Creative Destruction vs. the New Industrial State

The "embedded" capitalism of Joseph Schumpeter and John Kenneth Galbraith

Deirdre McCloskey from the October 2007 issue

Prophet of Innovation: Joseph Schumpeter and Creative Destruction, by Thomas K. McCraw, Cambridge: Harvard University Press, 719 pages, $35

The New Industrial State, by John K. Galbraith, Princeton: Princeton University Press, 518 pages, $24.95

Most of us get our politics in our early 20s and then never change. Saul Bellow said of his youthful Trotskyism, “Like everyone else who invests in doctrines at a young age, I couldn’t give them up.” A young adult hates the bourgeoisie or loves capitalism or believes passionately in the welfare state. Her politics becomes a cherished identity, a faith. Here I stand. I can no other.

The vintage matters. Someone who invested in doctrines when world capitalism seemed to be working just fine—on the eve of World War I, say—had a good chance of keeping for life an optimistic opinion of markets and entrepreneurs. So it was with one of the best-known economists of the last century, Joseph Alois Schumpeter (1883–1950) of Vienna, Bonn, and Harvard.

But someone who invested in his human capital when things were dismal and chaotic—early in the Great Depression, say—was likely to take a less cheerful view. So it was with another of the century’s best-known economists, Schumpeter’s younger colleague John Kenneth Galbraith (1908–2006) of Ontario, Berkeley, Fortune magazine, and then, at the very end of Schumpeter’s two decades there, Harvard.

Both tried political power early, Schumpeter as a pro-market minister of finance in Austria’s brief socialist government after World War I and Galbraith as a New Dealish deputy director of the U.S. Office of Price Administration during World War II. Experience in government had opposite effects on the two. Schumpeter became permanently suspicious of state power. Galbraith became permanently delighted with it.

These two men of clever words, both master rhetoricians, laid out the case for and the case against unregulated markets. Half a century on, you can review their efforts in a new biography of Schumpeter and a new reissue of Galbraith’s most famous book, The New Industrial State. Schumpeter’s pro-capitalist and conservative case looks better, Galbraith’s anti-market and regulatory case looks worse.

Regulated or not, as Schumpeter almost understood, capitalism hangs on words. In the end that’s what both men missed, Schumpeter only narrowly. Case-making with sweet words is how business decisions are made. It’s how regulatory agencies do their jobs. It’s how you shop for furniture. It’s how economic scientists persuade. It’s how managers in a free society manage. Rhetoric rules.

As Thomas McCraw, a professor of business history at Harvard Business School, explains in Prophet of Innovation, a charming new life of the man in full, Joseph Schumpeter from first to last defended the entrepreneur with his own talk, talk, talk. A free economy, Schumpeter claimed from his earliest important book, The Theory of Economic Development (1911), runs on innovation, not routine. “Schumpeter turned Karl Marx on his head,” McCraw writes. “Hateful gangs of parasitic capitalists become, in Schumpeter’s hands, innovative and beneficent entrepreneurs.”

Emotionally speaking, Schumpeter had always been attracted to the aristocratic side of the bourgeoisie. “The innovating entrepreneur,” noted one of Schumpeter’s colleagues at Harvard, “did have glamour”—which Schumpeter sought—“and was not dominated by middle-class values,” which Schumpeter viewed as stuffy conventionality without heroism. The aristocratic bourgeois: There’s your Schumpeterian entrepreneur.

In public Schumpeter liked “to play the part of an aristocrat,” McCraw writes, “even though his origins were middle-class and his eminence self-made.” At his first academic job in 1909 he fought a literal duel with swords against, of all people, the librarian, because he wouldn’t make books available to his students. The librarian got an honorable scar out of it, and the two became the best of friends.

Schumpeter “liked to disrupt faculty meetings by turning up late, still clad in jodhpurs and helmet from his daily horseback ride.” He would say in later years that his ambition was to become the world’s greatest economist, the world’s greatest lover, and the world’s greatest horseman. “Things are not going so well,” he would add, smiling, “with the horses.”

