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Saturday, July 30, 2016

Reflections on Joseph Schumpeter, Creative Destruction and Innovation

Reflections on Joseph Schumpeter and Creative Destruction
Part I: Introduction
In Capitalism, Socialism, and Democracy (1942), the Austrian economist Joseph Schumpeter (1883–1950) wrote:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. (p. 83)

Schumpeter devoted a mere six-page chapter to "The Process of Creative Destruction," in which he described capitalism as "the perennial gale of creative destruction." Despite some ups and downs in reputation over the decades, it has become a  centerpiece for modern thinking on how economies evolve. One of the most paradoxical economic theoreticians in history, Schumpeter is an intellectual child of Karl Marx and Frederick Engels. Yet he is father of the lions share of Free Market economic development theory on the "libertarian" right wing of the economics profession, and evolutionary economics on the left.

Schumpeter's paradox of progress, takes this expression, according to a modern "free market" -  Schumpeterian

"A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever. At the same time, attempts to soften the harsher aspects of creative destruction by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Schumpeter's enduring term reminds us that capitalism's pain and gain are inextricably linked. The process of creating new industries does not go forward without sweeping away the preexisting order."

This is clearly where the right wing does a Thelma and Louise with "creative destruction" and drives into a Grand Canyon with their obsession. Note the acceptability of individuals losing out "forever" combined with "inevitable pain"!! For Schumpeter the chaos would always lead naturally to efforts to moderate, to pay the losers. Those efforts and reforms would lead to institutions and laws, as well,  but would themselves in the end be undermined by the permanence of change.

This series discussion on Schumpeter and his legacy focuses on the implications for socialism and social democracy in the serious, and difficult-to-deny truths contained in his  essential insight -- relating "creative destruction" to innovation.  For this purpose, I will use the following, simplified, essentially Marxist (but also Schumperterian), definition of "capitalism": 

"a system of economic relations and development arising from the circulation (motion) of commodities. Commodities are defined as products or services produced primarily or solely for exchange." 

Notice that with the motion and circulation absent, there is no capitalism, and indeed, no commodities. It is the motion and the inherent contradictions and variation that flows from real motion, and real development, that give Marx's, and Schumpeter's, dialectical theory their special power and appeal.

Schumpeter borrowed some dialectics as it would apply to economics from Marx and Engels. Dialectics is a non-metaphysical logic of motion in which Negation (differentiation, variation, conflict, competition, contradiction, the new replacing the old, etc) plays a central role in propelling evolution in physical, biological and economic systems. Schumpeter also embraced philosophically Marx's and the classical economists' labor theory of economic value. However he agreed with his famous student, Paul Samuelson, that, price theory would have to be the data foundation of any practical value theory, since it is not easy, indeed likely not possible, to calculate the "mean socially necessary labor" required to comply with Marx's (or Adam Smith's, for that matter) value definition -- a definition that in Classical economics was derived more deductively than via data. It's worth noting that the primary objection here is not statistical. Most statisticians will agree you can plot a regression line through most any data set depending on what level of confidence you require in the result! The problem is different: there are many qualitative, in addition to quantifiable, inputs into the expression: "socially necessary labor". There are elementary ones, like skill differentials involving human capital investments (e.g. education). The division of labor in modern economies has become vastly more complex than in the times of classical economics. Then there is the thorny question of valuing public good and infrastructure inputs into the quality of  "an hour of labor", and the even more thorny question of valuation of intangible products (ideas, many services, software, etc). The sum of the thorny questions equals a value that cannot be computed presently. So, studying the behavior of prices, supply and demand has been a modern, data-driven approximation of "value" theory.

While Schumpeter agreed that the instability of capitalism would ultimately lead to a scantly  defined "socialism", he chiefly employed Marx's ideas to promote rather than deride capitalism's ceaseless revolutionizing of all previous modes of production and their associated social and economic relations. He was blunt in championing an echo of capitalism's critics in acknowledging that lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system. The saving grace, he argued,  comes from recognizing the good that comes from the turmoil. Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards. Yes,  following 1910, for example, 109,000 carriage and harness makers and 238,000 blacksmiths became obsolete and had to find other occupations. But, in a world increasingly dominated by what you could buy with the universal commodity, money, and with millions in subsistence or under-subsistence agriculture "tractor-ed out by the cat's" --- the higher productivity, and wages, in the emerging commercial and mass industrial sectors were a force too compelling to deny. Further, one  might say inevitably, a sharp class struggle arose alongside these structural changes in labor markets as workers demanded a bigger share of the vastly increased value(s) their labor created. This cumulative result impressed Schumpeter with its possible antidote, or at least counter-pressure, to Marx's description of a much stronger tendency toward working class immiseration as the primary outcome of capitalist class relations.

