"The most penetrating analyst of capitalism who ever lived?"
No, it’s not Adam Smith himself, who was in a poor position to be an "analyst" of what he essentially invented. Keynes? Marx? Darwin? (I’m actually not kidding about this last one, but that’s a topic for another day.)
Try Joseph Schumpeter, at least if you believe Thomas McCraw, the Isidor Straus Professor of Business History, Emeritus at Harvard Businses School, who has just come out with
Prophet of Innovation: Joseph Schumpeter and Creative Destruction, from Harvard University Press. Working Knowledge has an interview with McCraw, and I believe it holds manifest and powerful lessons for firms.
Schumpeter is surely most famous for his phrase "creative destruction," celebrating the power of the entrepreneur to upset the most entrenched of industries. Here’s how McCraw summarizes the concept (emphasis supplied):
"The main takeaway is the absolute relentlessness of creative destruction and entrepreneurship. In a free economy, they never stop—never. Schumpeter wrote that all firms must try, all the time, “to keep on their feet, on ground that is slipping away from under them.” So, no serious businessperson can ever completely relax. Someone, somewhere, is always trying to think of a way to do the job better, at every point along the value chain. Whatever has been built is going to be destroyed by a better product or a better method or a better organization or a better strategy.
"This is an extremely hard lesson to accept, particularly by successful people. But business is a Darwinian process, and Schumpeter often likened it to evolution."
(I told you Darwin and capitalism have a lot to say to each other.)
But let’s give Schumpeter himself the floor for a moment: According to him (this is from Capitalism, Socialism, and Democracy (1942)), surely his most famous work:
"[There is a] 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. It is what capitalism consists in and what every capitalist concern has got to live in.”
He goes on to explain, “The first thing to go is the traditional conception of the modus operandi of competition. Economists are at long last emerging from the stage in which price competition was all they saw. As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position. However, it is still competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organization in particular, that practically monopolizes attention.
"But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance) – competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”
McCraw points out that economists including Larry Summers and Brad DeLong
predict the 21st Century will be Schumpeter’s century, and McCraw agrees. For better or worse—wildly and indisputably for better, in my mind, so call me incorrigible on innovation—McCraw believes the current mantra of reciting "globalization" "understates the case" because no previous era of globalization included the Internet. And he believes as a historian, so "I don’t say this lightly," that management today is "harder and more challenging than it’s ever been before."
One of Schumpeter’s more famous, because shocking, quotes is the question he poses to himself and answers (in Capitalism, Socialism, and Democracy [1942, recall]): “Can capitalism survive? No, I do not think it can.”
What can this possibly mean, coming from the chief celebrant of the triumphs of entrepreneurial capitalism?
Although he backtracked a bit on this declaration later, he has, as usual, a fundamental insight. He did not believe capitalism would not survive because it would fail; he feared it would not survive because it would succeed so miraculously.
The paradox of capitalism is this: By tremendously enriching societies—the real standard of living in the US has doubled every 30 to 45 years, depending on who you believe—capitalism enables society to afford a variety of restrictions upon entrepreneurship, all in the name of perfectly salutary goals, which cumulatively throttle the engine of wealth creation.
And isn’t this the very paradox of Schumpeter, if you take his message seriously as leader of your own domain? Do we truly welcome new creations which "strike at [existing firms’] foundations and their very lives?"
The answer to that depends, I will suggest, on your disposition and temperament. As for myself, and in an attempt to resuscitate a laudable and quintessentially American rallying cry deeply sullied by its unfortunate recent use by our President, "Bring it on."
