The phrase “creative destruction” has become nearly ubiquitous in analyses of job losses in the domestic manufacturing sector or in states that once had a large industrial presence. A generation of market-based economists, conservative and libertarian alike, have routinely used it to defend the new economic status quo of fewer jobs and stagnant real-income growth. Yet the phrase, made famous by the Harvard economist Joseph A. Schumpeter (1883-1950) in his 1942 book, Capitalism, Socialism and Democracy, is one of the most misinterpreted terms of our time in the lexicon of economists.
Alan Greenspan referred to “creative destruction” more than a dozen times while he was chairman of the Federal Reserve. In a September 8, 1999, speech in Michigan, he argued,
The quintessential manifestations of America’s industrial might earlier this century—large steel mills, auto assembly plants, petrochemical complexes, and skyscrapers—have been replaced by a gross domestic product that has been downsized as ideas have replaced physical bulk and effort as creators of value. Today, economic value is best symbolized by exceedingly complex, miniaturized integrated circuits and the ideas—the software—that utilize them. Most of what we currently perceive as value and wealth is intellectual and impalpable. The American economy, clearly more than most, is in the grip of what the eminent Harvard professor Joseph Schumpeter many years ago called “creative destruction,” the continuous process by which emerging technologies push out the old.
Greenspan, in a September 4, 1998, speech at the University of California, Berkeley, explained Schumpeter as follows:
Capital equipment, production processes, financial and labor market infrastructure, and the whole panoply of private institutions that make up a market economy are always in a state of flux—in almost all cases evolving into more efficient regimes. The capital stock—the plant and equipment that facilitates our production of goods and services—can be viewed, with only a little exaggeration, as continuously being torn down and rebuilt.
In the U.S. manufacturing sector, there is plenty of tearing down, but precious little rebuilding. Manufacturing employment, the broadest indicator, peaked at 19.5 million in June 1979, according to the Bureau of Labor Statistics, and has since declined by 41 percent.
Other Fed officials interpret Schumpeter to defend manufacturing losses. On May 11, 2000, Board of Governors Vice Chairman Roger W. Ferguson, Jr., told a forum in Ohio that
Economic transformation has not come without cost. Between 1977 and 1987, U.S. industry reduced production jobs in manufacturing by 1.4 million workers. More than 200,000—or 15 percent—of those jobs were in Ohio. Of those job losses, over half were centered in two industries—primary metals manufacturing and industrial machinery manufacturing—each losing more than 50,000 jobs over the decade. . . . Schumpeter cautioned that economic policymakers who fail to appreciate the relationship between the relentless churning of the competitive environment and wealth creation will end up focusing their efforts on the methods and skills that are in decline. In so doing, they establish policies that are aimed at protecting weak, outdated technologies, and in the end, they slow the economy’s march forward.
On December 4, 2008, syndicated columnist George Will wrote: “In recent years, in normal conditions, the economy has ‘lost’ tens of millions of jobs through capitalism’s ‘creative destruction’ (Joseph Schumpeter’s phrase). It also has created a few million more than that, which is why the destruction is creative.” Will’s argument is that total U.S. employment has expanded since the 1950’s, a net gain despite losses from “creative destruction.” On December 17, 2008, economist Thomas Sowell used the term to attack federal aid to automakers GM and Chrysler. “Creative destruction” means
the replacement of businesses that have outlived their usefulness with businesses that carry technological and organizational creativity forward, raising standards of living in the process. Indeed, this is very much like what happened a hundred years ago, when that new technological wonder, the automobile, wreaked havoc on all the forms of transportation built up around horses.
It is easy to refute Will. Total employment has increased in every expansion since records were first kept early in the 20th century, but manufacturing employment, as noted, has contracted for three decades. Sowell, a true scholar and one-time Marxist who saw the light, should know better. Many paradoxes surround Schumpeter, a bon vivant, but none is greater than his conclusion that creative destruction means capitalism is doomed. “Can capitalism survive?” Schumpeter asked. “No. I do not think it can.” You won’t find that admission anywhere in the oeuvre of Greenspan and Will.
Schumpeter considered Marx, not Keynes, his great intellectual rival. Robert L. Heilbroner sets the stage in The Worldly Philosophers (1953):
Schumpeter had studied Marx in his student days and had participated in seminar discussions with scholars such as Rudolph Hilferding and Otto Bauer, two of the most brilliant young Marxist scholars of their day. He was even more deeply familiar than any Western economist with Marx’s work as it was then understood—much of that work did not appear in the Anglo-American world until the 1950s.
Schumpeter agreed that capitalism is doomed, but not for the reasons set forth by Marx, his main target in Capitalism, Socialism and Democracy. He dismissed stagnation, spreading monopolization, and other criticisms of capitalism, setting the stage, Heilbroner writes, “for what appears to be a direct refutation of Marx.” Instead, Schumpeter produces a seeming contradiction: “Capitalism may be an economic success, but it is not a sociological success.”
In Schumpeter’s words,
Capitalism creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own; the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole scheme of bourgeois values.
