Teaching
FREEDOM a series of speeches and lectures honoring the virtues of a free and democratic society
THE FUTURE OF CAPITALISM By Professor George Viksnins
Professor George Viksnins delivered the following remarks to students attending the 2011 Engalitcheff Institute on Comparative Political and Economic Systems (ICPES), a program of The Fund for American Studies (TFAS). Dr. Viksnins taught the course Comparative Economic Systems at TFAS for more than Dr. George J. Viksnins is professor of
30 years and is beloved by countless students who affectionately refer to him as
economics at Georgetown University,
“Uncle George.” He was honored with the Walter Judd Freedom Award in July 2002
where he has been a member of
by TFAS. Other recipients of this honor include Ronald Reagan, John Bolton, Donald
the faculty since 1964. From 1976 to 1981 Viksnins was a director of
Rumsfeld and Jeane Kirkpatrick.
the FMI Financial Corporation. He
I
has also served as a consultant to the board of governors of the Federal Reserve System, The World Bank, the Agency for International Development and the International Monetary Fund. In 1992 Viksnins worked as a
To start out on a light note: Apparently Einstein went to heaven and learned that there was a housing shortage. Saint Peter informed him that he would have to share a condominium with three other people. And Einstein said, “No, no. Wait a second. I want to interview these people before I commit to spend infinity with them.”
consultant to the National Bank of Latvia, a position that later earned him the Order of the Three Stars for his pivotal role in the development of the Latvian monetary system. The award was presented to him in 2004 by the president of Latvia Varra Vike-Freiberga. He is currently a senior advisor to the Bank of Latvia. Viksnins has authored many articles and books. He received his bachelor’s degree
from
Temple
University,
master’s degree from the University of Pennsylvania and his doctoral degree from Georgetown University.
So, Einstein asked the first one, “What is your IQ?” And he said, “145.” So, Einstein said, “Well, that’s fine. I’d be delighted to be one of your roommates. We can discuss nuclear physics, we can discuss relativity theory and so on.” He asked the second one, “What is your IQ?” The second said, “Well, it’s 120.” And Einstein thought about it for a while, then said, “Well, we can talk about literature. You probably know some foreign languages, you know some foreign literature, so we can discuss that.” Then he asked the final one, “What is your IQ?” And the final one said, “85.” Einstein thought about this for a long time and said, “How did the market do today?”
Keep that in mind for any discussions you have with relatives who are working on Wall Street and think themselves to be very important. Many of you know something about Karl Marx. Probably you don’t really need to know any more than you already do. Indeed, I am fond of saying that the only Marxists who are left in the 21st century are people who have never experienced socialism, and therefore they’re free and able to follow a Marxist approach to history. As you know, Marx’s most famous book is called Das Kapital. The basic historical message of that book is that economic progress involves inevitably a class struggle between the bourgeoisie – who own the means of production – and the proletariat – people like you and me – who actually work for a living, either doing mental work or physical labor.
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2 express their views on TV or on the radio or in newspapers? No way, not in 1987 because then that type of public communication was in the hands of the Communist Party. To a lesser extent, this is also true in China today. At times, I’m surprised at how open the Chinese have been to dissent and differences of opinion, though not at a fundamental level. Clearly there is a limit to what the Communist Party allows and the Party controls the means of communication.