Schumpeter’s best-known book is his hastily written but glittering Capitalism, Socialism, and Democracy, which received scant notice when it first appeared in 1942. It contained his usual praise for the businessperson, but it also predicted that capitalism would not survive, and that democracy might not either. The book “admits, and rather cheerfully, that the patient is dying,” the economist Paul Samuelson wrote in a 1970 Newsweek column, “but of a psychosomatic ailment. No cancer, but neurosis is [the capitalist’s] complaint. Filled with self-hate, he has lost his will to live.”

Most intellectuals in the 1930s and early ’40s had the same neurosis, and the same pessimism. Schumpeter believed that capitalism was raising up its own grave diggers—not in the proletariat, as Marx had expected, but in the sons and daughters of the bourgeoisie itself. Lenin’s father, after all, was a high-ranking education official, Lenin himself a lawyer. It wasn’t the children of autoworkers who pulled up the paving stones on the Left Bank in 1968. The most radical anti-globalists today are socialist children of capitalist parents.

Schumpeter’s cultural pessimism about capitalism has proven wrong. The American economy has continued to show startling entrepreneurial vigor, though both Schumpeter and Galbraith thought that committees would kill it. The capitalist idea has flourished worldwide.

By 1967, when Galbraith published The New Industrial State, his most considered book (he revised it three times down to 1985), he was already famous among general readers for The Affluent Society (1958). In that book he pointed out that we Americans have grown affluent in private goods, loaded down with refrigerators and finned automobiles. Splendid. But we have neglected the public goods of education and public parks and decent provision for the poor. In Sweden, he averred, they do things better.

Comments

|9.18.07 @ 7:19AM|#

Hmmm. A free market economist compares a free market economist and a near-socialist to see who wins. I'm going to guess................ Schumpeter.

I'll be back after I RTFA to see how I did...

|9.18.07 @ 7:50AM|#

Oops. McCloskey wrote the review, not the book. Still, Schumpeter wins.

...both Schumpeter and Galbraith thought that committees would kill [the economy]...

To be fair, committees are doing their best. Markets are just too powerful.

|9.18.07 @ 8:54AM|#

"Most of us get our politics in our early 20s and then never change."

That's untrue of most people I know who think and read. Much more common is the "socialist at 20, conservative (or libertarian) at 40" pattern.

|9.18.07 @ 9:23AM|#

Radicals on the the left and right have always conceived of economic policy as the field of honor on which Titans fight to the death - Capital vs. Labour, Capitalism vs. Socialism, the Bourgeoisie vs. the Proletariat. They can never quite believe that something as prosaic, incremental, and petit bourgeois as overlaying a liberal welfare state on a fundamentally capitalist system could actually produce a sustainable armistice. But it did.

x,y|9.18.07 @ 10:07AM|#

"Sustainable armistice"?

In what world are you living in? Have you checked the national debt? Do you realize there's no SS "trust fund" and that it will be insolvent in a few years? Etc. Etc. Etc.

VM|9.18.07 @ 10:07AM|#

Professor McCloskey has an impressive catalog of work: hier is her homepage. Highly worth browsing!

|9.18.07 @ 10:26AM|#

Professor McCloskey has an impressive catalog of work

MILF!

|9.18.07 @ 10:49AM|#

"Professor McCloskey has an impressive catalog of work"

Unfortunately that body of work also includes slandering Michael Bailey.

VM|9.18.07 @ 11:02AM|#

up yours, emme.

|9.18.07 @ 11:11AM|#

"Sustainable armistice."

The vampire, realizing that dead peasants have no blood, promises to only drink a few pints at a time, and the villagers promise not to burn down his castle and put a stake through him. Maybe sustainable, but the vampire relaxing in his castle is still taking advantage of the villagers who spend their days toiling in the fields.