The atmosphere has changed. Bureaucratic management, not the swashbuckling entrepreneur, emerges triumphant with a new employee class—bourgeois and infected with rationalism—becoming easy prey for the expanding welfare state that replaces laissez-faire. Schumpeter, Heilbroner observes, “has beaten Marx on his own ground.” Schumpeter
surrenders to Marx in what seems to be the crucial point of contention, namely whether capitalism can survive. But he has bested Marx by demonstrating—or at least arguing—that capitalism will give way to socialism for Schumpeter’s reasons, not for Marx’s! Marx is accorded every honor, but Schumpeter’s view nonetheless carries the day.
If we want to survive creative destruction we must understand that the phrase does not mean what Greenspan & Co. or CNBC commentators say it does: that job losses are inevitable under market-based capitalism. Rather, creative destruction is part of a process that Schumpeter saw as ending in welfarism and a wooly-type socialist state akin to modern Sweden. Thus, the welfare state’s expansion with each successive administration—Democratic or Republican—since the early 20th century is profound, yet lost on economists who misinterpret creative destruction.
Most families will not emerge as rugged Randian entrepreneurs in the wake of creative destruction. This is heresy to a post-Christian money culture that celebrates many myths, including the claim that every American can be a millionaire (although fewer than five percent of U.S. households actually have more than one million dollars in liquid assets, excluding their residences). Schumpeter celebrated the entrepreneur but would not prescribe entrepreneurship as the solution for laid-off workers. He did not view entrepreneurship as “a profession,” as Heilbroner explains, “or a position that can be handed down from one generation to the next.” We do not observe in the entrepreneur, Schumpeter wrote in The Theory of Economic Development (1911), “all those affective traits which are the glory of all other kinds of social leadership.” The entrepreneur “has no cultural tradition or attitude to fall back on” and “moves about in society as an upstart.” Many hear the siren song of entrepreneurism, but few, in Schumpeter’s interpretation, earn validation in the marketplace’s cash nexus. True, there are many examples of small-scale entrepreneurial responses to creative destruction—downsized manufacturing workers who find new jobs while farming part-time on the small plots they own; laid-off journalists who land on their ink-stained bottoms as paid bloggers; pink-slipped techies working on a project-by-project basis to write code or debug hardware. Unfortunately, these jobs often pay lower wages. Spouses are forced into the workplace to earn a second or third income to help buy the medical insurance that disappeared along with “30 & Out.”
Few entrepreneurs create the large-scale entrepreneurial enterprises that employ thousands. According to Schumpeter, 25 percent of the population are so deficient in economic leadership that they are destined for mundane, repetitive jobs. Half (“practically all business people”) possess normal skills of innovation. Entrepreneurs are an elite—“people who are a type characterised by supernormal qualities of intellect and will.” Schumpeter himself did not qualify for this elite. He served as Austrian Finance Minister (1919) and, later, president of the private Biedermann Bank in Vienna that collapsed in 1924 after the German hyperinflation.
Ultimately, surviving creative destruction means finding alternative economic solutions. Some of these are based outside the United States. Several examples of cooperative distributism are worth noting because they embody Catholic social teaching.
The Antigonish movement, influenced by priests in Canada’s Maritimes in the pre-war period, established a broad, successful network of credit unions and microfinance, partially in response to the Great Depression.
The Mondragón Co-operative Corporation, according to its website, “is the largest business corporation in the Basque Country and the seventh largest in Spain, as regards both sales and workforce.” The enterprise traces its roots to the early 1940’s and the vision of a Catholic priest, José María Arizmendiarrieta Madariaga (1915-76) who once observed that
Nothing differentiates people as much as their respective attitudes to the circumstances in which they live. Those who opt to make history and change the course of events themselves have an advantage over those who decide to wait passively for the results of the change.
Mondragón does not view its system as an alternative to capitalism:
We have no pretensions in this area. We simply believe that we have developed a way of making companies more human and participatory. It is an approach that, furthermore, fits in well with the latest and most advanced management models, which tend to place more value on workers themselves as the principal asset and source of competitive advantage of modern companies.
The firm describes its relationship with labor:
In our co-operatives, employees may be members of a specific trade union on an individual basis, but there is no company-wide union representation, since as the workers are also the owners, the historical role played by trade unions in conventional companies is rendered redundant. Some of the typical functions of trade unions, such as those linked to the company’s social policy, the supervision of working conditions and ensuring that the workforce is properly informed, etc. are carried out in our co-operatives by the Social Council, an internal body which is elected democratically by the General Assembly.
The firm’s response to globalization has taken it from “25% of international sales achieved in the industrial area at the start of the 1990s to 58.2% in 2008.” It has 73 production plants in 16 countries. Mondragón’s industrial structure includes a consumer-goods component that produces domestic appliances—refrigerators, washing machines, ovens, and dishwashers. It enjoys “a position of leadership in Spain and France, with a growing presence in Eastern Europe.” The capital-goods component is “Spain’s leading machine tool manufacturer in metal cutting and sheet metal forming.” The industrial-components sector “supplies components and assemblies” to automotive manufacturers.
Those who continue to misinterpret Schumpeter are unlikely to play a role in solving the problems left by “creative destruction.” Families suffer when they are reliant on an expanding welfare state. They thrive in the long term when they establish means of consistent employment and self-reliance within a broader Christian community.