The founder of modern capitalism, Adam Smith, published The Wealth of Nations in 1776, the same year 13 colonies declared their independence from Great Britain. It remains the most referenced guide to prosperity because of its moral force: Smith said the freest markets are led by an invisible hand benefiting everyone, not just the individuals and companies motivated by their own profit.
So where is capitalism succeeding in a world roiled by kleptocrats, simmering trade wars, and the xenophobia that inspired Brexit? That would be the US.
American free enterprise is achieving the greatest growth in the developed world, posting annual gross domestic product gains since 2009. Within just eight years of the global financial crisis, the US was the only non-emerging-market economy with record GDP. The nation’s growth has exceeded the Group of Eight leading industrial countries’ average every year since 2012, a trend that economists surveyed by Bloomberg forecast to continue through 2020.
That recovery followed nine months of deceleration, including the 3.9 percent contraction in the second quarter of 2009. Pessimism was still prevalent later that year when Warren Buffett made what he called his “all-in wager on the economic future of the United States”--the purchase of Burlington Northern Santa Fe Corp., the railroad delivering coal, grain, and timber from the West and Midwest and imports from Canada and Mexico and through California.
Since 2009 the U.S. unemployment rate has plunged to 3.7 percent, from 10 percent—a sharper drop than in any developed economy in that period. California alone has created 2.9 million jobs since July 2009, the most among the 50 states and 500,000 more than No. 2 Texas. With more than half of U.S. technology sales, California overtook the U.K. to become the world’s fifth-largest economy in 2017. The state’s surging personal income and job creation are unsurpassed among developed countries since 2013.
To be sure, growth in the world’s two most populous nations, China and India, is faster than in the US. But an important stimulus for those economies has been their adoption of free-market reforms over the past couple of decades.
In the US, the financial crisis generated unprecedented losses for American housing, a market considered impregnable since the end of World War II. But in the first 15 months of the comeback, real estate was the best-performing industry. The 33-company S&P 500 Real Estate sector index gained 71.4 percent.
The financial crisis triggered more than $37 trillion of losses in global equity markets, diminishing corporate America. For a while, three of the world’s 10 most valuable companies were Chinese. Microsoft Corp. and Johnson & Johnson were the only companies in the top 10 that were spending more than 10 percent of their revenue on research and development. The distinction proved significant. Sure enough, by the end of 2016 the largest 10 companies were American, and only Microsoft and Johnson & Johnson remained on the list from a decade earlier.
As Smith said, the potential for growth is unlimited when companies invest their surplus in innovation. Most of today’s global leaders spend 10 percent or more of their revenue on R&D, including Facebook Inc.’s 19 percent and Alphabet Inc.’s 15 percent. Amazon.com Inc., which plows 13 percent of its sales into R&D, joined Apple Inc. this year as the only two companies with market values that exceeded $1 trillion.
Robust growth has yet to make a dent in the US poverty rate, which at 16.8 percent remains the third-highest among member countries of the Organization for Economic Cooperation and Development and is more than twice that of France. Widening inequality and meager wage gains over the past decade have been blamed for fueling some of the protectionism and hostility toward immigrants, especially the undocumented.
Even in the freest capitalist society, government has a role to play. Wages in the US are now increasing faster than anywhere in the developed world, helped in part by the $15-an-hour minimum in California, New York, and Washington. State and local governments are committing greater resources to clean energy, health care, and general well-being, including New York City’s record year for affordable housing production. Progress is uneven. New York has expanded Medicaid to the extent that only 8 percent of non-elderly adults are uninsured, while the comparable figure for Florida is 18 percent.
Such measures would be impossible without the growth generated by capitalists who are free to pursue their ideas. Take Amazon. The company’s success over its 24-year lifetime stems from founder Jeff Bezos’ willingness to invest in a glimmer of promise, a distant bonanza. After revolutionizing retail, Amazon was at least five years ahead of its rivals in the burgeoning market for cloud computing—a significant advantage in an industry that still represents less than 10 percent of information technology spending. Smith would be smiling as Amazon’s worldwide workforce expanded more than 50 percent in 2018, to 575,700, while earnings per share increased 159 percent. Bezos, himself worth more than $100 billion, raised his company’s minimum wage to $15 an hour for more than 250,000 U.S. workers and more than 100,000 holiday season employees.
Bezos persevered despite a swarm of criticism during his company’s unprofitable early years. Similarly, Tesla Inc.’s efforts to upend the automotive market attracted more short sellers than 499 of the companies in the S&P 500. Elon Musk, Tesla’s chief executive officer and product architect, faced opprobrium from analysts, journalists, and, most recently, regulators. In September, Musk agreed to give up his position as Tesla chairman and pay a $20 million fine to settle fraud charges after tweeting, falsely, that he had secured funding to take the company private.
Still, Musk might be the archetype of Smith’s capitalist. A serial entrepreneur who also founded SpaceX and helped create PayPal, he has more than anyone inspired the world’s appetite for electric vehicles while simultaneously profiting from it. In the eight years since its initial public offering, Tesla has produced the Model S, Model X, Model 3, and Roadster in 28 countries and increased its market value from $1.6 billion to more than $50 billion.
Smith would relish the example of Musk plowing his estimated $90 million fortune into his nascent company after a devastating stock market crash in 2008. Like Buffett, Musk did what capitalists are supposed to do in times of adversity: He invested in his business and the prospect that the economy would rebound.
The essence of American capitalism is the ease of doing business. The World Economic Forum’s 2018 global competitiveness report called the U.S. “the closest economy to the frontier, the ideal state” in their rankings. Data compiled by the World Bank Group show that the US is sixth, behind the significantly smaller economies of Hong Kong, South Korea, Denmark, Singapore, and New Zealand, in measurements of business-friendly policies—from ease of starting a business, obtaining credit, trading across borders, and resolving insolvent companies. These economies grew 47 percent while the rest of the world’s GDP rose 34 percent during the past nine years, according to World Bank data.
Capitalism in the US benefits from established bankruptcy law, relatively low taxes, and the protection of intellectual property, according to Carl Riccadonna, Bloomberg’s chief US economist. But the true edge for American capitalists comes from the country’s public and private institutions of higher education.
Since 1901, when the Nobel Prizes were first awarded, 67 percent of the universities affiliated with the winners have been based in the U.S. Since 2000, that share has climbed to 73 percent.
And, as befits a true marketplace of ideas, many of the universities that helped educate America’s most successful capitalists also house academics studying the problems in capitalism, and American society, as a whole.
US politics are polarizing, and trade policies are jeopardizing growth. Still, almost every part of the US is getting stronger. None of this would surprise Abraham Lincoln. The Great Emancipator advocated for universal education by creating land-grant colleges, now prized state universities, and the Freedmen’s Bureau to assist former slaves.
Quoting Lincoln in her summer 2010 Marquette Law Review essay, Heather Cox Richardson wrote: “A healthy American society worked so that ‘[t]he prudent, penniless beginner in the world, labors for wages awhile, saves a surplus with which to buy tools or land, for himself; then labors on his own account another while, and at length hires another new beginner to help him.’ This was the idea behind free labor, ‘the just and generous, and prosperous system, which opens the way for all—gives hope to all, and energy, and progress, and improvement of condition to all.’ ”
That remains at the core of American capitalism. “The invisible hand is the most visible in the United States,” says Bloomberg’s Riccadonna. And that, he adds, isn’t about to change anytime soon.—With Shin Pei
Matthew Winkler is editor-in-chief emeritus of Bloomberg News. The views expressed are personal.