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TMFPhillyDot (37.69)

Capitalism: A Possible Sea Change

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October 14, 2009 – Comments (15)

For those of you who read The Economist, you may have noticed a change in the business section -- and for that matter, a possible change in the direction of their general philosophy.

There used to be a column titled “Face Value”, where business leaders and global tycoons were discussed and analyzed. Not too long ago that column changed; now it is called “Schumpeter”, and it discusses a broad array of business and management topics.

Okay, so what’s the big deal?

True -- Joseph Schumpeter was a Moravian-born economist who eventually landed at Harvard in 1928.  He did have a few famous publications, including History of Economic Analysis and Capitalism, Socialism, and Democracy. But why name the entire column in one of the most prominent news publications after this somewhat obscure academic? After all, there have been plenty of brilliant economists: John Maynard Keynes, David Hume, and Adam Smith; and plenty of business leaders to top the list: Jack Welch, Lee Iacocca, and Walter Disney. So who the heck is this Schumpeter guy?

The Harvard Professor was known not so much for his teachings, but for having a devout following of students and academics who respected his unique thoughts on business, innovation, and market theory. In the United States, during a period of extreme growth and wartime productivity, Schumpeter had incredible foresight, though it was wrapped in a degree of contradiction. He disagreed with Keynes. He favored Turgot, not Smith. He valued commerce, yet empathized with Marx. In hindsight, when the veil of a cold war kept capitalism relatively unscathed by critique, Schumpeter’s ideas seem even more exceptional today. Simply put, Schumpeter was different, and that distinctiveness is what made him one of the most prophetic economists of our time.

Business and free markets have been attacked and demonized for quite some time. In 1906, Upton Sinclair wrote “The Jungle”, the novel that chronicles the plight and poverty of workers in Chicago’s meatpacking district; Engels and Marx laid out the problems of capitalism in their 1848 manuscript The Communist Manifesto; and Henry Frick, U.S. representative and chairman of U.S. Steel, relayed to partner Andrew Carnegie before he died, “Tell him I’ll see him in hell, where we both are going.” The tale continues today, as Michael Moore’s documentary “Capitalism: A Love Story” was recently released into theatres. Some criticism is valid, some is just populist rigor. However, Schumpeter seems to get capitalism right in four of the most important spheres:

1.       Objective: being a champion of business, he knew that the ultimate point of capitalism was not to produce goods and services solely for the rich, but rather to make those goods and services more accessible to the masses. Nevertheless, he warned of man’s desire to build “private kingdoms” (Bernie Madoff) and men who were willing to do anything to crush their rivals and gain market share (Jeffrey Skilling).

 

2.       Path: Schumpeter argued that innovation was the most significant engine of economic growth. Similar to Clayton Christensen, author of “The Innovators Dilemma” and who recently spoke at the Fool, he believed in and coined the phrase ‘creative destruction’.  Creative destruction is when entrepreneurs innovate and through radical change, they push out old business models and monopolies. While innovation destroys the value of long established companies, it helps sustain long-term growth. In one of his most famous phrases, he likened capitalism to a “perennial gale of creative destruction”.

 

3.       Leadership: as innovation served to be the main engine of growth, Schumpeter argued that an entrepreneur was its main driver. His definition was not limited; it included both small and large businesses, middle managers and college dropouts. The ultimate goal of a leader was to move resources from the least productive places to the most productive – all with the ambition of spreading mass affluence.

 

4.       Result: Schumpeter also believed that free enterprise would collapse under the weight of its own success. Unlike Marx who warned against a proletariat revolution, Schumpeter believed that a new class of “intellectuals” and “bureaucrats” would bring down the system. He warned that successful businessmen would always try to scheme and plot with politicians in order to ensure the status quo. In a non-political way, Schumpeter argued that democratic majorities, frustrated with corporatism, would vote for the creation of a welfare state and place too many burdens on entrepreneurship that would eventually wreck the structure of capitalism.

 

It is obviously far too early to make a call on whether or not Schumpeter’s conclusion will prove truthful, and far be it for me to be the one to speculate on the outcome.

But I am happy to see that someone, in this case the private shareholders and writers for The Economist, are openly acknowledging the problems of capitalism without political motivations or destructive intentions. Just as people begrudgingly said that communism was good in theory but bad in practice, well, that too can apply to any concept of markets -- especially when implemented without caution and devise.  In the wake of corporate scandals and excessive consumer materialism, let’s not lament the resulting financial collapse, but look at business through the old lens of a Moravian student and economist.  The allocation of capital. The distribution of goods and services. Relative ease, not relative riches.

-Jordan(TMFPhillyDot)

15 Comments – Post Your Own

#1) On October 14, 2009 at 12:19 PM, SkepticalOx (99.44) wrote:

Awesome post... I seriously didn't pay attention to this in The Economist (will now).

I fear that there is too much silly debate going on that's black and white. It's as if a state has to be either Socialist or adopt Laissez-Faire capitalism fully. The sweet-spot is probably somewhere in between, closer to the right, and highly dependent on the situation. 

