[.ca] Prophet of Innovation: Joseph Schumpeter and Creative ... (ISBN 0674025237)

The Basic Paradox of Capitalism:
As I recently read Thomas K. McCraw's brilliant biography of Joseph Schumpeter (1883-1950), I was intrigued by the evolution of his career after he earned a Ph.D. at the University of Vienna (1906). At age 24, he served as a secretary of state for finance in the new Austrian republic (1919-1920), and later became chairman and president of a Vienna-based Biederman Bank (1920-1924) that collapsed. As a result of that and several substantial investments in companies which also failed, Schumpeter suffered major financial setbacks (both professional and personal) but eventually repaid his debts, then taught at the University of Bonn (1925-1932) before accepting an offer to join the Harvard faculty as a professor of economics where he continued to teach until his death in 1950. McCraw also examines Schumpeter's personal life that, understandably, reflected the successes and failures in his career. For example, Schumpeter fell deeply in love with Anna Josifina Reisinger and married her in 1925. The next year, his beloved mother died and within a month, his wife died in childbirth, as did their son. McCraw suggests that Schumpeter never fully recovered from these personal losses. Of greatest interest to me is the context or frame-of-reference the biographical material provides for one of Schumpeter's most influential business concepts, "creative destruction," which he introduced in his most popular book, Capitalism, Socialism, and Democracy," first published in 1942. Scholars have divided opinions as to the influences on Schumpeter's development of this concept. They probably include Karl Marx, Friedrich Nietzsche, and Werner Sombart. According to Schumpeter, there is a "process of industrial mutation-if I may use that biological term-that 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." He goes on to explain, "The first thing to go is the traditional conception of the modus operandi of competition. Economists are at long last emerging from the stage in which price competition was all they saw. As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position. However, it is still competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organization in particular, that practically monopolizes attention. 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 (the largest-scale unit of control for instance) - 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." (from "The Process of Creative Destruction," 1942) There are countless examples of applications of this concept, notably Jack Welch's determination to "blow up" GE after he succeeded Reginald Jones as CEO. In his own review of Prophet of Innovation in the Wall Street Journal, Dan Seligman includes Schumpeter's widely quoted question-and-answer sequence: "Can capitalism survive? No, I do not think it can." Seligman then suggests that that answer "is hedged in later passages \oin Capitalism, Socialism, and Democracy\c. Even so, it will seem wildly counterintuitive to readers who have read Schumpeter on capitalism's huge successes." I agree. In fact, I presume to suggest that, from Schumpeter's perspective, no form of capitalism can survive and that continuous replacement of one form of capitalism by another confirms the enduring reality of creative destruction. Without it, there can be no innovation. In essence, that is the basic paradox of capitalism.