I am conflicted about how to evaluate Zachary’s Schumpeterian article in a recent Sunday New York Times. On the one hand he says much that is true and useful about Schumpeter and capitalism. On the other hand he seems to relish the destructive side of creative destruction, extending it beyond what Schumpeter intended, to include disasters such as war and environmental crises.
My view, on the other hand, is that the destructive side is usually over-estimated, can be reduced further, and is an unfortunate cost of innovation and progress.
Here is a part of the Zachary op-ed piece that I like:
An Austrian economist who taught at Harvard, Mr. Schumpeter in 1942 coined the term ”creative destruction” to describe what he viewed as the engine of capitalism: how new products and processes constantly overtake existing ones. In his classic work, ”Capitalism, Socialism and Democracy,” he described how unexpected innovations destroyed markets and gave rise to new fortunes.
The historian Thomas K. McCraw writes in his new biography of Schumpeter, ”Prophet of Innovation” (Belknap Press): ”Schumpeter’s signature legacy is his insight that innovation in the form of creative destruction is the driving force not only of capitalism but of material progress in general. Almost all businesses, no matter how strong they seem to be at a given moment, ultimately fail and almost always because they failed to innovate.”
Mr. Schumpeter’s concept of creative destruction is justly celebrated. The economics writer David Warsh calls it the most memorable economic phrase since Adam Smith’s ”invisible hand.” Peter Drucker, the late business guru, went so far as to declare Mr. Schumpeter the most influential economist of the last century.
Clearly, any quick survey of technological change validates Mr. Schumpeter’s essential insight. The DVD destroyed the videotape (and the businesses around it). The computer obliterated the typewriter. The automobile turned the horse and buggy into an anachronism.
Today, the Web is destroying many businesses even as it gives rise to others. Though the compact disc still lives, downloadable music is threatening to make the record album history.
”Schumpeter’s central idea is just as important now as ever,” says Louis Galambos, a business historian at Johns Hopkins University. ”The heart of capitalism and its claim as an efficient economic system over the long term is the role that innovation plays.”
For the full commentary, see: