by Bryan Caplan [Submitted for the Center for World Capitalism's 1996 Davis Essay Contest. Footnotes omitted.]
What I must do is all that concerns me, not what the people think. This rule, equally arduous in actual and in intellectual life, may serve for the whole distinction between greatness and meanness. It is the harder because you will always find those who think they know what is your duty better than you know it. It is easy in the world to live after the world's opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.
-Ralph Waldo Emerson
The citizens of market-oriented societies, especially the United States, have long been considered "individualistic"; that is, (by world standards) unusually self-reliant, independent, and free-thinking. "Individualism" also designates a type of economic system: "economic individualism" is a common synonym for the advocacy of free-market capitalism. What exactly is the link, if any, between the individualistic mentality of market-oriented societies and the individualistic economic institutions of capitalism?
The sequel argues that the connection is quite deep. A widespread individualistic mentality is the only stable foundation for capitalistic institutions; in particular, the high rate of progress that capitalism historically delivered depends crucially upon the creative, free-wheeling spirit. Importantly, the connection also works the other way: a stark distinction between society and the state tends to foster the individualistic ethos upon which capitalism depends.
2. Emerson and the Virtue of Self-Reliance
Twentieth-century Americans have frequently looked to Europe for cultural leadership, to learn what is "modern" and "progressive." In the 19th-century, however, Americans often saw themselves as the vanguard of modernity and progress. Rather than castigating their countrymen for their unusually individualistic attitudes, a number of American thinkers eloquently berated their country for not being individualistic enough.
Probably the finest 19th-century defense of the ideal of individualism may be found in Ralph Waldo Emerson's "Self-Reliance." Like many social critics, Emerson faults others for failing to live up to and appreciate the importance of their own ideals, giving modern readers a remarkable perspective on 19th-century American culture.
Traditionally, moralists urged obedience and submission to authority. Emerson preached quite the opposite:
Let us affront and reprimand the smooth mediocrity and squalid contentment of the times, and hurl in the face of custom and trade and office, the fact which is the upshot of all history, that there is a great responsible Thinker and Actor moving wherever moves a man; that a true man belongs to no other time or place, but is the centre of things.
Most earlier thinkers emphasized the priority of the group over the individual, the need for dissenters to humbly embrace society's greater wisdom. Emerson saw the same conflict, but took the other side: "Society everywhere is in conspiracy against the manhood of every one of its members." He saw this conspiracy as an omnipresent threat to the proper development of the human personality:
But now we are a mob. Man does not stand in awe of man, nor is the soul admonished to stay at home, to put itself in communication with the internal ocean, but it goes abroad to beg a cup of water from the urns of men. We must go alone. Isolation precedes true society. I like the silent church before the service begins, better than any preaching.
Note that Emerson defends the personality traits that every creative human being must possess. A conformist merely repeats the techniques discovered by earlier innovators, but a creator boldly claims that he can do something better than everyone else preceding him. A creator is essentially someone who doubts the alleged wisdom of the status quo, and who has the courage to think matters through for himself. Emerson's hero is the Thinking Actor, a person's whose intellectual independence enables him to surpass the achievements of previous generations.
Emerson's individualism was uncommon even in his own time. Yet he gave intellectual definition to a diffuse cultural tendency in need of a spokesman. Nineteenth-century Americans earned the world's respect with their business talent and inventiveness, but from the start world opinion berated them for their individualistic attitudes. What Emerson said to the world, in effect, was that individualism was the virtue that made Americans' - and all other - achievement possible. Imagine, he implies, how much greater Americans' achievements would be if they were to enshrine their individualism instead of minimizing it:
It is easy to see that a greater self-reliance - a new respect for the divinity in man - must work a revolution in all the offices and relations of men; in their religion; in their education; in their pursuits; their modes of living; their association; in their property; in their speculative views.
3. Schumpeter and Creative Destruction
"Perfect competition" is a popular ideal among economists. The essential idea is that if all business firms have a tiny market share, competitive pressure will force them to sell products at the lowest possible price. Conversely, more concentrated market structures allow businesses to charge harmful monopolistic prices. Economists within this tradition place little emphasis upon the remarkable creative abilities of the capitalist system.
The economist Joseph Schumpeter harshly criticized his colleagues for this restrained compliment to the productive power of capitalism, arguing that they noticed only the most banal of the free market's virtues. Schumpeter instead focused his attention on the immense creative power of capitalism, its fantastic ability to create new products and improve old ones. As he explained in his classic Capitalism, Socialism, and Democracy:
Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary...The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
During Schumpeter's lifetime, the automobile industry was an obvious example of the creative power of capitalism; if he were alive today, he would surely point out the personal computer market as a superb illustration of his perspective. While purchasers of home computers benefit from businesses' efficient use of inputs, this is actually a relatively minor achievement of capitalism. What is most impressive is that computers exist at all; that visionary entrepreneurs and scientists created a remarkable new product the uses of which we have only begun to explore.
