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THE BOTTOM LINE

Capitalism under siege

THE story of American capitalism is a contradiction. It has succeeded in creating widespread material well-being, but yet has not satisfied a popular yearning for a society with less economic insecurity and more "fairness" and equality.

These questions hang over the impending mid-term election. Democrats want a more humane capitalism or an embrace of "socialism"; the Trump administration rejects socialism and advocates tax cuts, a juiced-up capitalism.

The stock market's recent turmoil is a reminder of the system's instability. Granted, capitalism lacks a precise definition. It's more a spirit than a strict formula. Still, capitalism requires some bedrock conditions: property rights and widespread private ownership, reasonably free markets - decisions of what to produce and how are left mainly to private firms and individuals, an acceptance of some inequality to reflect differences in talent, work effort, risk-taking and good or bad fortune.

We now have a splendid new overview of capitalism's successes and failures in a new book - Capitalism in America: A History - by former Federal Reserve chairman Alan Greenspan and Adrian Wooldridge, an editor at The Economist.

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You may have thought that America's economic advances have alternated between rapid gains and stretches of stagnation. Take the years between 1790 and 1860 - dull decades, you thought? Not so.

In 1793, Eli Whitney invented the cotton gin, dramatically improving cotton's profitability and entrenching a slave-holding economy. The Civil War became a certainty. In 1825, the Erie Canal opened transport between Albany and Buffalo. A canal-building boom ensued. By 1850, America had nearly 6,000 km of canals.

Nor was that all. In 1844, Samuel Morse introduced the telegraph. Mr Greenspan and Mr Wooldridge consider it more important than the later invention of the telephone, which mainly stimulated socialising.

By contrast, the telegraph quickly expanded the reach of business. Railroads were big users, because they needed to co-ordinate train movements.

What explains America's success at creating prosperity, argue Mr Greenspan and Mr Wooldridge, is society's willingness to accept change. Using economist Joseph Schumpeter's phrase, they write: "The central mechanism of this progress has been creative destruction."

Creative destruction involves a collective, though informal, bargain. In return for accepting the disruptions of new technologies, management methods and consumer tastes, people expected higher incomes and living standards.

This bargain is besieged, as Mr Greenspan and Mr Wooldridge note. Gains have dwindled; wages and productivity increases have slowed. Meanwhile, pain has increased. Unemployment after the Great Recession peaked at 15 million. Income inequality has risen. Corporate executives seem ridiculously overpaid.

As a result, the sanctity of American capitalism is now questioned more than at any time since World War II. Critiques have proliferated, including a provocative and informative book (Can American Capitalism Survive?) by my Washington Post colleague Steven Pearlstein.

Referring to dubious incidents of business conduct, he wrote: "These individual stories ... now colour the way we think about American capitalism. ... What was once considered the optimal system for organising economic activity is now widely viewed ... as having betrayed its ideals ... and forfeited its moral legitimacy."

Some of this rancour reflects a hangover from the 2008-09 financial crisis and Great Recession, when the system's near breakdown coincided with much self-interested, ethically challenged or greedy behaviour. If nothing else, this reminds us that capitalism has always had its seamier side of exploitation and fraud.

Mr Pearlstein argues that the distribution of income could be improved - without harming the rate of economic growth - by public policies that emphasised worker profit-sharing and an overhauled welfare system based on a "guaranteed minimum income".

Maybe - or maybe not.

The truth is that American capitalism is a joint venture between the private sector and public policies. Laissez-faire died a long time ago. But the interaction of so many pressures frustrates our ability to control the outcome.

We don't know whether capitalism is reinvigorating itself or is in a slow decline, overwhelmed by the effect of government regulations, higher taxes and ageing populations.

Writing in the 1940s, Mr Schumpeter expressed doubt that it would survive.

Mr Greenspan and Mr Wooldridge echo the same thought. "By producing prosperity, capitalism creates its own gravediggers in the form of a comfortable class of intellectuals and politicians. People link arms to protect threatened jobs and dying industries. They denounce capitalists for their ruthless greed." THE WASHINGTON POST WRITERS GROUP