Posts Tagged ‘Joseph Schumpeter’

 My new art and philosophy project for 2015 will incorporate the Aesthetics of Resistance and Creative Destruction.

CREATIVE DESTRUCTION

Creative destruction (German: schöpferische Zerstörung), sometimes known as Schumpeter’s gale, is a term in economics which has since the 1950s become most readily identified with the Austrian/American economist Joseph Schumpeter‘s theory of economics innovation and business cycle.

Creative destruction describes the;

“process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

The German Marxist sociologist Werner Sombart has been credited with the first use of these terms in his work Krieg und Kapitalismus (“War and Capitalism”, 1913).

In the earlier work of Marx, however, the idea of creative destruction or annihilation (German: Vernichtung) implies not only that capitalism destroys and reconfigures previous economic orders, but also that it must ceaselessly devalue existing wealth (whether through war, dereliction, or regular and periodic economic crises) in order to clear the ground for the creation of new wealth.

In Capitalism, Socialism and Democracy (1942), Joseph Schumpeter developed the concept out of a careful reading of Marx’s thought (to which the whole of Part I of the book is devoted), arguing (in Part II) that the creative-destructive forces unleashed by capitalism would eventually lead to its demise as a system.
Despite this, the term subsequently gained popularity within free-market economics as a description of processes such as downsizing in order to increase the efficiency and dynamism of a company.

The Marxian usage has, however, been retained and further developed in the work of social scientists such as David Harvey, Marshall Berman, and Manuel Castells.

In Marx’s thought

Although the modern term “creative destruction” is not used explicitly by Marx, it is largely derived from his analyses, particularly in the work of Werner Sombart (whom Engels described as the only German professor who understood Marx’s Capital), and of Joseph Schumpeter, who discussed at length the origin of the idea in Marx’s work (see below).

In The Communist Manifesto of 1848, Karl Marx and Friedrich Engels described the crisis tendencies of capitalism in terms of;

“the enforced destruction of a mass of productive forces”

Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether-world whom he has called up by his spells.

[…] It is enough to mention the commercial crises that by their periodical return put the existence of the whole of bourgeois society on trial, each time more threateningly. In these crises, a great part not only of existing production, but also of previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why?

Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions. […] And how does the bourgeoisie get over these crises?

On the one hand by enforced destruction of a mass of productive forces; On the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.

A few years later, in the Grundrisse, Marx was writing of;

“the violent destruction of capital not by relations external to it, but rather as a condition of its self-preservation”.

In other words, he establishes a necessary link between the generative or creative forces of production in capitalism and the destruction of capital value as one of the key ways in which capitalism attempts to overcome its internal contradictions:

These contradictions lead to explosions, cataclysms, crises, in which […] momentaneous suspension of labour and annihilation of a great portion of capital […] violently lead it back to the point where it is enabled [to go on] fully employing its productive powers without committing suicide.

In the Theories of Surplus Value (“Volume IV” of Das Kapital, 1863), Marx refines this theory to distinguish between scenarios where the destruction of (commodity) values affects either use-values or exchange-values or both together.

The destruction of exchange-value combined with the preservation of use-value presents clear opportunities for new capital investment and hence for the repetition of the production-devaluation cycle:

the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use-values.
What one loses, the other gains.
Values used as capital are prevented from acting again as capital in the hands of the same person.
The old capitalists go bankrupt.
[…] A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction.
This is also the period during which moneyed interest enriches itself at the cost of industrial interest.

Social geographer David Harvey sums up the differences between Marx’s usage of these concepts and Schumpeter’s:

“Both Karl Marx and Joseph Schumpeter wrote at length on the ‘creative-destructive’ tendencies inherent in capitalism.
While Marx clearly admired capitalism’s creativity he […] strongly emphasised its self-destructiveness.
The Schumpeterians have all along gloried in capitalism’s endless creativity while treating the destructiveness as mostly a matter of the normal costs of doing business”.

In philosophical terms, the concept of “creative destruction” is close to Hegel´s concept of sublation.

In philosophy, aufheben (sublation) is used by Hegel to explain what happens when a thesis and antithesis interact, and in this sense is translated mainly as “sublate”. When Hegel uses the term in its double meaning in German, he usually expressly informs the reader that he does so. Hegel may be said to visualize how something is picked up in order that it may no longer be there just the way it was, although, it is not cancelled altogether but lifted up to be kept on a different level.

At the level of social history, sublation can be seen at work in the master-slave dialectic.

  • Whereas, in Hegel, sublation shows the movement of Geist, often translated as mind or spirit, Marx identifies it as the manner of development of material conditions.

In German economic discourse sublation was taken up from Marx’s writings by Werner Sombart, particularly in his 1913 text Krieg und Kapitalismus:

Again, however, from destruction a new spirit of creation arises; the scarcity of wood and the needs of everyday life… forced the discovery or invention of substitutes for wood, forced the use of coal for heating, forced the invention of coke for the production of iron.