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#2) On October 14, 2009 at 12:53 PM, catoismymotor (24.55) wrote:

I regret that I have but one Rec to give.

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#3) On October 14, 2009 at 1:19 PM, eLizKinnel (< 20) wrote:

Great post!!  I have been an avid Economist reader for many years, but this new addition has been a breath of fresh air for the publication.

 Everyone who continues to get sucked into the doomsday downtown "capitalism has failed" banter should read last week's "Thriving In Adversity".  Some of the most successful and lasting companies were founded during economic tough times.  I subscribe to the idea that we need to continue to innovate, rather than shrink back to old ideals.  This applies not only to business and economics, but to the political backdrops as well. Hybrid cars and hybrid political theory are good for us!!! 

 http://www.economist.com/businessfinance/displaystory.cfm?story_id=14540023

  

 

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#4) On October 14, 2009 at 1:47 PM, ocsurf (< 20) wrote:

Like SkepticalOx I never paid attention to this. Thanks for bringing this to my attention! +1

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#5) On October 14, 2009 at 2:00 PM, TMFTurtle (25.64) wrote:

Thanks, Jordan, for bringing a new read to my attention! I like the way this guy thinks.

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#6) On October 14, 2009 at 2:09 PM, AdirondackFund (< 20) wrote:

The lightbulb is on here...one rec.

Nice post.

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#7) On October 14, 2009 at 2:43 PM, 4everlost (29.40) wrote:

Wow, what a perspective on things...thanks for bringing him to my attention; in particular this section: "...Schumpeter believed that a new class of “intellectuals” and “bureaucrats” would bring down the system. He warned that successful businessmen would always try to scheme and plot with politicians in order to ensure the status quo."

I believe that our country has been increasing the speed at which he head in this direction for decades now, and it seems he called it ~ 90 years ago.

Rec #23 is mine...

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#8) On October 14, 2009 at 2:58 PM, floridabuilder2 (99.24) wrote:

Great post as a reader of the Economist I am glad you pointed this out. 

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#9) On October 14, 2009 at 3:28 PM, dudemonkey (38.50) wrote:

Wow.  That's an incredible find.  Thanks!

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#10) On October 14, 2009 at 3:43 PM, devoish (98.26) wrote:

You get a rec from me as does Schumpeter. I cannot believe you selected Madoff as you example of #1 instead of the health insurers and/or investment bankers though.

If Toyota destroys GM that is the creative destruction everyone celebrates.

If BONY lends to 6th Avenue electronics and allows them to undercut prices until Best Buy is driven out of business, not so much. And when they are done, and BBY goes out, then prices go up at 6th ave to pay the debt.

Do you think Schumpeter meant financial innovation as we have seen in the last decade?

And most important, #4 the result. Did Schumpeter talk about what would happen if the Democratic Majorities failed to form a welfare state, and left the businessmen and politicians in charge?

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#11) On October 14, 2009 at 4:29 PM, outoffocus (23.09) wrote:

Do you think Schumpeter meant financial innovation as we have seen in the last decade

I think your statement more aptly belongs with the statement below:

Schumpeter also believed that free enterprise would collapse under the weight of its own success. Unlike Marx who warned against a proletariat revolution, Schumpeter believed that a new class of “intellectuals” and “bureaucrats” would bring down the system. He warned that successful businessmen would always try to scheme and plot with politicians in order to ensure the status quo. In a non-political way, Schumpeter argued that democratic majorities, frustrated with corporatism, would vote for the creation of a welfare state and place too many burdens on entrepreneurship that would eventually wreck the structure of capitalism.

The majority of this "financial innovation" would not have been possible if not for the repeal of Glass-Steagle and the relaxation of regulatory enforcement.  In other words, the business had already plotted with the politicians by that point.

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#12) On October 15, 2009 at 12:47 PM, 4everlost (29.40) wrote:

devoish

Isn't there a contradiction in here?:

"...what would happen if the Democratic Majorities failed to form a welfare state, and left the businessmen and politicians in charge?"

If the Democratic Majorities end up forming a welfare state then the politicians and special interest businessmen will be in charge!  Even worse, bureaucrats that are appointed by the politicians make decisions about what you can and cannot do.  The Constitution does not give the federal gub'ment the authority needed to form a welfare state.

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#13) On October 15, 2009 at 4:12 PM, devoish (98.26) wrote:

4everlost,

Politicians and businessmen are not a majority of Americans.

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#14) On October 21, 2009 at 3:19 AM, Manutius (< 20) wrote:

When I was a midwestern conservative sprout (so many years ago), I was taught in high school Civics that we were the proud inheritors of a "mixed" economy; neither 100% capitilistic, nor 100% socialistic. I have believed that some sort of mix is the right path to this day.  I suppose that in today's rhetoric this would put me somewhat left of center, which I find ironic as at heart I'm a fiscal conservative. That "Economics" is explicitly recognizing a "semi-capitalist" viewpoint is an interesting development: perhaps I will actually subscribe the next time they dun me!

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#15) On October 21, 2009 at 7:35 PM, devoish (98.26) wrote:

Manutius,

100% agreement from me.

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