Saturday, June 26, 2010

Joseph Schumpeter and the Creative Destruction of Capitalism Should Be Taught in College

Schumpeter Should Be Taught in College

Joseph Schumpeter (1883-1950) is one of the greatest economists of the 20th century.

Born in Moravia in the Austro-Hungarian Empire, educated in Austria, he was a Professor of Economics at Harvard from 1932-1950.

As a conservative economist during the Depression, he was overshadowed first by the flamboyant John Maynard Keynes at Cambridge. Keynes gave us the theory of priming the pump to get us out of the Depression. It failed, as did all the subsequent pump primings in recessions, as it is now in Greece, Spain, and Portugal..

The Obama Administration has practiced Keynesian economics and pump priming to the extreme with disastrous results. Prime Ministers Merkel of Germany and Cameron on Great Britain have just told President Obama “No more internationally you won’t.”
The past two years should finally inter Keynes.

Schumpeter also had a famous colleague at Harvard, John Kenneth Galbraith, who was the oracle for the New Industrial State. If only Galbraith had lived just a little longer to see his views fully implemented by President Obama, and again with disastrous consequences.

Joseph Schumpeter was the apostle of capitalism, but the reluctant prophet of the rise of the social welfare state.

Schumpeter’s first contribution to capitalism was to coin the word “entrepreneur” and praise the role of the entrepreneur in the rise and success of capitalism. The successes and innovations of entrepreneurs fuel economic growth. Without entrepreneurs and innovation, an economy will, at best, stagnate and be stationary.

Like Keynes, Schumpeter was a student of business cycles, which we also sometime refer to as a boom and bust cycle. He credited the entrepreneur for much of the business cycle.

For example, millions of Americans have replaced their older TV’s with HD TV’s, but at some point retailers will be flooded with unsellable HD inventories.

The corollary of the innovative entrepreneur and creative capitalism is the creative destruction of capitalism: “Creative destruction is the essential fact about capitalism.” The new innovations, the new industries, the new products would result in the demise of older industries. A quick example is the rise of desktops and laptops with typewriters becoming antiques. So too with the old calculators and slide rules. The HP 65 doomed them.

In essence, capitalism reallocates resources to the new, growing industries from the aging ones. It’s Darwinian.

Thus, society and government should encourage the entrepreneur.

And yet, Joseph Schumpeter also predicted the rise of the social welfare state and the ultimate collapse of capitalism. He foresaw the rise of the intellectuals with their jealously and opposition to capitalism. Think of how liberal, especially in the humanities and social sciences, that the universities are. In turn, the professional classes, lawyers, doctors, and the like, also become hostile to capitalism. Again, think of the Obama Administration.

As the entrepreneurial and capitalistic class begins to shrink in size, politicians increasingly reap votes by giving out governmental favors, such as entitlements. Social Democrats in Europe, and Democrats in the United States, become the favorite political class and the party of the welfare state and government.

The restrictions, regulations and limitations on business grow, thereby restricting economic growth. Think of the 2,409 page Health Reform Act, which quasi-nationalizes the health industry, and imposes onerous restrictions and taxes on 1/6 of the nation’s economy, as well as the 2,000 page, give or take, Financial Reform Bill, the details of which Senator Dodd has told us we will not know how it works until after it’s enacted. Speaker Pelosi said we had to enact the Health reform Bill to learn what’s in it. Actually, we will not know what’s in the bills until after the new and expanded bureaucracies issue their rules and regulations, followed by years of litigation.

Business does not invest with these Swords of Damocles hanging over their heads.
Sounds familiar, doesn’t it?

Schumpeter unfortunately is not taught in many economic programs, which helps to explain how so many economists get it wrong.

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