In praise of Schumpeter
I’ve just reviewed the last issue of “The Economist”. It includes article about Schumpeter, a new biography, “Prophet of Innovation: Joseph Schumpeter and Creative Destruction”.
The article falls short of calling Schumpeter the ultimate prophet of capitalism. It talks about his creative destruction theory, that states that capitalism reinvents itself through destructive cycles that end up in a new beginning. Of course that means putting the weight of reconstruction on entrepreneur’s shoulders. It’s one of the most cellebrated and lucid visions of capitalism.
When Schumpeter wrote it he already knew the work of Clement Juglar who, in 1860, described three phases in every cycle: prosperity, crisis and liquidation. Schumpeter believed that entrepreneurs began the cycle of prosperity accumulating productive factors in an era of scarcity, thus paying well, and expanding productive capacity to its maximmum extent. Then there would come a time with production surpluses, which also meant that means of production wouldn’t be needed so badly, and that lead to prices going down and consumers having less purchasing power. If you add that by that time entrepreneurs would have paid most of their loans, there would be cheap money all over the system, so there would be a triple surplus, and the economy would crumble.
Of course Schumpeter explained all that in other words, but what he wrote is still valid today. The cycles were thoroughly studied and Kitchin defined the inventory cycles (40 months), Kuznets the infraestructure cycles (18 years) and Kondratev (or Kondratieff, I’m never able to know the best way to write his name) the 50-year waves. If you add them to Juglar 10-year cycles, later redefined as 8-year cycles, to hog cycles (three to four years), cotton cycles (two years), beef (five years in the Netherlands) and leather (18-month cycle)… you have as many cycles as you want to be able to prove anything (or just the opposite).
But, as the article very well says, the turbulences (that would be caused when most of the cycles were simoultaneusly in lows) would be just a small place to pay for progress. Voilà. That’s one of the reason why Schumpeter was a great economist, and still is today. And I agree.
What I don’t agree is on the fact that Schumpeter still is a great economist because of his conclusions. I think he was great because of his methodology, using sociology, psychology, statistics added to the dismal science trying to build an unified social science. So the economy would be related to everything else, such as the entrepreneurs that make this society advance.
Conclusions are not that important, IMHO. The article fails to remember how Schumpeter predicted that capitalism would collapse by itself and great corporations would take the power and lead us to the ultimate socialist state. The success would lead to absolute control.
I hope that he wasn’t that right on that too. Or maybe he is already right?