A Capital Writing interview with the author of The Next American Economy.
A Capital Writing interview with the author of The Next American Economy
As part of a new project for Capital Matters, called Capital Writing, I’ll be interviewing authors of economics books for the National Review Institute’s YouTube channel. For our first interview, I talked to Samuel Gregg of the American Institute for Economic Research about his book The Next American Economy: Nation, State, and Markets in an Uncertain World. Below you will find an edited transcript of a few key parts of our conversation as well as the full video of our interview.
Dominic Pino: In the book, you present a tension between private interests and the general welfare. When the Founders said, “general welfare,” it was supposed to be a restriction on government, saying that government should only look out for the general welfare, not for the welfare of specific groups of people and not to concentrate benefits in specific places. But all throughout American history, as you note in the book, we’ve seen government do just that and use policy to benefit specific people. You say that industries should take pride in not asking for government protection. What do you think are some things that could help us to move in that direction, so that companies aren’t sitting around spending money lobbying and instead spend money providing things to their customers?
Samuel Gregg: I think this idea of the “general welfare” as you describe it is the way it was understood by the Framers. It’s very similar to the type of argument you see advanced in Adam Smith’s Wealth of Nations. He talks about the ways in which businesses pursue favors, which was very much part of the mercantilist system that existed at the time. Adam Smith was a great proponent of markets; he wasn’t particularly a fan of businessmen because he noticed this propensity on their part to go to the government, to get privileges, favors, and licenses to do certain things in parts of the world that would exclude anyone else from engaging in the same type of activity. So I think that’s very much part of this late-18th-century outlook that Smith is articulating, and it’s at least partially influential of the way the American Founders thought about this.
Fast-forward to today and I think it’s fair to say that cronyism is alive and well in large parts of the United States. I cite some different data showing that various counties around Washington, D.C., are among the richest in the United States, and they literally produce nothing. They’re there to lobby, to acquire favors, to form links between legislators and private interest groups.
So, we have to ask ourselves, how do we break this nexus up? There should be a type of norm that American business leaders should take it as a point of pride to say, “I do not go to the state to fix my problems. My job is to produce goods and services that customers want and need, and that is how I am going to make money.” But we also know that incentives really matter, and incentives can be very powerful, especially in the sense that they can outweigh very strong moral norms to do the contrary. One way to do that is by reducing the size of the regulatory state, not just in numbers, but in the regulatory state’s capacity to offer these privileges and favors in the first place. If a regulatory agency has nothing to give people, then private interests are not going to go to them.
You can shift the incentives away from the state and back to what markets are supposed to do, which is delivering goods and services for consumers. It’s ultimately about restoring consumer sovereignty. You do that by reducing the capacity of private interests and regulators to scratch each other’s backs.
DP: Before China was the big economic threat to the United States in conventional wisdom, it was Japan. We saw how that turned out for Japan. They basically haven’t seen significant economic growth for the better part of 30 years now; they’re still a rich country, but a stagnant one. We’re seeing China right now, in the face of higher interest rates and in the face of scaling back their market reforms they had done in previous decades, face some really significant problems. What are some lessons we can learn from our economic adversary of 30 years ago, and our economic adversary now?
SG: Let’s start with Japan. I was a teenager in the late 1980s, and I remember, very distinctly, people telling me that Japan was the future. We saw this in popular literature and in films, like Black Rain, Rising Sun, or even the first Die Hard film. There were reams of books telling us that we had to become like Japan, and at that very point in time, the Japanese economy entered a period of stagnation that they have never really come out of.
There are lots of reasons for that stagnation, including their population problem and bad monetary-policy decisions, but also it’s very clear that the use of industrial policy — in fact, they had an entire ministry that was focused upon this and was seen as one of the most powerful ministries in the Japanese government — had disastrous effects. It’s also interesting that those parts of the Japanese economy that continued to prosper were precisely the ones that were not influenced by industrial policy. The lesson of Japan is: Do not be like Japan. They still do industrial policy to a certain extent, even though their own finance ministry has publicly said that the Japanese model was not the cause of their success and was in fact the cause of their failure.