Mike Laursen|9.18.07 @ 11:13AM|#

overlaying a liberal welfare state on a fundamentally capitalist system

Wow. This comment dovetails with an excellent article I read last night, "Libertarianism: Left or Right?":

http://www.fff.org/freedom/fd0706b.asp

The article has a quote from Rothbard that is really saying the same thing as joe, but with a not so flattering light:

".... socialism, while to the 'left' of conservatism, was essentially a confused, middle-of-the-road movement. It was, and still is, middle-of-the-road because it tries to achieve Liberal ends by the use of Conservative means."

Mike Laursen|9.18.07 @ 11:19AM|#

But, of course, Rothbard was a bit of a fundamentalist dick. I'd gladly accept a basically libertarian, free market society with a government safety net. If we could eliminate all the huge government wastes like wars and corporate welfare, providing assistance to people in true need, and only to people who are in true need, wouldn't be that big of a drain on the economy.

Garth|9.18.07 @ 11:24AM|#

Ummm... Lurkin Merkin. You do realize that prof McClosky has a "y" chromosome, yes? She used to be "Donald".....

Not that there is anything wrong with that.

x,y|9.18.07 @ 11:30AM|#

Mike,

And just how would we tell who's truly in need? And who makes that decision?

|9.18.07 @ 11:34AM|#

Yes, Garth. It was supposed to be a joke.

Mike Laursen|9.18.07 @ 11:35AM|#

And just how would we tell who's truly in need? And who makes that decision?

Some imperfect process. Like I said, it's a compromise I'd be willing to accept, not libertopia.

|9.18.07 @ 11:43AM|#

x,y,

I was talking about politics. Particular feelings about the wisdom of left, right, or center politics aren't really the point. Both sides were geared up for a fight to the death, certain that their perfect, gleaming edifice was the only way to stave off disaster, and they were wrong. We muddled through with some duct tape and bailing wire.

|9.18.07 @ 11:57AM|#

Also, x,y,

If the United States averages 3.3% economic growth per year, there will never be a Social Security deficit, or anything even close, from now unto the infinite time horizon.

Since the end of the Civil War - a period of 140 years, one that includes several depressions including the Great Depression - the American economy has grown at 3.4% per year.

The sky is not falling.

|9.18.07 @ 11:58AM|#

Unfortunately that body of work also includes slandering Michael Bailey.

Looks more like Michael Bailey slandered Deirdre McCloskey.

So I second Viking Moose.

|9.18.07 @ 12:03PM|#

What's cuter, a fluffy little kitten or Dennis Kucinich? Read the article to find out!

|9.18.07 @ 1:25PM|#

joe is right in at least one sense. The Road to Serfdom slippery slope argument is on the ropes. The mechanisms described by the book are all in place, but the idea that weakened private property necessarily leads to socialism appears not to be the case.

There is a boundary placed on modern welfare states. Namely, the life of the golden goose. You can't kill the productive off. You can't even make them uncomfortable enough that they lessen production too much. You just let the welfare state grow with the economy. The argument now is about how much growth is required to provide x amount of transfers without causing a net loss, or how much in the way of transfers can you afford if you want to look at it that way.

|9.18.07 @ 2:44PM|#

Joe, the faster the economy grows the faster wages and therefore SS benefits will grow.

|9.18.07 @ 2:59PM|#

joe is right in at least one sense. The Road to Serfdom slippery slope argument is on the ropes. The mechanisms described by the book are all in place, but the idea that weakened private property necessarily leads to socialism appears not to be the case.

No offense, but every time I read something like this, I wonder if the other person and I read the same book. I remember Hayek going into why "overlaying a liberal welfare state on a fundamentally capitalist system" was an utterly different thing from socialism and completely not what he was talking about.

|9.18.07 @ 3:44PM|#

Jason L, I've been using the Golden Goose analogy on my anti-capitalist friends for some time now.

That's it, exactly. Capitalism isn't BAD. It's GOOD - it produces wealth, and does a fine job distributing it, for the most part.

It's just not completely sufficient, all by itself. We can work on that, but we can't kill the goose that lays the golden eggs.

Eric the .5b,

Like Mill, Hayek gets dragged into all sorts of absolutist, market-fundie arguments he never actually endorsed.

|9.18.07 @ 4:00PM|#

Halfbee:

I'll have to re read, but I seem to recall an argument about a progression from weakened property to no property and from no property to tyranny. I may have just been hearing that argument too often in the echo chamber though.

