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"Creative Destruction": is economic dynamism worth the instability?

Nov 03, 2020 · 7 mins read

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Capitalist civilization

We all have a basic idea of how capitalism works, but how do you feel about it? Does it inspire you, or fill you with dread?

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Austrian economist Joseph Schumpeter had a divided mind. He admired capitalism’s dynamism, but thought it was so unstable and volatile that it would eventually be replaced by a calmer “technocratic socialism”.

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Schumpeter became famous for the term “creative destruction” to describe the capitalist system, yet spent his later life predicting its demise.

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The other irony is that a person who became a patron saint of entrepreneurship and business got much of his understanding of “creative destruction” from capitalism’s arch-enemy, Karl Marx.

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In The Communist Manifesto of 1848, Marx and Friedrich Engels argued that “commercial crises” constantly upend the capitalist economic and social order. The result was that “Productive forces, are periodically destroyed.”

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In the search for excess profit, capitalism was always damaging itself, Marx & Engels said. If the means of production was owned by everyone, this wouldn’t happen.

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Schumpeter spends the first part of his classic Capitalism, Socialism, and Democracy (1942) analyzing Marx’s view of capitalism. But he comes to a different conclusion.

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Unlike a planned or socialist economy, capitalism has a non-linear aspect to it, and therefore it is unpredictable. We never really know what will be the next big industry or the next hit product, because capitalism is the sum of billions of thinking individuals.

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For Schumpeter, the very unevenness and imperfect utilization of resources in the capitalist system becomes a spur for entrepreneurs to solve perceived problems and gaps in the market. Some people are able to spot opportunities amid the inefficiency.

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Schumpeter didn’t just contradict Marx, he also differentiated himself from classical liberal economists. They believed in the self-balancing “equilibrium” of capitalism, but he believed this was a mirage. In fact, he thought that part of the genius of capitalism was its inherent instability.

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