It has been argued that Sombart’s formulation of the concept was influenced by Eastern mysticism, specifically the image of the Hindu god Shiva, who is presented in the paradoxical aspect of simultaneous destroyer and creator. Conceivably this influence passed from Johann Gottfried Herder, who brought Hindu thought to German philosophy in his Philosophy of Human History (Ideen zur Philosophie der Geschichte der Menschheit) (Herder 1790–92), specifically volume III, pp. 41–64. via Arthur Schopenhauer and the Orientalist Friedrich Maier through Friedrich Nietzsche´s writings. Nietzsche represented the creative destruction of modernity through the mythical figure of Dionysus, a figure whom he saw as at one and the same time “destructively creative” and “creatively destructive”.

In the following passage from On the Genealogy of Morality (1887), Nietzsche argues for a universal principle of a cycle of creation and destruction, such that every creative act has its destructive consequence:

But have you ever asked yourselves sufficiently how much the erection of every ideal on earth has cost?
How much reality has had to be misunderstood and slandered, how many lies have had to be sanctified, how many consciences disturbed, how much “God” sacrificed every time?
If a temple is to be erected a temple must be destroyed:
that is the law – let anyone who can show me a case in which it is not fulfilled! – Friedrich Nietzsche, On the Genealogy of Morality

Other nineteenth-century formulations of this idea include Russian anarchist Mikhail Bakunin, who wrote in 1842;

“The passion for destruction is a creative passion, too!”

Note: however, that this earlier formulation might more accurately be termed “destructive creation”, and differs sharply from Marx’s and Schumpeter’s formulations in its focus on the active destruction of the existing social and political order by human agents (as opposed to systemic forces or contradictions in the case of both Marx and Schumpeter).

 

 

My new art and philosophy project for 2015 will incorporate the Aesthetics of Resistance and Creative Destruction.

I came across a phrase in a recent debate on classical Marxism and modern Capitalism by Joseph Schumpeter (Austrian. Economist. 1919) “Creative Destruction” within Capital. Schumpeter was a supporter of capitalism and capitalist free market economics.

So decided to do some research (and thus prevaricating and diverting from my philosophy MA research yet again! Lol).

Joseph Schumpeter (1883–1950) coined the seemingly paradoxical term creative destruction, and generations of economists have adopted it as a shorthand description of the free market’s messy way of delivering progress.

In Capitalism, Socialism, and Democracy (1942), the Austrian economist wrote: “The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same 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.” (p. 83)

Although Schumpeter devoted a mere six-page chapter to “The Process of Creative Destruction,” in which he described capitalism as “the perennial gale of creative destruction,” it has become the centerpiece for modern thinking on how economies evolve.

Schumpeter and the economists who adopt his succinct summary of the free market’s ceaseless churning echo capitalism’s critics in acknowledging that lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system. The saving grace comes from recognizing the good that comes from the turmoil.

Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.

Herein lies the paradox of progress.

A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever.

At the same time, attempts to soften the harsher aspects of creative destruction by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Schumpeter’s enduring term reminds us that capitalism’s pain and gain are inextricably linked. The process of creating new industries does not go forward without sweeping away the preexisting order.

Transportation provides a dramatic, ongoing example of creative destruction at work. With the arrival of steam power in the nineteenth century, railroads swept across the United States, enlarging markets, reducing shipping costs, building new industries, and providing millions of new productive jobs. The internal combustion engine paved the way for the automobile early in the next century. The rush to put America on wheels spawned new enterprises; at one point in the 1920s, the industry had swelled to more than 260 car makers. The automobile’s ripples spilled into oil, tourism, entertainment, retailing, and other industries. On the heels of the automobile, the airplane flew into our world, setting off its own burst of new businesses and jobs.

Americans benefited as horses and mules gave way to cars and airplanes, but all this creation did not come without destruction. Each new mode of transportation took a toll on existing jobs and industries. In 1900, the peak year for the occupation, the country employed 109,000 carriage and harness makers. In 1910, 238,000 Americans worked as blacksmiths.

Today, those jobs are largely obsolete.

After eclipsing canals and other forms of transport, railroads lost out in competition with cars, long-haul trucks, and airplanes.
In 1920, 2.1 million Americans earned their paychecks working for railroads, compared with fewer than 200,000 today.

What occurred in the transportation sector has been repeated in one industry after another—in many cases, several times in the same industry.

Creative destruction recognizes change as the one constant in capitalism.

Sawyers, masons, and miners were among the top thirty American occupations in 1900. A century later, they no longer rank among the top thirty; they have been replaced by medical technicians, engineers, computer scientists, and others.

