Schumpeter – Page 6 – artdiamondblog.com

Companies “Once as Strong as Dinosaurs But Now Just as Extinct”

From McCraw’s discussion of Schumpeter’s legacy:

(p. 496) No country, regardless of how long it has been prosperous, can take permanent affluence for granted. Nor can any company assume its continued existence—as names such as Digital Equipment, Pan American Airways, Pullman, Douglas Aircraft, and the Pennsylvania Railroad remind us. Each of these companies once epitomized the cutting edge not only of its own industry but of American business as a whole. And all are now in the dustbin of history, along with hundreds of thousands of other businesses of all sizes—once as strong as dinosaurs but now just as extinct.

Source:
McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.

“Three Generations from Overalls to Overalls”

(p. 156) Because it proceeds by competitively destroying old businesses and hence the existences dependent upon them, there always corresponds to it a process of decline, of loss of caste, of elimination. This fate also threatens the entrepreneur whose powers are declining, or his heirs who have inherited his wealth without his ability. This is not only because all individual profits dry up, the competitive mechanism tolerating no permanent surplus values, but rather annihilating them by means of just this stimulus of the striving for profits which is the mechanism’s driving force; but also because in the normal case things so happen that entrepreneurial success embodies itself in the ownership of a business; and this business is usually carried on further by the heirs on what soon become traditional lines until new entrepreneurs supplant it. An American adage expresses it: three generations from overalls to overalls. And so it may be. Exceptions are rare, and are more than compensated for by cases in which the descent is still faster. Because there are always entrepreneurs and relatives and heirs of entrepreneurs, public opinion and also the phraseology of the social struggle readily overlook these facts. They constitute “the rich” a class of inheritors who are removed from life’s battle. In fact, the upper strata of society are like hotels which are indeed always full of people, but people who are forever changing.

Source:
Schumpeter, Joseph A. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Translated by Redvers Opie. translation of 2nd German edition that appeared in 1926; translation first published by Harvard in 1934 ed. London: Oxford University Press, 1961.

A Schumpeterian Policy Program Promotes Innovation and Creative Destruction

McCraw on the nature of “a Schumpeterian program” :

(p. 169) Yet it is not difficult to identify a Schumpeterian program—at whatever level of analysis one chooses: the individual entrepreneur, the business firm, the industry, or even the country. At all levels, Schumpeter’s litmus test is whether the players are pursuing innovation and bringing about creative destruction. If they are, then the program is Schumpeterian.

Source:
McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.

Schumpeter Learned from His Failures

McCraw (2007, p. 112) quotes from Schumpeter’s diary:

Really, I don’t quite regret any of my efforts and failures—every one of them taught me something about myself and life that uniform success would have hidden.

Source:
McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.

When the Ship Is Sinking, Schumpeter Suggests: “Rush to the Pumps”

Wabash economics professor Ben Rogge’s best lecture focused on a question made famous by Schumpeter: “Can Capitalism Survive?” In some ways, Ben’s message was a pessimistic one.
But near the end of his lecture, Rogge included the following quote from Schumpeter’s Capitalism, Socialism and Democracy:

(p. xi) This leads to the charge of “defeatism.” I deny entirely that this term is applicable to a piece of analysis. Defeatism denotes a certain psychic state that has meaning only in relation to action. Facts in themselves and inference from them can never be defeatist or the opposite whatever that might be. The report that a given ship is sinking is not defeatist. Only the spirit in which this report is received can be defeatist: The crew can sit down and drink. But it can also rush to the pumps.

Source of quote:
Schumpeter, Joseph A. Capitalism, Socialism and Democracy. 3rd ed. New York: Harper and Row, 1950.

Reference to Rogge’s collection of essays that includes the title essay mentioned above:
Rogge, Benjamin A. Can Capitalism Survive? Indianapolis: Liberty Fund, Inc., 1979.

L.E.D.’s as the Next Leapfrog Advance in Light

A few years ago I presented a paper at the meetings of Society for Social Studies of Science in which I mentioned Nordhaus’s wonderful paper in which he measures advances in technology that produce illumination. Some of the technologies represent leapfrog advances that are part of Schumpeter’s process of creative destruction.
At the end of my presentation, a member of the audience gave me a reference to the new L.E.D. light technology that he suggested was the next leapfrog advance. (Alas, I do not remember his name.)

(p. C3) L.E.D. bulbs, with their brighter light and longer life, have already replaced standard bulbs in many of the nation’s traffic lights. Indeed, the red, green and yellow signals are — aside from the tiny blinking red light on a DVD player, a cellphone or another electronic device — probably the most familiar application of the technology.

