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The ‘Creative Destruction’ of Capitalism


David Hurley

By

May 18th, 2016


Joseph Schumpeter reluctantly offers a stark account of the future of capitalism. Alarmingly, Schumpeter’s thesis is looking increasingly accurate.


For Joseph Schumpeter, the story of capitalism is of constant change; slowing or expanding, but never stagnating. The system itself is reliant on always creating new and better – new industries, new products, new demand, and new consumption are its staples. Once the ‘new’ has been introduced, the ‘old’ ceases to be relevant – this is what Schumpeter means when he references ‘creative destruction.’ The creation of the ‘new’ necessarily entails the ‘destruction’ of the old.

 

The idea of creative destruction isn’t particularly controversial, nor is it a perfect encapsulation of the essence of capitalism. But it is a reasonable narrative and one could not take major issue with the idea that capitalism worships the ‘new’ over the ‘old.’ But here Schumpeter’s argument shifts into an increasingly pessimistic, dark narrative of the fate of capitalism. It is through the process of creative destruction that capitalism sows the seeds of its own destruction (more on that later).  

 

Entrepreneurs are concerned, Schumpeter argues, in competitor’s creation of new products “which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” (Schumpeter, 1976, p. 83). Competition is the force which “disciplines before it attacks.” (Schumpeter, 1976, p.84). The time spent as a monopoly is short, in relative terms, and always getting shorter. The businessman cannot predict future activity with any certainty. Schumpeter likens long-term investing in this environment to “shooting at a target that is not only indistinct but moving—and moving jerkily at that” (Schumpeter, 1976, p.88). The monopolist is then forced to insure himself against future uncertainty – this is achieved in the form of ‘excess’ profits. Innovation, then, is only possible if it were “known from the outset that exceptionally favorable situations are likely to arise which… will produce profits adequate to tide over exceptionally unfavorable situations.” (Schumpeter, 1976, p.89) Hence, the motivation for innovation is a monopoly on an idea, which allows the firm to charge excess profits in order to insure themselves against the uncertainty of the long term.  

 

Schumpeter is critical of general theory, aiming at the idea that prices are stabilizing in a recessionary period, rather than destabilizing (as he suggests). Further criticism is found in his dismissal of the exaltation of perfect competition (a situation in which zero profit is realized by individual firms, and price equals the marginal cost of production). Schumpeter instead promotes the economies of scale, access to capital reserves, and the ability to influence the product market – characterizations of oligopolies and monopolies. The theory of capitalism being in a constant flux is at odds with the idea of a stable equilibrium suggested in the neoclassical school. Schumpeter strays far from the doctrines of neo-classical economics.

 

Now to the end of capitalism. Regrettably, according to Schumpeter, the future belongs to socialism (Schumpeter, 1976). This is entirely distinct from the socialist revolution Marx wrote of – a class system replaced by a dictatorship of the proletariat. Schumpeter envisioned that capitalism would be taken over by the intellectuals which were naturally opposed to it. Those out of work (due to being replaced in the system of creative destruction) would engage in unrest, led and inspired by the intellectuals. Democracy would enable the popular movement to take hold, restricting the ability for creative destruction to take place (perceived as the enemy of progression). The future, then, belongs to a socialist system which is popularly elected by the people.

 

Left-wing ideology has returned with a vengeance. The worst financial crisis in over 70 years has left many in long term unemployment, disinterested in the merits of capitalism and alienated from the government which purports to represent them. Is Schumpeter right? Do we have reason to fear a socialist future? Elections in Europe and the US don’t allow us to discard Schumpeter’s theory. If, as he suggests, the essence of capitalism is creative destruction, then to remove it would be to remove capitalism itself.

 

Governments are seemingly without an answer to the growing discontent in their ranks. Democracies are replacing leaders as fast as they come in (one needn’t look further than Australia for an example of this trend). Just like Schumpeter, we can use current trends to predict what the future may bring. Perhaps, as Schumpeter suggests, the future does belong to socialism.

 

Sources

Schumpeter, J. A., 1976. Capitalism, Socialism, and Democracy. 5 ed. London: Routledge.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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