McCloskey’s suggestion for changing the term “capitalism” into “innovism” might be a more practical way of arguing for free markets. Capitalism, as it’s tossed around in conversation, ends up getting misconstrued by both sides of the argument, because it lends itself to assume that societies have only become rich through the accumulation of capital. However, this is simply not true. It is ideas and the ability for entrepreneurs to assume the risks of employing the factors of production, by means of prices set in a market, to produce new (and perceived better) products or services to then turn around and sell them at uncertain prices in the market. The z, not the k, in our Solow model, if you will. This is “trade-tested betterment” as also proposed by McCloskey.
Accumulating capital certainly does help for taking risks. How money is raised in the stock market on the foundation of “limited liability” is a catalyst for breeding innovation. But, it is not the end all be all. Innovations happen without needing tons of capital. If this was the case, how did humans even make it this far?
“Accumulated capital becomes unusually, nonroutinely profitable only if it embodies betterment, innovism. As John Maynard Keynes pointed out, the return on capital could be driven down by investment to zero in a generation if there were no betterment. Because he thought that by the 1930s betterments had been exhausted — as some during the 2010s have come to believe again — he thought that savings (which depend on income, he claimed, not on profit) would henceforth exceed profitable investments (which depend on the allegedly exhausted betterments), leading to perpetual unemployment unless the government substituted social investment for private.” (McCloskey, pp. 101)
I don’t believe we have exhausted betterments. There are still plenty of poor people in the world, meaning there is room for improvement. As I was corrected by a colleague of mine, it’s not that in a state of perfect competition there is no innovation, but that all innovations have been exhausted. At this state of perfect competition, we are as “good” as we can ever be. This state of affairs will probably not happen within my lifetime, nor in the lifetimes of many future generations.
Innovations will continue to come. The rise of blockchain technology is at the brink of revolutionizing and streamlining industries like healthcare, finance and banking, and even government processes. Autonomous vehicles will reduce deaths by automobile by up to 90 percent! The grocery and food industry will change dramatically, making it easier to produce, process, and deliver, reaching more people at lower costs. These are just a few things off the top of my head that, though will experience some kind of growing pains, are undoubtedly under the umbrella of “betterments.”
This way of looking at the world is at the heart of free market economists (giving them the benefit of the doubt.) This is what they are trying to convey, but are often thrown into a discussion based on semantics. As a result, we see the defenders of capitalism having to constantly retort with, “Well, that’s not ‘capitalism,’ that’s ‘crony-capitalism.’” Or, “Being a proponent of capitalism doesn’t mean we can’t have a welfare state. I don’t hate the poor.” And so on and so forth.
It’s like referring to people as African-American or Cuban-American. It implies that they are something different from just plain ol’ American. But, really, they are all just as American as anyone else may be. The term crony-capitalism implies that it is something different from capitalism, but is it really? Explaining the differences seems like a waste of time.
We should replace “capitalism” with “innovism” — “understood as the frenetic bettering of machines and procedures and institutions after 1900, supported by a startling change in the ethical evaluation of the betterings.” By all coming together on the notion of trade-tested betterment, or innovism, we can then focus our discussions on the implications of government intervention into this process, monopoly or market power imbalances, regulations, taxes, income inequality, and issues on distributions of wealth. This would be much more fruitful as opposed to having to discuss on the frays of a loose, and frankly worn-out, term, capitalism.
McCloskey, Deirdre, Bourgeois Equality “How ideas, not capital or institutions, enriched the world,” 2016.