Technology roils job markets, as Schumpeter conveyed in coining the phrase “technological unemployment”, e-mail, word processors, answering machines, and other modern office technology have cut the number of secretaries but raised the ranks of programmers.

The birth of the Internet spawned a need for hundreds of thousands of webmasters, an occupation that did not exist as recently as 1990. LASIK surgery often lets consumers throw away their glasses, reducing visits to optometrists and opticians but increasing the need for ophthalmologists. Digital cameras mean fewer photo clerks.

Companies show the same pattern of destruction and rebirth. Only five of today’s hundred largest public companies were among the top hundred in 1917. Half of the top hundred of 1970 had been replaced in the rankings by 2000.

“The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process,” – Schumpeter wrote (p. 82).

Schumpeter summed up how entrepreneurship and competition fuel creative destruction as follows:

“The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” (p. 83)

Entrepreneurs introduce new products and technologies with an eye toward making themselves better off—the profit motive.

New goods and services, new firms, and new industries compete with existing ones in the marketplace, taking customers by offering lower prices, better performance, new features, catchier styling, faster service, more convenient locations, higher status, more aggressive marketing, or more attractive packaging.

In another seemingly contradictory aspect of creative destruction, the pursuit of self-interest ignites the progress that makes others better off.

Producers survive by streamlining production with newer and better tools that make workers more productive. Companies that no longer deliver what consumers want at competitive prices lose customers, and eventually wither and die.

The market’s invisible hand—a phrase owing not to Schumpeter but to Adam Smith—shifts resources from declining sectors to more valuable uses as workers, inputs, and financial capital seek their highest returns.

Through this constant roiling of the status quo, creative destruction provides a powerful force for making societies wealthier. It does so by making scarce resources more productive. The telephone industry employed 421,000 switchboard operators in 1970, when Americans made 9.8 billion long-distance calls.

With advances in switching technology over the next three decades, the telecommunications sector could reduce the number of operators to 156,000 but still ring up 106 billion calls. An average operator handled only 64 calls a day in 1970. By 2000, that figure had increased to 1,861, a staggering gain in productivity. If they had to handle today’s volume of calls with 1970s technology, the telephone companies would need more than 4.5 million operators, or 3 percent of the labor force. Without the productivity gains, a long-distance call would cost six times as much.

The telephone industry is not an isolated example of creative destruction at work. In 1900, nearly forty of every hundred Americans worked in farming to feed a country of ninety million people. A century later, it takes just two out of every hundred workers. Despite one of history’s most thorough downsizings, the country has not gone hungry. The United States enjoys agricultural plenty, producing more meat, grain, vegetables, and dairy products than ever, thanks largely to huge advances in agricultural productivity.

Resources no longer needed to feed the nation have been freed to meet other consumer demands. Over the decades, workers no longer required in agriculture moved to the cities, where they became available to produce other goods and services. They started out in foundries, meatpacking plants, and loading docks in the early days of the Industrial Age. Their grandsons and granddaughters, living in an economy refashioned by creative destruction into the Information Age, are less likely to work in those jobs. They are making computers, movies, and financial decisions and providing a modern economy’s myriad other goods and services.

Over the past two centuries, the Western nations that embraced capitalism have achieved tremendous economic progress as new industries supplanted old ones. Even with the higher living standards, however, the constant flux of free enterprise is not always welcome. The disruption of lost jobs and shuttered businesses is immediate, while the payoff from creative destruction comes mainly in the long term. As a result, societies will always be tempted to block the process of creative destruction, implementing policies to resist economic change.

Attempts to save jobs almost always backfire. Instead of going out of business, inefficient producers hang on, at a high cost to consumers or taxpayers. The tinkering shortcircuits market signals that shift resources to emerging industries. It saps the incentives to introduce new products and production methods, leading to stagnation, layoffs, and bankruptcies. The ironic point of Schumpeter’s iconic phrase is this: societies that try to reap the gain of creative destruction without the pain find themselves enduring the pain but not the gain.

Author – W. Michael Cox senior vice president and chief economist at the Federal Reserve Bank of Dallas. Richard Alm is an economics writer at the Dallas Fed. They are coauthors of Myths of Rich and Poor (1999).


Further Reading
Cox, W. Michael, and Richard Alm. “The Churn: The Paradox of Progress.” Federal Reserve Bank of Dallas, annual report, 1992.
Davis, Stevens J., John Haltwanger, and Scott Schuh. Gross Job Creation, Gross Job Destruction. Cambridge: MIT Press, 1996.
Schumpeter, Joseph A. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York: McGraw-Hill, 1939.
Schumpeter, Joseph A. Capitalism, Socialism, and Democracy. 3d ed. 1942. New York: Harper and Brothers, 1950.
Schumpeter, Joseph A. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle.Cambridge: Harvard University Press, 1936.