The self-proclaimed gravedigger of capitalism

The Economist has started a new Column on the legend “Schumpeter” emphasizing his intellectual contribution to the well being of the world prosperity. His brief bio is here.

The inaugurating column is a good start but needs patience to realize his ideas. Read the full article below as it turns to muse in every angle except the evil of socialism and communism.

Taking flight

Sep 17th 2009

From The Economist print edition

• This week we launch a new column on business and management. Why call it Schumpeter?
• THERE is something about business that prevents most people from seeing straight. The rise of modern business provoked relentless criticism. Anthony Trollope featured a fraudulent railway company in “The Way We Live Now” (1875). Upton Sinclair dwelt on “the inferno of exploitation” in Chicago’s meat packing industry in “The Jungle” (1906). Muckraking journalists denounced the titans of American business as “robber barons”.
• A striking number of business people accepted this hostile assessment. Friedrich Engels used some of the profits of his successful textile business to support Karl Marx, the self-proclaimed gravedigger of capitalism. Henry Frick’s last message to his fellow steel magnate, Andrew Carnegie, was “Tell him I’ll see him in hell, where we both are going.” Many of the greatest business people threw themselves into philanthropy to try to win back the souls that they had lost in making money. Anti-business sentiment is still widespread today. For many environmentalists, business is responsible for despoiling the planet. For many apostles of corporate social responsibility, business people are fallen angels who can only redeem themselves by doing good works.
• But anti-business sentiment is not as pervasive as it once was, thanks to the Thatcher-Reagan revolution and the collapse of communism. Instead there is new irritation to contend with—the blandification of business. Companies are at pains to present themselves as warm-and-fuzzy global citizens. Politicians praise businessmen as job creators. The United Nations and the World Bank celebrate businesses as all-purpose problem-solvers. Nicolas Sarkozy makes a distinction between business people (who create things) and financial speculators (who wreak havoc).
• Joseph Schumpeter was one of the few intellectuals who saw business straight. He regarded business people as unsung heroes: men and women who create new enterprises through the sheer force of their wills and imaginations, and, in so doing, are responsible for the most benign development in human history, the spread of mass affluence. “Queen Elizabeth [I] owned silk stockings,” he once observed. “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort…The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.” But Schumpeter knew far too much about the history of business to be a cheerleader. He recognised that business people are often ruthless monomaniacs, obsessed by their dreams of building “private kingdoms” and willing to do anything to crush their rivals.
• Schumpeter’s ability to see business straight would be reason enough to name our new business column after him. But this ability rested on a broader philosophy of capitalism. He argued that innovation is at the heart of economic progress. It gives new businesses a chance to replace old ones, but it also dooms those new businesses to fail unless they can keep on innovating (or find a powerful government patron). In his most famous phrase he likened capitalism to a “perennial gale of creative destruction”.
• For Schumpeter the people who kept this gale blowing were entrepreneurs. He was responsible for popularising the word itself, and for identifying the entrepreneur’s central function: of moving resources, however painfully, to areas where they can be used more productively. But he also recognised that big businesses can be as innovative as small ones, and that entrepreneurs can arise from middle management as well as college dorm-rooms.
• Schumpeter was born in 1883, a citizen of the Austro-Hungarian empire. During the 18 years he spent at Harvard he never learned to drive and took the subway that links Cambridge to Boston only once. Obsessed by the idea of being a gentleman, he spent an hour every morning dressing himself. Yet his writing has an astonishingly contemporary ring; indeed, he seems to have felt the future in his bones. The gale of creative destruction blew ever harder after his death in 1950, particularly after the stagflation of the 1970s. Corporate raiders and financial engineers tore apart underperforming companies.
• Governments relaxed their hold on the economy. The venture-capital industry exploded, the computer industry boomed and corporate lifespans shortened dramatically. In 1956-81 an average of 24 firms dropped out of the Fortune 500 list every year. In 1982-2006 that number jumped to 40. Larry Summers, Barack Obama’s chief economic adviser, argues that Schumpeter may prove to be the most important economist of the 21st century.
• A prophet and a role model
• The prophet of capitalism’s creative powers also understood the precariousness of the capitalist achievement. He pointed out that successful firms depend upon a complex ecology that has been created over centuries. He wrote extensively about the development of the joint-stock company and the rise of stockmarkets. He also understood that capitalism might be destroyed by its own success. He worried that a “new class” of bureaucrats and intellectuals were determined to tame capitalism’s animal spirits. And he warned that successful business people were always trying to conspire with politicians to preserve the status quo.
• Naming this column after Schumpeter does not imply that we endorse everything he said. His ideas about long business cycles have not withstood the test of time. He was too sceptical about the case for using government spending to avert depressions. He underestimated the self-correcting power of democracy. Moreover, this will be a column about business and management, rather than finance and economics. But the champion of innovation and entrepreneurship surely got as close as anybody to identifying what a column on modern business should be about.