Capitalism: A Possible Sea Change
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.