The Perennial Gale Of Creative Destruction

One of the readings for today at the PFF IRLE workshop is Chapters 6-8 of the “Can Capitalism Survive?” section of Schumpeter’s Capitalism, Socialism, and Democracy. I think this is one of the most important economic works ever written, notwithstanding the fact that much of Schumpeter’s doom and gloom fear for the future of capitalism has been falsified by events since his writing the book in 1942. Schumpeter was arguing in the context of two broad strands of thought in the 1930s and 1940s that are not as relevant today: socialism, and scientific management.

Still, these three chapters are utterly foundational to the understanding of how real, dynamic economics work, thrive, grow and change. Note the language I’ve used there: it’s evolutionary and focuses on the complex dynamics of economic systems. And that’s part of what is still remarkably relevant about Schumpeter, yet has remained outside of the mainstream neoclassical economics paradigm in many ways. On p. 82 he says

The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. … Capitalism, then, is by its nature a form or method of economic change and not only never is but never can be stationary.

These three chapters lay out Schumpeter’s famous “perennial gale of creative destruction” argument:

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new formes of industrial organization that capitalist enterprise creates. …

[t]he … process of industrial mutation … incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.

Typically we think of competition in terms of number of sellers, and of “perfect competition” as the benchmark case in which price=short-run marginal cost and all consumers pay that price. Problem with that case is that it only exists on the blackboard. It’s also a very static snapshot; for example, if all consumers pay only short-run marginal cost, how do producers invest to expand their business?

Schumpeter describes the oversimplification of the static efficiency P=MC expectations of perfect competition, and argues that competition in reality is a lot more organic and dynamic:

But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization … — competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.