Too, and I've never been clear on how Hayek felt about this, there is the problem of the size of the overlaid welfare state. At some margin, it is difficult to see what a 'fundamentally capitalist system' is.

|9.18.07 @ 4:13PM|#

"Looks more like Michael Bailey slandered Deirdre McCloskey."

Read the case study by Professor Dregger. McCloskey is a total bitch.

http://www.bioethics.northwestern.edu/faculty/work/dreger/controversy_tmwwbq.pdf

VM|9.18.07 @ 4:38PM|#

this needs repeating.

UP YOURS, EMME.

|9.18.07 @ 4:44PM|#

"this needs repeating.

UP YOURS, EMME."

How mature.

VM|9.18.07 @ 4:54PM|#

how 'bout this:

blow it out yer ass, Emme.

Yeah. That'll work.

Jaap Weel|9.18.07 @ 9:31PM|#

Re: the slippery slope...

Hayek was not a historicist, and in fact was in violent agreement with Popper that social science trying to make a priori prophetic predictions about the long run course of history amounts to pretentious piffle. If you read any of his writing as a prophetic prediction that all welfare states will go to hell over time, you misread him.

What he did say is that any welfare state, if it is to achieve total equality of opportunity, needs to become totalitarian. He wouldn't have spent so much time writing if he hadn't thought that it was feasible to convince people to scale down their expectations of total equality and appreciate the benefits of spontaneous order. The welfare state may be a slope, but it's not quite so slippery that you can never climb back up.

Besides, Hayek also repeatedly wrote that modest "safety net" programs (I imagine he was thinking of something like the Swiss system) could be compatible with a free society.

|9.19.07 @ 2:18PM|#

I'll have to re read, but I seem to recall an argument about a progression from weakened property to no property and from no property to tyranny. I may have just been hearing that argument too often in the echo chamber though.

I'll have to do the same thing (it's been at least five years since I read it), but his concern as I recall it wasn't property, but the scope of government action in the economy and the attempt of governments to manage economies. He was pointing out the naked emperor of command economies and socialism, and how their failings lead to increasingly greater failed government management and instability.

He really only touched upon the issue of "how much welfare state is safe?", but I thought that touch was rather relevant. He was specifically refuting the claim that the postwar Scandinavian countries were examples of socialist success. He argued that no, those countries weren't very socialist at all - they had minimal government control of production and such, just an extensive welfare state atop a liberal, free market society. He contrasted them with postwar England, which still had extensive nationalization of industries and services; England was far more genuinely socialist.

So by his logic (and pretty well borne out by history), welfare states, even big European ones, don't seem to pose the same qualitative threat as actual socialist systems.

|9.19.07 @ 2:27PM|#

Besides, Hayek also repeatedly wrote that modest "safety net" programs (I imagine he was thinking of something like the Swiss system) could be compatible with a free society.

Free-market economists tend to accept the need for government safety-net functionality in some form. I'm not sure I buy that need myself, but I'd really happily settle for things like negative income tax. "Remove any and all government safety net" is somewhere around "Get rid of that 'in God we trust' motto" in terms of importance on my agenda. It's miles below "Get rid of the current entitlement system", and that's below things like "Prevent nationalization of medicine", which is a hop or three below "Undo the Bush policies of the last six years".

Jaap Weel|9.19.07 @ 9:09PM|#

@Eric:

Take the case of somebody who loses their job after 11 months because labor contracts of more than a year receive dismissal protection in their country. Or of an elderly immigrant who doesn't speak the language very well and can only really contribute $5 per hour to the revenue of any firm, but the minimum wage is $7.

These people might take freedom of contract over handouts any day, but any system that deprives them of both at the same time is cruel.

|9.20.07 @ 6:22PM|#

I'd have to agree, Jaap.

|9.26.07 @ 9:44AM|#

Good article, although I'm not sure McCloskey defends her view that language and rhetoric play such important roles in the economy.