Schumpeter's dialectics  of creation and destruction as brides of development and innovation have been sustained by the 20th and 21st century capitalist history. He felt strongly that capitalism could only be understood as a historical, and evolutionary, phenomenon. He also was, like Marx, a "long waver" -- an adherent of the theory that roughly 50-75 year -- perhaps generational -- cycles of technology and innovation (not the supply and demand business cycle) were the source of  both instability and growth in capitalism. Further "growth" had a fundamental definition as a kind of reproduction, as in organic birth, as the system reproduced itself. Each generation (projecting reproduction in a mass context) -- a third of the entire division of labor must be replaced --  but replaced in ever more evolved forms since the "system" is not, and cannot be, the same as it was when the retiring generation entered, before the human labors of two generations had made their mark, and changed the "real world".  

Lets take a walk through some recent economic history from a socialist Schumpeterian viewpoint. After 1991 the USSR model of socialism was judged a failure. The Maoist one had already been judged that after the catastrophe of the Cultural Revolution. Though different in various ways, both shared a common, and conscious, adherence to a "command", or "planned" economic model that has proved unworkable, or at least unsustainable, in the era of commodities. The planned model cannot escape scarcity in this era. Historically that leads to strong corruption pressures, weak innovation, or, a return to markets. Scarcity is the prime condition for human wants being satisfied by exchange -- or by commodities -- assuming labor and wealth has advanced to enable a non-primitive division of labor. For a Schumpeterian neither turn of events (the USSR, or the Mao regime) would be surprising.  He might even quote Marx on the conditions for communism: the technological ability to provide material human wants and needs abundantly and cheaply (if not freely). Although, to be fair to Marx, he wrote very little elaborating his views of post capitalist society. Plus, he clearly changed his mind over time. In any event, its clear now that Chinese, Vietnamese, many Latin American and indeed most socialist trends have accepted a dose of Schumpeter and committed themselves to mixed (part capitalist, part socialist) socialist economic models. Of these, it must be said that those with more -- but not too much -- planning, are growing faster. At the same time, those who, economically, retreated from the "command" policy least, or slowest, are growing least. Those where socialism held insufficient power, or was excessively reliant on natural resource commodities (oil, etc), have the most political instability. Countries with historically strong social democracies have fared best, at least from a working class point of view. However they too are struggling to accommodate and restructure in response to the many dimensions of globalization and the "creative destruction" forces it unleashes. 

On the "capitalist" side of the "creative destruction" walk, after 2007 there are few economists left who still believe that some deft combination of Keynes and/or Friedman regulatory regimes  have solved the "depression problem".  But for 40 years the corporate led unraveling and gutting of the New Deal social contract with American working families -- itself the cap of a Schumpeterian cycle of growth and restructuring --  was frequently covered up in economic debate in large measure by a consensus that said decades of "no raises for workers" won't seriously threaten the economy, never mind the entire society. A lot of malarkey one might say, while technology and globalization have turned every  US and global labor and capital market -- even fast food -- upside down; while incomes in "advanced economies" are going down, or are flat; while the 1% is grabbing all it can consume and parking it anywhere in the world where cops and taxation cannot find it. The turmoil is generating global dysfunction in government at every level, and extremes in politics, including violence, and, if not contained and constrained, will lead irreversibly to war.

Can creative destruction be contained and managed for at least the duration of time in which we depend upon commodities? That is a key question and challenge for both socialists and all working class democratic forces.  In Part II of this series I will survey possible Schumpetarian solutions to this challenge from heterodox economics, innovation studies, game theory, and some alternate economic models in practice around the world. Part III will survey a different question:Does creative destruction apply in economies, or communities, freed from commodities?

John Case
Harpers Ferry, WV

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