Marx views the economic situation as fundamentally unstable. He believes there will always be a tendency toward overproduction and under-consumption. He sees an inevitable trend toward something he calls the immiserization of the proletariat – in other words, the working class becomes very poor, and as the struggle continues, the working class becomes more and more exploited. Any time that wages rise slightly above subsistence, the poor have more kids and that drives the wage rate down in another 10 or 11 years. So, there’s sort of a sine curve between wage rates and population growth that means there is nothing in the functioning of the system for the working people. Moreover, there will be increasing violent business cycles associated with overproduction and under-consumption. Joseph Schumpeter, on the other hand, who is my favorite economist, has a very different view on capitalism. He views capitalism as capable of explosive growth. Schumpeter’s point of view about history is that this explosive growth benefits all the people. For example, electricity made a great deal of difference for the ordinary
household. The ordinary household doesn’t have to go shopping every single day. They are able to store their food in their refrigerator. The typical household is able to do laundry once or twice a week instead of every day or every other day. And so, capitalist growth leads to mass production – production that benefits the masses. Furthermore, capitalism tends to go hand in hand with democracy and with individual freedom. Individual freedom is something that is preserved by the capitalist system. This is very similar to the thoughts of Milton Friedman in his book Free to Choose or his earlier book called Capitalism and Freedom. He makes a very interesting point. In capitalism, it’s enough to have money. If you want to criticize the system, you can indeed buy a full page in the Washington Post or The New York Times and advertise your views. On the other hand, under a socialist system, where the government owns the basic means of production, it’s not enough to have money. In the old Soviet Union, in 1987, there were a lot of people who had made a lot of money by speculating. But, could they
So, Schumpeter says mass production benefits the masses. Moreover, Schumpeter in his best-known book published in 1942, Capitalism, Socialism and Democracy, confidently forecast that poverty in the capitalist countries would be eradicated in 50 years. Okay, 42 plus 50 – so he said by 1992, in the U.S. and in most other capitalist countries, there would no longer be poverty. Now, I know that this may sound shocking to many of you. In fact, I would say Schumpeter was too pessimistic. I would say most poverty was, in fact, eliminated by 1982, not 1992. Now, of course Schumpeter meant – and here I also go along with that point of view – Schumpeter meant real, basic human needs kind of poverty, where a household would not have enough to eat, they would not have decent clothes and they would not know where they would be sleeping that night. Today I think you would be hard put to find a household in the United States experiencing real physical poverty in terms of not having enough to eat, not being able to afford any clothes and not being able to find a place to sleep. I know that there are the homeless. The homeless are, of course, in many cases, ill. They have some serious diseases like alcoholism or drug abuse, and so they refuse any attempts on the part of local government or the Salvation Army to
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provide them with a hot meal, a place to sleep and some secondhand clothes. So, I think you would really have to go around with a magnifying glass in our society to find real poverty. I grant that there may be a few cases which are beyond the reach of communications and transportation kind of systems, but that’s a very, very small number. And certainly in countries like Germany, France, Sweden – all capitalist countries – you would find it difficult to experience any sort of basic human needs. Marx also wrote about greater and greater concentration of economic power in fewer and fewer hands, that in each downturn, the little fish would be gobbled up by the big multinational corporations and concentration of economic power would proceed rapidly.
I am fond of saying that the only Marxists who are left in the 21st century are people who have never experienced socialism, and therefore they’re free and able to follow a Marxist approach to history.”
Schumpeter says, “Who really cares?” Who is concerned about short-term market power – because in the long run, profits actually serve a useful function. Capitalist entrepreneurs are like moths that are drawn to a flame. The larger the profit, the more surely a big moth will come along and try to get a piece of that. His famous experience there has to do with the whale oil monopoly. The seagoing captains of New England around the middle of the 19th century
had set up the equivalent of an OPEC. I don’t know what the acronym would be – I guess the Whale Oil Exporting States. But, the Whale Oil Exporting States had divvied up demand, had divvied up the output among themselves and had a very nice, fat profit margin. Well, Schumpeter calls it the gale of creative destruction. The gale of creative destruction – in this case, electricity – would basically blow away this short-run whale oil monopoly.
TRIBUTE TO “UNCLE” GEORGE VIKSNINS ON THE OCCASION OF HIS RECEIPT OF THE WALTER JUDD FREEDOM AWARD July 25, 2002, The Fund for American Studies, Remarks by Roy H. Ginsberg (E 73) Professor Viksnins, Walter Judd would have been pleased that you were selected to receive the freedom award named for him. During the darkest days of the Cold War, Walter tirelessly reminded us of the plight of millions of Chinese and Russians living under communist rule…and you, George, kindled the flame of Latvian and Baltic freedom and independence. You did this in the classrooms of Georgetown University. You did this in the halls of government. And you did this in the hearts and minds of Americans with roots in Eastern Europe and the Baltic republics. When you and I were professor and student together at TFAS in summer 1973, it had only been 33 years since Latvia, a sovereign state and member of the League of Nations, had lost her independence to the Soviet Union in 1940. She endured the brutalization of Nazi rule under the policies of ethnic cleansing and lebensraum of Adolf Hitler, and the hard years of Sovietization, which bore the signature of Josef Stalin. Today Latvia is not only free, independent and democratic,
she is preparing for membership in the European Union – a union of peace and reconciliation among the European states based on the same principles taught by TFAS – respect for the rule of law, freedom of choice and market economics. You never abandoned Latvia and, through you, neither did your students and associates. We will never forget what you meant to Latvia and all captive nations during the Cold War. Professor Viksnins, you are to generations of TFAS students an intimidating, commanding and tough professor with an encyclopedic knowledge of economic theory and comparative economics systems. You combine theory and practice by consulting for international institutions and you thus make the classroom a policy-relevant place; yet it does not take very long for your students to see through the veneer of toughness a pussycat, an Uncle George, who loves teaching and cares about his students’ well-being. What I admire most about you, George, and what inspires me as a professor, is your rounded/holistic approach to teaching – you are a stellar teacher in the classroom and a renowned scholar in your field, but you also take an interest in your students as individuals – their broader education and well-being and their subsequent professional development.