But it is showing up in more prominent spots. The ball that descends in Times Square on New Year’s Eve is illuminated with L.E.D.’s. And the managers of the Empire State Building are considering a proposal to light it with L.E.D. fixtures, which would allow them to remotely change the building’s colors to one of millions of variations.
. . .
The problem, though, is the price. A standard 60-watt incandescent usually costs less than $1. An equivalent compact fluorescent is about $2. But in Europe this September, Philips, the Dutch company dealing in consumer electronics, health care machines and lighting, is to introduce the Ledino, its first L.E.D. replacement for a standard incandescent. Priced at $107 a bulb, it is unlikely to have more than a few takers.
“L.E.D. performance is there, but the price is not,” said Kevin Dowling, a Philips Lighting vice president . . .
. . .
“The Marcus Center lighting will require no maintenance for 15 years,” Mr. Gregory said. “That’s a dream for a lighting designer.”
But he does not expect standard bulbs to disappear totally. Just as the invention of the light bulb did not completely kill the candle and kerosene lamp markets, Mr. Gregory said, “there will always be a need for incandescent bulbs. They will never totally go away.”
“The way an incandescent bulb plays on the face on a Broadway makeup mirror,” he said, “you can never duplicate that.”

For the full story, see:
ERIC A. TAUB. “Fans of L.E.D.’s Say This Bulb’s Time Has Come.” The New York Times (Mon., July 28, 2008): C3.
(Note: ellipses added.)

The reference to the Nordhaus paper is:
Nordhaus, William D. “Do Real-Output and Real-Wage Measures Capture Reality? The History of Light Suggests Not.” In The Economics of New Goods, edited by Robert J. Gordon and Timothy F. Bresnahan, Chicago: University of Chicago Press for National Bureau of Economic Research, 1997, pp. 29-66.

“The full spectrum of color, design and programming available for the Times Square ball.” Source of the caption and photo: online version of the NYT article quoted and cited above.

The Current Financial Crisis Reveals a Need for Reform

As I think about the current financial crisis, I have been struck by the uncertainty among economists about what should be done. Many economists are silent. Those who speak, have offered very diverse opinions. And even among those who express opinions, there is a lack of confidence in their opinions.
Milton Friedman used to say that economists will be listened to when there is a crisis, and that economists need to be ready, as Friedman himself was with his floating exchange rate proposal. (Milton, we need you again.)
I believe that one lesson from the current crisis is that we need reform—reform of economists’ research priorities and methods. We should become more interested in policy relevance, history and institutions; and less interested in mathematical rigor.
We should avoid what Schumpeter called “the Ricardian Vice.” (Highly stylized, aggregated models, based on unrealistic simplifying assumptions, that are then blindly applied to policy decisions in the actual, richly “thick” world—see McCloskey’s essay on thick and thin methods in economics.)
We also should spend less time in studying cute, counter-intuitive results (“freakonomics”), and spend more time on the big issues.
We should be willing to suggest institutional reforms and experiments, and participate in experiments (natural and artificial) to see how they work. (Spontaneous order is nice when it happens, but entrepreneurial vision and initiative can improve the world too.)
Capitalism has produced huge gains in longevity and standards of living. Yet capitalism is in danger of being hobbled or destroyed.
Schumpeter warned of “the crumbling of the protecting walls.” We should have been better prepared to rebuild and defend them.

Note: The “Ricardian Vice” phrase is from Schumpeter’s History of Economic Analysis, p. 473; the “protecting walls” phrase is from Capitalism, Socialism and Democracy, p. 143.

The McCloskey essay mentioned is:
McCloskey, Deirdre. “Thick and Thin Methodologies in the History of Economic Thought.” In The Popperian Legacy in Economics, 245-57. Cambridge, UK: Cambridge University Press, 1988.

McCraw on the Nature of Schumpeter’s Defense of Socialism

McCraw on the third part of Schumpeter’s Capitalism, Socialism and Democracy:

(p. 359) In answer to the question that opens Part III, “Can socialism work?” Schumpeter responds with the provocative statement, “Of course it can.” But a close reading of the subsequent text reveals that he actually means, “Of course (p. 360) it can’t,” at least in comparison with capitalism. He is now writing in full ironic mode, like the satirist Johnathan Swift. “A Modest Proposal”—Swift’s famous pamphlet of 1729—had suggested that problems of famine and overpopulation could be met by one simple step: feeding children from poor families to the rich. His proposal, Swift argued, was “innocent, cheap, easy and effectual.”

Schumpeter’s Swiftian approach to socialism recalls to mind the delight he took as a young man in Vienna’s coffeehouses, where political and artistic discussion often continued well into the night. In this kind of setting, no proposition was too absurd or too subtly hedged with conditions and exceptions . Speakers won admiration for their sarcasm and wit, no less than for the cogency of their arguments. To puncture a point of view while seeming to recommend it was especially delicious.