Let’s switch to China. China did engage from 1978 onwards in some economic liberalization. That primarily involved gradually opening its markets to external investors and traders, including Americans, but we shouldn’t kid ourselves. That liberalization was always relatively limited, and the Chinese government was managing that in a way to make sure that they wouldn’t lose their grip on power. And they never gave up on using state forms of development, in other words, pretty big and expansive industrial policy. After the 2008 financial crisis in America, it’s very clear that a lot of Chinese policy-makers looked at the American situation and said, “If that’s free-market capitalism, we’re not sure we want that.” Beginning then and continuing and accelerating in 2012, when Xi first came to power, China has been winding back that limited economic liberalization.
And what’s happened? Well, the growth has slowed dramatically. In fact, China is releasing fewer economic statistics for public access, and I think that’s because they know that the statistics show that the growth is just not what it used to be. I would argue China is falling into the middle-income trap. That’s where they have to move from having a comparative advantage in cheap labor — which has been their comparative advantage for a long time and is now disappearing because they too, through the one-child policy, have managed to inflict a demographic disaster upon themselves — to high-intensive capital formation, and they haven’t managed to make that jump. So China has moved down the path of more expansive state capitalism, and it’s producing immense corruption, trillions of dollars in misallocated capital, cities where nobody lives, and severe dysfunctionalities in capital markets. And more and more foreign investors are simply leaving.
DP: Going back to Tocqueville, a key part of American life is that we have so many civic associations that can pursue goals that aren’t profit. They can pursue environmental protection or animal welfare, things that are very important, but it’s also important that each organization understands what its purpose is.
SG: Think of it this way: No one would say that the job of the military is to raise a family. No one would say that the job of the family is to wage war. The purpose of an NGO is not to pursue profit. When you apply it to business, the conclusion you reach is that business pursues profit and shareholder value, which is why it’s not a family, which is why it’s not the army, which is why it’s not an NGO. Stakeholder capitalism threatens to throw all that up in the air. And everyone will suffer as a consequence of that in the long term, because it will mean a lot less growth, a lot of organizational confusion, and it will result in a lot of major businesses being turned into just another NGO.
DP: One of the biggest takeaways from your book, which was very refreshing to read, is that it ends on a pretty optimistic note. You are dealing with some really serious issues, but you retain this confidence that the United States can resolve these issues, can move forward in a more productive way. You reject a lot of the defeatism mentality that I think we see from a lot of people, who either say the U.S. needs to be just another country or that America at its root is actually bad and needs to be changed or destroyed. Why is it that you have this confidence in the United States to overcome these challenges and be able to prosper in the future?
SG: The American people, since they came together as one, have shown a remarkable capacity to overcome obstacles that at the time seemed insurmountable. And we have a capacity also to go back and refresh ourselves and remind ourselves what America is supposed to be about. Maybe it’s because I was born outside this country that I notice it, but most countries don’t have that. Most countries do not have a set of documents, debates, historical events, and personalities that we can go back to and say, “This is who we are, this is what we’re supposed to be,” and fundamentally it’s not about ethnicity, it’s not about religion, it’s not about the type of reference points that many European countries, naturally enough, use when it comes to defining themselves.
Our identity, as the American historian Gordon Wood — who is not a conservative, by the way, he’s more or less a modern liberal historian, but he makes the point, I think very convincingly, that what gives Americans identity and distinctiveness are these ideas, debates, documents, and personalities from the Founding period. That is what lots of Americans still look back to when asking questions about how to move forward in a way that’s consistent with our principles. It’s also the reason, by the way, that groups like the 1619 Project are desperately trying to tear these things down, because they know that once you tear that down, that America is just another country, and our fate is to be nothing more than just another Western social democracy.
The power of those ideas that lie at the heart of the American experiment in ordered liberty are particular in the sense that they were brought together in a particular time and place, but they are also ideas of universal import. The idea of ordered liberty is not just an American thing. It’s an idea that all peoples are capable of, but we have been blessed that this has been made so much a part of who we are as a country in a way that no other country can come close to claiming. The more we look back at that, the more we look, for example, at The Federalist Papers and the political economy envisioned there, or my favorite of the Founding documents, Washington’s farewell address. The vision of political economy that shines through there is of America as a commercial society and a commercial republic, in which entrepreneurship and economic creativity flourishes, in which economic competition binds the country together, and in which America is looking out and has a dynamic trade relationship with the rest of the world. That is ultimately a deeply optimistic document, and it is far preferable to the defeatism that has entered so much of the American body politic, on the left a long time ago, but unfortunately, we find it now on parts of the right as well.
