Schumpeter

Creative Destruction

My old man is an old Economics grad. The latest guy with a Theory of Everything at the time he finished university was Joseph Schumpeter. And the way it was understood at that time was that there was Marx, Keynes and Schumpeter. That’s how important his writings were received way back before Milton Friedman or ‘Trickledown economics’ and Michael Miliken and junk bonds and Liar’s Poker and mortgage bonds and ‘Greed is Good’ and Global Fried Chickens, was this Austrian dude who wanted Capitalism to be understood in the right context.

Schumpeter? I can hear you ask. Joseph Schumpeter in a nutshell is the theorist who started offering ideas after the capitalist system got under way and delivered so much, so quickly.

Considering just how much Marxist criticism has abounded and how Keynes and Bretton Woods set the frame work for 60years of relative prosperity, it’s sort of weird to find not many people are talking Schumpeter.

The Economist is, and they’ve started a column with his name.

Joseph Schumpeter was one of the few intellectuals who saw business straight. He regarded business people as unsung heroes: men and women who create new enterprises through the sheer force of their wills and imaginations, and, in so doing, are responsible for the most benign development in human history, the spread of mass affluence. “Queen Elizabeth [I] owned silk stockings,” he once observed. “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort…The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.” But Schumpeter knew far too much about the history of business to be a cheerleader. He recognised that business people are often ruthless monomaniacs, obsessed by their dreams of building “private kingdoms” and willing to do anything to crush their rivals.

Schumpeter’s ability to see business straight would be reason enough to name our new business column after him. But this ability rested on a broader philosophy of capitalism. He argued that innovation is at the heart of economic progress. It gives new businesses a chance to replace old ones, but it also dooms those new businesses to fail unless they can keep on innovating (or find a powerful government patron). In his most famous phrase he likened capitalism to a “perennial gale of creative destruction”.

For Schumpeter the people who kept this gale blowing were entrepreneurs. He was responsible for popularising the word itself, and for identifying the entrepreneur’s central function: of moving resources, however painfully, to areas where they can be used more productively. But he also recognised that big businesses can be as innovative as small ones, and that entrepreneurs can arise from middle management as well as college dorm-rooms.

Schumpeter was born in 1883, a citizen of the Austro-Hungarian empire. During the 18 years he spent at Harvard he never learned to drive and took the subway that links Cambridge to Boston only once. Obsessed by the idea of being a gentleman, he spent an hour every morning dressing himself. Yet his writing has an astonishingly contemporary ring; indeed, he seems to have felt the future in his bones. The gale of creative destruction blew ever harder after his death in 1950, particularly after the stagflation of the 1970s. Corporate raiders and financial engineers tore apart underperforming companies. Governments relaxed their hold on the economy. The venture-capital industry exploded, the computer industry boomed and corporate lifespans shortened dramatically. In 1956-81 an average of 24 firms dropped out of the Fortune 500 list every year. In 1982-2006 that number jumped to 40. Larry Summers, Barack Obama’s chief economic adviser, argues that Schumpeter may prove to be the most important economist of the 21st century.

I read Schumpeter in the late 90s, just to try and understand where the hell my old man was coming from when he radically championed free trade. He’s still a fierce free trade advocate, and I have to admit that on the whole I am firmly on the side of it rather than against it. And if that perplexes you, then I recommend you go and read some Schumpeter.

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