Welcome to the Center on Capitalism and Society

Today’s established economics – the economics dominant in classrooms, banks and governments – misconceives the modern economy. This disconnect has consequences for how we understand history, how we make policy, and how we view capitalism.

Its explanations fail, or at any rate mislead, at important junctures in modern history.

•In the present decade, most notably in the U.S. and U.K., an enormous bubble in housing prices led to their collapse, to massive defaults on mortgages and a near-bankruptcy of the banking system.

The established body of theory speaks of poorly designed incentives but does not explain the towering rise of housing prices. In existing models based on this theory, this rise does not square with the theory’s postulate of “rational expectations.” No wonder, since the latter assumes that markets possess complete knowledge. That assumption does not apply to a modern economy, in which innovation and evolution face actors with imperfect knowledge.

•Since 2000 or so, the U.S. economy has shown signs of a decline in its “dynamism” – its capacity and urge to make indigenous innovations – even if “growth” kept up. Neglect of business by banks, neglect of the long term by business firms, and a drying up of venture capital all point to a decline in dynamism.

The established theory is incapable of addressing such possibilities since it fails to incorporate indigenous creativity, exploration of the unknown and discovery.

•By the 1980s, it became obvious that continental western Europe lacked the dynamism it had displayed in the 1800s. The continent’s postwar “miracle” was mostly catch-up, not dynamism. In contrast, the U.S. retained its dynamism, as innovation surged in the 1920s and 1930s, 1960s and 1990s.

Adherents of the established theory say that the rise of the welfare state reduced after-tax wages, cutting the supply of labor. However, this story overlooks the wealth effect. When take-home pay moved to a lower growth path, reducing the incentive to work, private wealth gradually sank to a lower path, increasing the incentive to work.

•In the early 1800s, the U.S. economy of Alexander Hamilton enjoyed a phenomenal “take-off” – without railroads or steam power to speak of. In Europe, one country after another sooner or later experienced the same.

The established body of economic theory offers no explanation of why this explosion occurred then or at all. The theory makes no room for any creative internal forces that may have powered it.

 Until economics is grounded on the essential character of modern economies – their ideas, uncertainties and ignorance – it limits and distorts our view of the world.

In response, the Center on Capitalism and Society is rewriting economics so that we can understand the workings of capitalism, that is, of modern economies – how they get their dynamism, how they promote economic inclusion and how the imperfect knowledge on which they operate opens them to healthy booms yet also to unhealthy booms and ensuing slumps. (See our Mission statement.) On these questions, work at the Center has already produced basic insights over this decade.

In its early years, following the brilliant innovation and joyous boom of the late 1990s, the Center recognized American capitalism to be the exemplar of economic dynamism among existing modern economies. The recent crisis may not alter that judgment but it has raised new questions – questions about ways in which the financial sector may have diminished the economy’s dynamism and the ways in which it has destabilized the economy. We are interested in restructuring the financial sector with several objectives in mind: to temper its speculative excesses, to reduce the vulnerability of the economy to the speculative excesses that will inevitably remain, and to recreate the traditional links between finance and business in order to increase the economy’s dynamism and inclusion.