The Fruits of Civilization – Joseph Schumpeter

Joseph Schumpeter

Economic progress, in capitalist society, means turmoil. ~ Joseph Schumpeter

Austrian economist and political scientist Joseph Schumpeter (1883–1950) was one of the most influential economists of the 20th century. Schumpeter is best known for his notion of “creative destruction”: that capitalism was an economic evolutionary gyre that offered continual innovation by creatively replacing the old with the new. To Schumpeter, cyclical booms and busts were an inevitable part of capitalist development; to be tempered perhaps, but also accepted.

Schumpeter believed that stagnation resulted if creative destruction was thwarted. To Schumpeter, the Great Depression came from a combination of taxes on the wealthy and corporate profits that laid the economy low by stifling investment and innovation. Schumpeter indulged in revisionist history of the worst sort.

Schumpeter was an economic Nietzsche. Schumpeter’s Übermensch was the entrepreneur. To Schumpeter, the brave and creative few were responsible for the economic well-being of workers and society in general. Schumpeter turned the labor theory of value upside down and shook it, whereby finding the only the coins of worth to fall out were those minted by a gambler’s courage, not hard work.

Entrepreneurial profit is the expression of the value of what the entrepreneur contributes to production. ~ Joseph Schumpeter

Schumpeter was not the first to take up the theme that creative leadership was central to capitalism’s success. Liberal European thought from the late 19th century into the 1920s emphasized the significance of elites, with an eye to explaining why those of superior ability were able to rise and exert social influence – and, of course, to congratulate the elite as superior.

English novelist and economics writer William Mallock wrote a string of books in the late 19th century, arguing that the material progress of the majority depended upon a tiny number of talented elite. By this, economic inequality was desirable. Schumpeter sorely approved of Mallock, “who was never recognized by the economics profession and seems to be entirely forgotten now, perhaps because he had the courage to tell unpopular truth.”

In contrast, Schumpeter thought Adam Smith was misled by his egalitarian assumptions, thereby underestimating the importance of superior individuals in fueling economic progress. Supply and demand, which had carried currency with economists since Smith, missed the essential element of capitalism: dynamic transformation via the efforts of entrepreneurs.

Schumpeter distinguished the entrepreneur from the provider of capital, inventor, and manager. For Schumpeter, the role of the entrepreneur came in introducing economic innovation. Such innovation took various forms: introducing new or improved commodities, finding new markets and new methods of production and distribution, and introducing new economic organizations. It took “the creative and dominating force of a leader” to break the routine habits of economic life.

Schumpeter’s influence can be attributed to his singing a siren song to the business elite and their sycophantic admirers in economics, government, and the press.