Successful capitalism presupposes three conditions: first, the legitimacy of the profit motive — the ability to do well, even fabulously; second, widespread markets that mediate success and failure; and finally, a legal and political system that, aside from establishing property and contractual rights, also creates public acceptance. Note that the last condition modifies the first two, because government can — through taxes, laws and regulations — weaken the profit motive and interfere with markets…

If companies need to be rescued from “the market,” why shouldn’t Washington permanently run the market? That’s a dangerous mindset. It justifies punitive taxes, widespread corporate mandates, selective subsidies and meddling in firms’ everyday operations (think the present anti-bonus tax bill). Older and politically powerful companies may benefit at the expense of newer firms. Innovation and investment may be funneled into fashionable but economically dubious projects (think ethanol).

Government inevitably expands in times of economic breakdown. But there is a thin line between “saving capitalism” from itself and vindicating Schumpeter’s long-ago prediction.