Those of you who read The Economist may have noticed a change in the business section -- and for that matter, a possible change in the direction of the magazine’s general philosophy.
There used to be a column called “Face Value,” in which 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.
OK, so what’s the big deal?
Joseph Schumpeter was a Moravian-born economist who eventually landed at Harvard in the late 1920s. He did have a few famous publications, including History of Economic Analysis and Capitalism, Socialism, and Democracy. But why name an entire column in one of the most prominent news publications after this somewhat obscure academic? After all, there are plenty of brilliant economists (John Maynard Keynes, David Hume, and Adam Smith) and plenty of business leaders (Jack Welch, Lee Iacocca, and Walter Disney) who could have topped the list. 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, in a period of wartime productivity during which companies like General Electric (NYSE:GE) and Boeing (NYSE:BA) experienced extraordinary growth, Schumpeter had incredible foresight (albeit wrapped in a degree of slight contradiction). He disagreed with Keynes. He favored Turgot, not Smith. He valued commerce, yet empathized with Marx. In hindsight, Schumpeter’s ideas seem even more exceptional today, put forth as they were during a time when the veil of a cold war kept capitalism relatively free from criticism. Simply put, Schumpeter was different, and that distinctiveness is what made him one of the most prophetic economists of our time.
Schumpeter and capitalism
Business and free markets have been attacked and demonized for quite some time. In 1906, Upton Sinclair wrote The Jungle, a novel chronicling 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 even the Dalai Lama has expressed ethical criticisms about the modes of capitalism.
The tale continues today, as filmmaker Michael Moore’s documentary Capitalism: A Love Story, recently released in theaters, condemns companies like Goldman Sachs (NYSE:GS) and Wal-Mart. Some criticism is valid, some is just populist anger.
However, Schumpeter seems to get capitalism right in four of the most important spheres:
- 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” (see Angelo Mozilo of Countrywide Financial) and of men who were willing to do anything to gain and win market share (for example, Jeffrey Skilling of Enron).
- Path: Schumpeter argued that innovation was the most significant engine of economic growth. Similar to Clayton Christensen, the author of The Innovator's Dilemma who recently spoke at the Fool, he believed in “creative destruction” -- in fact, he coined the phrase. Creative destruction is when entrepreneurs innovate and, through radical change, push out old business models and monopolies. Notable examples today would be Amazon.com (NASDAQ:AMZN) disrupting Barnes & Noble (NYSE:BKS), or Netflix (NASDAQ:NFLX) destabilizing Blockbuster (NYSE:BBI). While innovation destroys the value of long-established companies, it helps sustain long-term growth. In one of his most famous phrases, Schumpeter likened capitalism to a “perennial gale of creative destruction.”
- Leadership: As innovation served as 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.
- 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.
Something rich and strange
It is obviously far too early to make a call on whether Schumpeter’s conclusion will prove truthful, and far be it from me to speculate on the outcome.
But I am happy to see that someone -- in this case, the private shareholders and writers for The Economist -- is 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 statement can apply to any concept of markets -- especially when implemented without caution and discretion. 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.