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4 I think also an example of this is OPEC itself. Although we cannot really claim that OPEC is overpricing its petroleum at the moment, nevertheless, I think if you look at the last 50 years or so, from 1973 until about 1980, oil prices rose from around $4 to around $40. Thereafter, after some of the gale of creative destruction came in, like new discoveries of oil, discoveries using natural gas, the electric car and so on, the demand for petroleum is not as stable as you might think. Indeed, we now know that gas can be collected through a process known as fracking, and this natural gas can be used to drive automobiles, can be used to generate electricity and all of that. So, I think you’ll find that the Russian Federation, which up to now has been fat and happy with respect to its monopoly – or near-monopoly in the
rest of Europe – is going to find that its petroleum and natural gas are not going to be as scarce and they’ll not be able to charge as high a price as they thought they would always be able to.
business downturns are, in fact a good, cold shower for the economic system. Indeed, Schumpeter also argued that bankruptcy and unemployment play
So, excessive profits, in fact, call forth more innovation and lead to a sharing of the markets to a much greater extent than the monopolists initially believed. Next, there is the question of business cycles. Marx thought that there would be increasingly violent business cycles, concentrating ownership in fewer and fewer hands, and driving back down to the level of subsistence wages for the unemployed – the unemployed who Marx called by a special name – the industrial reserve army – who would be impoverished by these business cycles. Well, Schumpeter’s view is that business downturns play an important role, that
And you’ve never hesitated to teach students your own values and beliefs in government and economics while expecting them to develop and argue their own opinions and arrive at their own conclusions. Your interest in young people reminds me of the interest David Jones and Walter Judd – founders and leaders of the Charles Edison Memorial Youth Fund, now TFAS – had in students and alumni. Because they took an interest in the education and development of young Americans, they inspired and encouraged young people to be all that they can be. They not only took an active interest in students while they were at ICPES, but they celebrated their accomplishments and offered them support as these students took their place in society as adults. In so doing, they and you instilled in these young people a sense of ownership in the American polity, economy and society. George, just as you carried the torch of Latvian freedom during the Cold War, so too you carry the torch of David Jones and Walter Judd and other luminaries of this organization who did so much to open the world to ICPES students from across America, and to expose them to the workings of government at a time of turmoil at home and abroad for the United States. I want to be the kind of teacher-leader you are…and Walter and David were. I suspect that all of us in this room, whether students, staff members, leaders or contributors to TFAS, want to have the same kind of impact on young
Americans as you have had. I will always remember, George, the C+ you made me earn in comparative economics and how that course reinforced my interest in international affairs and helped me understand at root why American capitalism, even with its imperfections, is preferable to socialism. I will never forget you and your wife’s wonderful hospitality to the TFAS students of 1973 at your home and throughout the summer – and our heated debates over Watergate and its impact on the workings of our political system, the Vietnam War, rapprochement with mainland China and its impact on the Republic of China on Taiwan, relations with the Shah’s Iran, the Jackson-Vanik amendment, and U.S.Soviet détente. I will always remember your guest lecture at my institution, Skidmore College, which you called a “bastion of capitalism” and where you preached capitalism to capitalists. Nor will I forget your assistance in helping me and other alumni honor Walter Judd on the occasion of his 90th birthday; and your continued support of me by welcoming my own students who have been coming to TFAS for nearly twenty years. George, after Latvia’s return to independence in 1990, you could easily have become the Latvian economics, finance or foreign minister or Latvian ambassador to the U.S. or U.S. ambassador to Latvia. And you still might. But till then, we’re glad your name remains synonymous with The Fund for American Studies. Congratulations, Uncle George.
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Capitalism tends to go hand in hand with democracy and with individual freedom so that individual freedom is something that is preserved by the capitalist system.”
a role – play a functional aspect of the capitalistic system, that indeed, if we guaranteed a level of living for everyone, there would be no particular motivation for the entrepreneur to innovate, to take risks and, indeed, to embark on what Schumpeter called the quest for boundless wealth.
