Senior Analyst, Ewing Marion Kauffman Foundation
The economic transformation in the United States from managerial capitalism
to entrepreneurial capitalism, marked in part by a near-constant wave of
innovation and high-growth firms, is already producing widespread social and
cultural changes. If history offers any lessons, a far-reaching political
transformation could shortly follow.
A common assumption today holds that politics represents the driving force,
the prime mover, behind change and progress. Historically, however, economic and
social changes often precede and even produce political changes. This is not to
say that politics and public policy can never instigate economic change—indeed,
the emergence of entrepreneurial capitalism itself has been greatly facilitated
by public policy. Yet these policies were not part of a grand plan to cultivate
entrepreneurial capitalism. They were instead deliberate but unconnected actions
that interacted with social and economic shifts to produce a new macroeconomic
structure. This is a historically recurring phenomenon.
In medieval Europe, for example, technological advances and the rise of a
merchant class increased the importance and independence of cities, which then
blossomed into thriving city-state republics. Similarly, the economic currents
of the eighteenth century exerted a strong influence on the political
philosophies—and thus the political creations—of the American founders. Indeed,
the growing economic independence and power of colonial America contributed to
and shaped the longing for political independence. Witnessing the importance of
free commercial trade, the founders designed a self-limiting democratic
republic, and even enshrined the protection of an economic resource,
intellectual property, in the Constitution.
Thus, economic developments frequently reshape the political landscape, and
the new political forms then influence subsequent economic changes in an
ever-evolving recursive process. At times, however, the new political order
outlives its utility, becoming anachronistic and even stultifying. We face such
a situation today with the legacy of the Progressive movement.
Response to industrial capitalism
In the late nineteenth and early twentieth centuries, the United States
transformed from a largely agrarian economy into one defined by industrial
capitalism. This new form was marked, among other things, by
large-scale production, sprawling factories, and the assembly line. Enormous
hierarchical corporations emerged, reliant on new techniques of scientific
management. Large nonprofit organizations such as the Red Cross also emerged in
this era. Industrial capitalism also birthed a new political movement,
Progressivism, which embodied many of the qualities driving the new economic
The Progressive movement redefined American government at all levels,
purporting to make the American democratic republic more democratic and less
republican, as through the initiative and referendum and the direct election of
Senators. In response to the growing power of corporate conglomerates, the
Progressives pursued salutary measures such as antitrust legislation and child
Yet inasmuch as the Progressive impulse arose as a response to the excesses
of industrial capitalism, it also reflected many of the same sensibilities. In
the economic sphere, firms moved toward vertical integration in an attempt at
the rationalization of the market—in an increasingly complex industrial economy,
firms found it advantageous to internalize and control transaction costs. The
political analogue was the federal administrative agency—the centerpiece of the
Progressive impulse. Just as business firms sought to rationalize the market, so
too did Progressives seek to rationalize the political and social spheres
through bureaucratic, expert-led regulation and agencies. The Federal Reserve
and Food and Drug Administration epitomized this sensibility.
The potential of entrepreneurial capitalism
The Progressives generated many benefits and helped the United States in the
transition to industrial capitalism. Their legacy endured through the New Deal
and Great Society and eventually helped to produce managerial
capitalism—characterized by big business, big government, and big labor—which
reached its apotheosis in the 1970s. And although the American economy has now
evolved into entrepreneurial capitalism, the political system remains stuck in
the Progressive sensibility, ill-fitting for this new economic order.
Entrepreneurial capitalism, however, holds the potential for another
far-reaching political transformation.
It is difficult to say what direction or character this transformation will
take. Structural changes in the political order do not occur accidentally or
"naturally." They result from deliberate and intentional action in response to
events. And often, such changes may not be facilitative of the new economic
system, but rather burdensome and even harmful.
Whatever changes are spurred by the shift to entrepreneurial capitalism, they
will differ hugely from the political forms put in place by the Progressives.
One consequence of the Progressive reforms was that more power flowed to the
federal government, in particular federal agencies. Additionally, the government
moved more toward a hands-on management approach to the economy. These two
characteristics may be lessened in entrepreneurial capitalism as the government
realizes that economic management may be less facilitative for entrepreneurs and
entrepreneurial firms than, in Malcolm Gladwell’s phrase, "structuring
conditions for successful spontaneity." Similarly, an entrepreneurial economy
may push the government toward greater dispersal of power.
If the Progressive impulse moved our democratic republic more toward
democracy, perhaps entrepreneurial capitalism will return the country to its
republican principles. Republics are inherently messy and marked by constant
churning, two hallmarks of entrepreneurial capitalism, and emphasize the
importance, often the centrality, of commerce and the attendant exercise of
reason. At the same time, the growing importance of entrepreneurship and
entrepreneurial behavior will reinforce democracy because they require
widespread economic participation and freedom.
Predicting the course of political and economic developments is of course
impossible, but it is safe to say that entrepreneurial capitalism will
profoundly alter our political landscape.
This essay is an excerpt from the Kauffman Thoughtbook 2007
. To view a table of contents for the 2009 edition, or to order a printed copy of the publication, please visit our 2009 Thoughtbook page