Capitalism's creative ability, Schumpeter argued, is only half of its success story. Just as capitalism builds up new modes of production, so too does it perform the less popular but equally necessary task of eliminating and disbanding obsolete industries. Schumpeter termed this the "creative destruction" of the free market:
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation - if I may use that biological term - that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.
Schumpeter therefore has a compelling explanation for why economic progress under capitalism has been so dramatic. Most historical economic systems, from feudalism to mercantilism to socialism, cement economic power in the hands of a self-satisfied orthodoxy. Statist economies deliberately shield producers from change; the surest path to success is to gain the favor of the government, rather than the favor of a clientele. In contrast, laissez-faire capitalism strips established interests of governmental protection, and throws the economic contest wide open. While this theoretical ideal has never been fully implemented, the facts strongly support Schumpeter's interpretation; in relatively unregulated economies, industry leaders frequently lose their dominance while competitors forge ahead. Thus, after Henry Ford virtually created the modern automobile industry, he was displaced by General Motors; some years later, American auto-makers desperately sought governmental protection from Japanese competitors that suddenly threatened their entrenched position. While other firms hold their lead, the danger of falling behind remains real: Microsoft retains its leading position in computer software, but the company must struggle merely to avoid falling behind.
4. Personal and Economic Creativity
While their concerns differed markedly, Emerson and Schumpeter actually hold remarkably similar views on why relatively free societies are so successful. Schumpeter focuses on the economic institutions of the free society. While most economic systems seek stability for established producers, free-market capitalism strictly protects the right of creative entrepreneurs to overturn the status quo with new ideas. Emerson instead focuses on the mentality of the free society. Free societies promote self-reliance, the most necessary of all virtues for the creative individual.
Upon reflection, it appears that Emerson's insight is more fundamental than Schumpeter's. Schumpeter praises free markets for unleashing the economic potential of human creativity. Nevertheless, how well would these institutions work in a society bereft of creative individuals? Emerson's concern is that all societies needlessly stifle creativity instead of encouraging it. Good institutions are not enough; without a widespread individualistic mentality, free markets reveal only a fraction of their progressive power.
The individualistic mentality of market-oriented societies helps nurture the creativity that typifies free markets at their best. But the causality works in the other direction as well. The surest way to acquire a virtue is constant practice. Individuals learn self-reliance by relying upon themselves, and learn dependence when other people run their lives.
Writing in 1835, Tocqueville famously contrasted the United States and Russia: "the principle of the former is freedom; of the latter, servitude." The self-reliant mentality sustains freedom, while the dependent mentality perpetuates despotism. But at the same time, a free society rewards self-reliance, while a despotism nourishes conformity; both sorts of systems reinforce themselves by inculcating the mentality that makes them possible.
It is hard to read Emerson or Thoreau without realizing that despite their continuing reputation for individualism, the citizens of the United States are far less self-reliant today than they used to be. Despite some impressive efforts to develop a distinctly American intellectual tradition, the cultural elite of the United States gradually accepted many of the world's complaints about Americans' "excessive individualism"; these complaints then spread throughout the broader culture. What is especially dangerous is that the decline of individualism is self-perpetuating; diminished self-reliance makes it possible for the power of the government to expand, which teaches future generations to rely upon the protective comfort of the government rather than themselves.
Hopefully, the process works the other way, too. As the inhabitants of the post-communist world learn to take care of themselves, they will learn the opposite lesson: To rely on their own judgment and abilities, to develop their own personality and dreams rather than merely attempt to survive by fitting in. Ayn Rand, herself a Russian who struggled to reach freedom in America, left behind fitting individualistic advice for the post-communist world:
Redeem your mind from the hockshops of authority. Accept the fact that you are not omniscient, but playing a zombie will not give you omniscience - that your mind is fallible, but becoming mindless will not make you infallible - that an error made on your own is safer than ten truths accepted on faith, because the first leaves you the means to correct it, but the second destroys your capacity to distinguish truth from error.
The value of creativity is a vital link between personal and economic individualism. Personal individualism, by promoting independence and critical thought, gives people the tools they need to be creative. Economic individualism, by rewarding innovation and progress, gives people the incentive to be creative. As Schumpeter explained, economic progress is largely the consequence of the process of "creative destruction." Moral progress toward the ideal of individualism, however, is what makes this process possible. Economic progress depends upon this moral progress. Or as Emerson's friend Henry David Thoreau put it:
The progress from an absolute to a limited monarchy, from a limited monarchy to a democracy, is a progress toward a true respect for the individual...Is a democracy, such as we know it, the last improvement possible in government? Is it not possible to take a step further towards recognizing and organizing the rights of man? There will never be a really free and enlightened State, until the State comes to recognize the individual as a higher and independent power, and treats him accordingly.