Source:
McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.

Schumpeter Saw Keynes’ Work as a “Striking Example” of “the Ricardian Vice”

McCraw on Schumpeter’s History of Economic Analysis:

(p. 460) . . . , Schumpeter compared Keynes to David Ricardo: “His work, is a striking example of what we have called above the Ricardian Vice, namely, the habit of piling a heavy load of practical conclusions upon a tenuous groundwork, which was unequal to it yet seemed in its simplicity not only attractive but also convincing. All this goes a long way though not the whole way toward answering the questions that always interest us, namely the questions what it is in a man’s message that makes people listen to him, and why and how.”

Source:
McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.
(Note: ellipsis added.)
(Note: italics in original.)

McCraw Calls Schumpeter’s History of Economic Analysis “an Epic Analytical Narrative”

McCraw on Schumpeter’s History of Economic Analysis:

(p. 461) History of Economic Analysis succeeds where much economic writing or our own time fails, having sacrificed the messy humanity of its subject on the alter of mathematical rigor. Above all else, Schumpeter’s History is an epic analytical narrative. It is about real human beings, moored in their own time, struggling like characters in a a novel to resolve difficult problems. Sometimes the problems (p. 462) are purely intellectual. Sometimes they are issues of public policy. Often they are both. But what Schumpeter was trying to do—and in fact did—was answer the deceptively simple question he posed in the early pages of his book: to discover “how economists have come to reason as they do.”

Source:
McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.

Steve Jobs Shows Schumpeter Was Wrong About Bureaucratization of the Entrepreneurial Function

“Steven P. Jobs during a conference in June in San Francisco.” Source of caption and photo: online version of the NYT article cited below.

Sometimes Schumpeter suggested that in mature capitalism, it would be possible for some aspects of entrepreneurship to be made routine enough to be performed by corporate bureaucracies.
The creative innovations of Steve Jobs, and the stock market reaction to rumors of his ill-health, illustrate that individual entrepreneurs still matter.

(p. B2) During Apple’s earnings conference call Monday, Chief Financial Officer Peter Oppenheimer declined to answer an analyst’s question about Mr. Jobs’s health, calling it “a private matter.” Apple’s demurral raised new concerns among investors, who have been worried about Mr. Jobs’s health since a 2004 bout with pancreatic cancer.

Their fears flared earlier this year, when Mr. Jobs appeared gaunt at a public appearance; the company at the time blamed “a common bug.” The fears were stoked anew this week with a report in the New York Post that the CEO is unwell. Now, said one Apple fund investor, “everyone’s worried.”
Apple shares fell as low as $146.53 earlier Tuesday following the company’s lackluster outlook for the current quarter. Some analysts suggested that concerns about Mr. Jobs’s health were also weighing on the stock, which closed at $162.02, down $4.27, in 4 p.m. Nasdaq Stock Market trading.
. . .
The dearth of information has led investors to do their own digging over the years. In 2004, one hedge fund hired private investigators to tail Mr. Jobs to hospital appointments in the hopes of figuring out how sick he was, said a portfolio manager at the fund. Eventually, he said, Mr. Jobs “seemed to catch on,” and became harder to track.
More recently, hedge-fund managers said Tuesday, fund managers have talked of asking doctors to closely analyze pictures of Mr. Jobs to monitor changes in his physical appearance, and have been talking about once again hiring investigators to find out Mr. Jobs’s prognosis.

For the full story, see:
BEN CHARNY and JUSTIN SCHECK. “Worries Over Jobs’s Health Weighs on the Stock.” The Wall Street Journal (Weds., July 23, 2008): B2.
(Note: ellipses added.)

Another relevant WSJ article is:
breakingviews.com. “GE Deal Is Looking Bright; Abu Dhabi Capital Accord Yields Potential Benefits For Both Participants; Boardroom Health.” The Wall Street Journal (Weds., July 23, 2008): C18.
(Note: The online version of the title of this second WSJ article is: “GE’s Imagination at Work Challenged at Home, Company Strikes Gusher With Abu Dhabi Linkup.” )

The NYT article is:
JOHN MARKOFF. “Talk of Chief’s Health Weighs on Apple’s Share Price.”
The New York Times (Weds., July 23, 2008): C5.

In fairness to Schumpeter, his position on this issue was frequently conflicted, as has been shown and discussed in:
Langlois, Richard N. “Schumpeter and the Obsolescence of the Entrepreneur.” Advances in Austrian Economics 6 (2003): 287-302.