation, recognizing that with economic rights come economic responsibilities.
In this conception, the economy serves not only the family and community, but also the nation. Efforts to dissolve borders and construct a more efficient global market devalue the nation-state, weaken its sovereignty, and reduce the citizenry’s democratic control. And notwithstanding liberalism’s one-world ideals, leaders in many other countries remain firmly committed to operating on behalf of their own national interests. If America pursues global supply chains while China pursues national ones, the result will be Chinese supply chains.
The conservative vision thus requires that markets not only allocate capital to productive uses and serve consumers at the lowest possible price, but also create the range of secure and dignified jobs in which people of varying aptitudes, with varying interests, in varying places can build decent lives. Over time, the market must produce growth that is widely shared and sustainable—a term coopted by the environmental movement but applicable as well to other foundations of a free and prosperous nation that market forces will tend to erode. The industrial commons requires protection, to ensure that its capital base, talent pool, and centers of innovation fuel productivity gains and provide for the national defense. So does the labor market, to ensure that the nation’s workers are essential to economic success and prepared for contributing to it. So does the social fabric, to ensure a sense of place, caring relationships built on mutual obligation, and the solidarity to solve problems and counter threats.
Capitalism, properly buttressed and constrained, can do all this. One need only look at the first 200 years of American history, as a backwater colonial republic grew into a continent-spanning industrial colossus and home of the world’s middle class, to have confidence it is possible. A robust national economic policy promoted this development through aggressive public investment in both industry and infrastructure, heavy involvement in the financial system, regulations for safe and equal access to vital services, the pioneering of public education and organized labor, and high tariffs to insulate the domestic market. These were not exceptions to American capitalism; they were its scaffolding.
In the 21st century, capitalism itself, and the public policies supporting it, will necessarily look different. Rebuilding American capitalism is not a nostalgic exercise in recreating the past. The effort is more akin to what occurs after an earthquake levels parts of a city. The disaster causes great suffering, but it also exposes poor construction, crushes unsuitable structures, and provides the opportunity to modernize. Rebuilding does not mean recreating the old city, but rather building something that retains its character while preparing to better serve its residents for the decades to come.
The task begins with an emphasis on Productive Markets—ones in which the conditions and constraints channel investment toward the uses most valuable for workers, the broader economy, and the nation. Globalization must be replaced with a bounded market that restores the mutual dependence of American capital and labor and invites the trade and immigration that benefit American workers. Financialization must be reversed, so that both talent and capital in pursuit of profit find their best opportunities in productive investment rather than extraction and speculation. Policymakers must embrace the principle that making things matters and boost investment in critical industries.
Likewise, policymakers will need to help reinvigorate Supportive Communities—the institutions that operate alongside and within the market. The American labor movement has devolved into a dysfunctional and sclerotic collection of unions that fail to advance workers’ interests effectively or represent very many at all. But a strong labor movement is vital for capitalism to function well. Public education has become obsessed with college prep, and does it poorly, but what Americans want it to do is help students develop the skills and values needed to build decent lives in the communities where they live. At the foundation of it all, families must form and flourish. For capitalism to succeed, the jobs it creates must be ones that support families and allow them to thrive.
This is true partly because families are important to a well-functioning capitalist system, but more so because they are its proper end. Families do not exist to support capitalism; capitalism exists to support families. The fundamental task of rebuilding American capitalism is establishing those constraints and strengthening those institutions that will create a market and reinforce a culture supportive of family life. The decision to form a family and raise children is not a consumption choice—an experience, to be weighed against a nice vacation or more time for gardening. It is the basic obligation of life and citizenship, incurred by virtue of having been born and raised oneself, and of enjoying liberty and prosperity in a nation built through that same work performed countless times across generations. A capitalism that avows neutrality on the importance of this pursuit compared to others, rather than holding it up as the highest good, has no future, and does not deserve one.
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This handbook presents a comprehensive agenda for restoring conservative economics and rebuilding American capitalism. The first section, Responsive Politics, outlines capitalism’s poor performance in recent decades and defines the substantive goals toward which the American people would orient the market. The second section, Productive Markets, discusses the policy reforms necessary to align investment and the pursuit of profit with the public interest. The third section, Supportive Communities, discusses the policy reforms necessary to buttress key institutions.
Each section includes an introduction, analysis and policy proposals, and commentary from Compass Advisors—all leading policy experts in their respective fields. Each advisor was asked to compose a brief memo for conservative policymakers, providing recommendations for addressing the issues at hand.
The discussion of data and policy proposals is by necessity brief, but each of the ideas presented here is supported by American Compass’s in-depth research, including essays, surveys, whitepapers, policy briefs, and podcasts. These are highlighted throughout, and available on our website. We hope that policymakers will find these materials useful, and join us in advancing a conservative economics that emphasizes the importance of family, community, and industry to the nation’s liberty and prosperity.