Schumpeter, however, asked the question “Can capitalism survive?” And he answered it, “No, I don’t think it can.” So, Schumpeter, who really admired capitalism and thought that the capitalist entrepreneur was a hero rather than a villain, nevertheless thought capitalism as a historical experiment would not be allowed to survive.
What motivates people like Warren Buffett, Bill Gates or the late Steve Jobs? Well, it’s the quest for boundless wealth, even if they give away most of it.
Here, he mentions four things that I will just mention very briefly.
Finally, Schumpeter also disagrees with Marx concerning imperialism. Marx viewed imperialism as necessary to avoid the collapse of capitalism in its final days. This idea, of course, was developed to a much greater extent by Lenin, whose best-known book is called Imperialism, the Highest Stage of Capitalism. And this is where a lot of the political attitudes of the so-called third world are found today. They are found in the Marxist/Leninist view of the inevitability of the collapse of capitalism.
First of all, Schumpeter says the entrepreneur becomes obsolete. The individual entrepreneur who has a very strong opinion about what needs to be done is not really welcome in the modern bureaucracies – either in government or in business. If you were to go to work for IBM – which, by the way, is doing remarkably well – you would have to become an organization man. You would have to listen to the bosses up high who wanted you to work on A rather than B so that your ability to choose your own projects, your own ideas, would be severely limited.
Schumpeter, as I think you can see, was a very optimistic analyst of capitalism. He argued that there was nothing in the inherent economics of capitalism that would lead to its demise. He certainly did not think that the Marxist prediction of the immiserization of the proletariat had any validity.
Second, Schumpeter mentions the destruction of the protective strata. He mentions that in the Austria-Hungary days of the von Habsburgs there was indeed a class of nobles who would be taking care of the affairs of church and state. Today those in business
are expected to serve on government commissions, are expected to offer their opinion, and they’re not allowed to function freely to follow the goal of maximizing profits. Third, Schumpeter talks about the modification of the institutional framework. He says the modern corporation changes and challenges bourgeois thinking, that capitalist motivation is not really at home in many corporations, that corporate management is in fact encouraged to follow a multitude of goals, such as high employment, such as stable employment, such as regional diversity. So, the institutional framework is such that the individual entrepreneur is really severely limited. And there is, of course, a separation of management and ownership. The managers are agents and the principals are the owners, but in many cases, the principals don’t have any interest in what’s going on with their business. They may own a few shares of IBM or some other corporation, but most people who own these shares directly do not really bother to vote. It’s possible that at a meeting of the IBM membership, ownership could be taken over by people who control maybe 10 percent or 15 percent of total votes because the remaining votes were not cast at all.
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6 Finally, Schumpeter talks about the hostility of the intellectuals. Think about the villains in American literature and pop culture. Consider the TV show Dallas. Who was the villain? The villain was J.R. Ewing. J.R. Ewing was the perfect villain because he was a straight male, he was an oil company executive, he lived in Texas – so immediately, three strikes and you’re out. There’s no way of redeeming a person like that and stopping him from becoming a villain. We would be hard put to find villains on the silver screen or even on TV who would always be hissed when they appeared on the screen. That used to be the case when the villain appeared. The movie audiences would hiss and would
be encouraged to do this hissing because these were obviously the bad guys. Not so anymore. These days, who are the heroes or heroines? Let me conclude. Do I think Schumpeter was right? Is capitalism coming to an end? Well, I don’t really think so. It certainly isn’t inevitable. When I gave this lecture 30 years ago, I said, “Sorry, Schumpeter was right. Game over.” It was like the crew of a ship sitting on the deck and getting drunk as the ship is going down because there was nothing they could do. But Schumpeter wrote in the second edition that it is possible to get buckets and to start bailing.
Teaching Freedom is a series of remarks published by The Fund for American Studies, a nonprofit educational organization in Washington, D.C. The speakers featured in each issue delivered their remarks at a TFAS institute or conference or serve as faculty members of an institute. The speakers who participate in the educational programs contribute greatly to the purpose and mission of TFAS programs. The speeches are published in an effort to share the words and lessons of the speakers with friends, alumni, supporters and others throughout the country and world who are unable to attend the events.
The elections of Ronald Reagan and Margaret Thatcher were a pretty good example of people grabbing buckets and starting to bail. So, progress is possible. I suppose the question “Can capitalism survive?” will be answered by you and your generation.
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