Schumpeter – Creative Destruction

by | Jun 18, 2014

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Born 1883 in Třešť, Austria-Hungary. Died 1950 in Taconic, Connecticut: 


A riddle for the modern mind

Schumpeter’s name is probably better known than his ideas – which is understandable, since he straddled the theoretical divide in a way that we find awkward these days. But his 20th century influence was simply huge.

 

Schumpeter wasn’t a Marxist by any stretch of the imagination – he was a deeply theoretical professor at Harvard, and a bit of a monetarist actually – but he shared Marx’s conviction that capitalism was the destructive cause of all its own problems. The difference was that he thought the capitalist ethic was being ripped apart by its own contradictions, without any help from the revolutionary left. Was that a bad thing? Actually, no, he said, the destruction was a source of hope and progress.

A fresh perspective at a time of global change

Born into the declining Austro-Hungarian empire, Schumpeter arrived in Vienna in 1909, just in time to watch Lenin’s tragic Bolshevik experiment in Russia unfolding before his eyes. Originally a lawyer, he quickly became known for his densely theoretical economic works, such as his Theory of Economic Development (1911), in which he first outlined his famous theory of entrepreneurship.

 

A theory of entrepreneurship?

Yes indeed. Schumpeter said that the entrepreneurial culture within capitalism would always be a source of destructive change, and that the constant misery that this caused would always be a hallmark of the profit-making society. The manic cycles of boom and bust that this created were actively beneficial.

But aren’t manic cycles a bad thing?

 

Schumpeter said no, which was pretty brave of him, considering how bad things were to get during the 20s and 30s. His theory of Creative Destruction sounds rather too close to Marx for our modern ears, but it got a better reception in the days when other influential economists including J.M. Keynes were also studying the problems of repetitive business cycles under capitalism. The important difference between them was that Keynes spent his time trying to tame the cycles with government spending, whereas Schumpeter said we should just stick it out and enjoy the bumpy ride.

What sort of entrepreneurship did he mean?

Schumpeter had already noted how the emergence of trains and cars and telephones had revolutionised distribution and wrecked the systems of the horse-drawn era. He would have loved the disruptive revolution of microchip technology, and he’d have been onto Facebook in a flash because he adored the way these developments forced change both in business and in the economy.

 

The great self-publicist

Schumpeter wasn’t short of admirers in Vienna. (He once declared that he wanted to become the city’s greatest lover and Austria’s greatest horseman. “And perhaps, also, the world’s greatest economist.” Years later, he added immodestly that he’d achieved “two out of three”.) But by 1932 he’d taken himself off to Harvard, where he led American academic thought for a decade or more, along with Galbraith, Hansen, Harberler and Leontief.

The threat from intellectuals

 

Schumpeter’s ideas reached their slightly frightening logical extreme with his classic Capitalism, Socialism and Democracy (1942). Eventually, said the sage, a growing mass of bourgeois intellectuals would scupper capitalism by voting for ‘soft’ social democratic governments that would draw all the teeth from capitalist entrepreneurism and leave it unable to continue with its beneficial destructive cycle.

The best hope of our survival, Schumpeter suggested, would be to evolve a minimalist democracy that did nothing more than encourage capitalist competition, while keeping the pesky public largely at arm’s length from the decision-making process. At best, that’s probably an ultra-libertarian argument. At worst, it just sounds scary. Nobody’s perfect.

 “Economic progress, in capitalist society, means turmoil”

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