Summary:
Sharon Reier on Schumpeter's creative destruction process; entrepreneurial spirit; Greenspan and Schumpeterian economics in 1999; transforming agents; monopolies (10/06/2000)
Notes:
- Marx: labor is fundamental unit of economic value, proletariat as key agent of change; Schumpeter: entrepreneur is cornerstone of capitalism
- Schumpeter: vital force behind capitalism is innovation and the entrepreneur willing to introduce it; introduction of innovations was responsible for both the progress and the instabilities of capitalism, i.e. creative distruction
- creative destruction: "process in which new technologies, new kinds of products, new methods of production and new means of distribution make old ones obsolete, forcing existing companies to quickly adapt to a new environment or fail."
- Best for governments not to interfere with the "prosperity-creating potential of this radical kind of capitalism," even if it leads to job losses as established companies are brought down
- Schumpeter departed from mainstream economic theory that viewed market and capitalism as stable
- Entrepreneurial spirit: different way of looking at the world; will to create empire for one's self; dynamic force that stems from disposition of people; not necessarily intelligent or subtle people; want to attack the world in a certain way; cfr. adventurers
- By advancing new products, technology or productive methods, entrepreneurs provide impulse for change
- Schumpeter: perennial gale of creative destruction (Capitalism, Socialism and Democracy, 1942)
- Greenspan using Schumpeterian economics to explain remarkable non-inflationary expansion in US in past 8 years
- Greenspan, 1999: "The evident acceleration of the process of creative destruction, which has accompanied these expanding innovations and which has been reflected in the shifting of capital from failing technologies into those technologies at the cutting edge, has been remarkable."
- Greenspan, cont'd: "The innovations in information technology have begun to alter the manner in which we do business and create value, often in ways that were not readily foreseeable even five years ago. As this century comes to an end, the defining characteristic of the current wave of technology is the role of information."
- Greenspan, cont'd: "We do not know, nor do I suspect anyone can know, whether current developments are part of a once-or-twice-in-a-century phenomenon that will carry productivity trends nationally and globally to a new higher track, or whether we are merely obscuring some unusual variations."
- Major advances occurring every 50 or 100 years: echoing Schumpeter's analysis of economic cycles;
- capitalism's restless history punctuated by long and short waves;
- long upswing stimulated when a new set of technologies and industries ("transforming agents") comes into existence
- early 19th century: rise of textiles, iron, coal and steam engines
- mid 19th century: steel production, construction of railroads
- early 20th century: automobiles, electric power, related products
- transforming agent opens up opportunities while clearing out old areas of activity and ways of behaving
- However, "booms contain the seeds of their own destruction"
- entrepreneur brings along something new, source of profit; others come into market and whittle profit away; as they copy, more investment; changes in investment; changes in profit; speculation cycle starts; lots of people speculating on the markets and market starts to boom; eventually, once everyone has the car, internet access, etc., there is only replacement demand, stop buying
- Schumpeter: nothing wrong with monopolies, could me more effective purveyors of innovation than many start-ups
- get monopoly position because you're very good
- should judge monopolies by their innovation record, not by whether or not it has monopoly profits
- but as long as there are open markets, all monopolies are transient
- Schumpeter was wrong about capitalism's endgame: thought it would become bureaucratic, squeezing out individual entrepreneur and making innovation routine subject to centralized management
