A moment with... Jonathan Levy, on capitalism

“At the end of the day, the federal government is still our risk manager of last resort. ”

The role of capitalism and the size of the federal government are more at issue in contemporary American politics than they have been since the 1930s. Jonathan Levy, an assistant professor of history, has studied the ways in which our conceptions of risk and economic freedom have changed throughout history. He traces much of that history in his new book, Freaks of Fortune: The Emerging World of Capitalism and Risk in America, which will be published in 2012. Levy discussed some of his conclusions with PAW.

What is your book about?

It’s a history of risk. The notion of personal assumption of risk as we know it was new to the 19th century. Instead of hedging risk outside of the market collectively, people started to do it within the market individually by doing things like buying insurance, putting their money in savings banks, and entering the futures markets. 

This all began in the middle of the 19th century and within the context of slave emancipation, which created a new conception of what it means to be a free person. A belief developed that free people must take economic risks, and therefore are entitled to enjoy the rewards of risk taking. But they also have a responsibility to hedge and manage their own risks in the market. The mid-19th century saw the passing away of collective forms of risk management and a transferring of that burden to both the individual and the financial system. A new conception of freedom tied to risk moved economic security into financial markets. 

Then, during the New Deal, the state became the fundamental guarantor of economic security. The New Deal tried to take some of the volatility out of capitalism and offer a new safety net.

How has our conception of risk changed since the 1930s?

Over the last generation, those 19th-century ideas of personal responsibility and risk taking have gotten a new lease on life as the ideals of the New Deal have come into question. We are now having some pretty important debates about whether we want our economic security to be dependent on the financial system or protected by the government. True, significant parts of American society never were sold on the New Deal. But today, politicians such as Rick Perry and Ron Paul are revisiting debates, for example, over the legitimacy of Social Security that we haven’t had in a very long time.

Progressives and New Deal liberals put a great deal of emphasis on managing society through science and technical expertise. Have we lost faith in the ability of experts to manage our economy?

Part of the New Deal promise was that bureaucratic experts could help control risk. If they don’t deliver the goods, however, it is reasonable to expect people to question their authority and expertise. That cuts both ways. We have heard a lot over the last 20 or 30 years about the magic of the markets. Part of the justification for the enlargement of the financial system during that period was that American­ ­capital markets could uniquely allocate risk efficiently and fairly. 

How do you think the current debate will play out? 

Historians are usually no better at predicting the future than anyone else. Even so, at the end of the day, the federal government is still our risk manager of last resort. For all the deregulation of the last generation, we still have the FDIC. When Lehman Brothers failed in 2008 and the financial system melted down, the federal government was left holding the bag. Going forward, things could go in very different directions. Look at the Federal Reserve. Ben Bernanke has begun holding press conferences, the first time the Fed chairman has ever done that. He is worried about his political legitimacy, and he should be. Things that were unthinkable before the financial crisis are now thinkable.

What do your students think of this debate?

I teach an undergraduate course on the history of American capitalism (HIS 379) and I think the students sense the possibility in the contemporary moment for things to change, and to change quite radically, in ways that will really have consequences for their own lives and careers and also for the country that they live in.