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Column

Robert H. Rock
Chairman and Publisher
Directors & Boards

Paradigm Lost
The presumption may be that capitalism has failed, but don’t give up just yet or it could be paradise lost forever.

By Robert H. Rock

As a Harvard undergraduate I majored in what at the time was a new concentration, “History and Science,” which had an overarching field of study, the history of science. In the late 1960s the seminal work in this field was a recently published book by Thomas S. Kuhn entitled "The Structure of Scientific Revolutions."

In Kuhn’s structure, there are “puzzle-solvers” who do “normal science” by making incremental advancements within the borders of the prevailing world view; and, there are “paradigm-builders” who question conventional thinking and look beyond these borders, ultimately effecting a “paradigm shift” that replaces one conceptual world view with another.

Kuhn builds his argument around three scientific revolutions, namely the Copernican revolution in 16th and 17th century astronomy, the Darwinian revolution in 19th century biology, and the Einsteinian revolution in 20th century physics. These three scientists thought outside the box and envisioned a fundamentally new, and more powerful, paradigm.

In terms of economics, where are the paradigm-builders of the 21st century?

The Long Shadow of Keynes
As the world struggles with the current economic meltdown, our leaders seem constrained within a paradigm defined 80 years ago by the English economist John Maynard Keynes. Today’s policy makers, like FDR’s New Deal brain trust, believe that massive government spending is the solution.

However, like their predecessors, these modern day Keynesians do not have a playbook; they are offering up an assortment of sometimes contradictory stimulus measures. No one, not even the policy makers themselves, are conveying any sense of confidence that these measures will work.

Along with this deficit-spending approach is the presumption that capitalism has failed and that government must step in to oversee the once hallowed free-market economy. This is not the first time in our working lives that the efficacy of capitalism has been questioned. In the Spring of 1980 Time magazine’s cover story asked, “Is Capitalism Working?” Unemployment had reached 8% (heading toward almost 10% in 1983), inflation peaking at just under 15%, and mortgage rates hitting 14%. The American economy was in crisis after two years of stagflation.

Enduring Lesson
Today’s crisis may be greater, perhaps much greater given the scale of the global meltdown, exemplified by derivatives ballooning to over $500 trillion, 10 times the economic output of the entire world!

It’s not surprising that the case against capitalism is reaching a crescendo with strong arguments for government intervention not only in regulating financial markets but also in managing so-called critical business sectors.

The enduring lesson of financial history is that sooner or later every bubble bursts, and the Achilles heal of capitalism has always been the business cycle of boom and bust when greed flips into fear.

Unquestionably Upward Trajectory
In his recently published book and accompanying PBS series, “The Ascent of Money,” Niall Ferguson, a Harvard history professor, examines 4,000 years of economic evolution, from the moneylenders of Second Millennium B.C. Mesopotamia to today’s “Chimerica,” the duopoly where the “East Chimericans” do the saving and the “West Chimericans” do the spending. Ferguson concludes, “Though the line of financial history has a saw-tooth quality, its trajectory is unquestionably upwards.” Unfortunately he ends his financial history in the summer of 2008, just before “9/15,” the fateful day when Lehman was allowed to go under.

Today’s “Great Recession” may be shaking our confidence in the capitalist paradigm, but discarding it could consign us to paradise lost forever.

Robert H. Rock is chairman and publisher of Directors & Boards. He can be contacted at rrock@directorsandboards.com.