Creative Destruction vs. the New Industrial State

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

Deirdre McCloskey from the October 2007 issue

(Page 2 of 3)

Ten years later The New Industrial State offered additional Sweden boosting. It has now been reissued with an introduction by the author’s son James, also a notable economist on the Democratic left. The elder Galbraith argued that the great scale of modern industry has created a “technocracy,” which runs the world with committees. Anyone who has worked in a large corporation or a large university knows the feeling. Galbraith argued that advertising manipulates demand in order to fit with technical necessities. Anyone who has lusted for an iPhone knows that feeling too. A new model of your father’s Oldsmobile was so very expensive to plan and took so very long to bring to market—ask Airbus today about all this—that the demand had to be guaranteed with elaborate provision years in advance for advertising and distribution.

So let us adopt democratic socialism, said Galbraith. Let us concede that the new industrial state is one of massive corporations facing massive unions, under the benevolent and skillful regulation of massive governments. “The small competitive firm cannot afford the outlays that [modern, big-time] innovation demands,” he wrote. If modernity needs big corporate bureaucracies to do such big stuff, surely we need big governments to coordinate everything; the so-called free price system won’t do. “If the market is uncontrolled,” Galbraith wrote, “it will not know” when the new car will roll off the line or when a new drug will pass FDA approval.

Rereading Galbraith long after his heyday, you’ll find that his zingers are still funny, his arch sneers at the conventional wisdom still amusing—until you realize that the zinging and the sneering are there to cover his tracks. “For a public official to be called an economic planner was less serious than to be charged with Communism or imaginative sexual proclivities,” he wrote, “but it reflected adversely nonetheless.” Or consider his summary of the conventional wisdom regarding work: “Leisure is something to be regarded with misgivings, especially in the lower income brackets.” Zing, zing.

The problem is that the tracks Galbraith is covering over are light. His works, essentially updatings of the great economic sociologist Thorstein Veblen, never really faced intellectual opponents with evidence. Galbraith in 1967, like Veblen in 1915, merely ran ahead laughing. While Schumpeter always acknowledged the very best academic and political cases made by his socialist opponents, Galbraith confined himself to making merry of pamphlets from the National Association of Manufacturers.

McCraw’s book on Schumpeter is an absorbing read, with short chapters, lots of personal detail and historical scene setting, and an important anti-Galbraithian economic theme. McCraw argues that Schumpeter’s search for “exact economics”—the ruling passion of modern economics, though not a passion that Galbraith indulged—was inconsistent with Schumpeter’s profound discovery about the marketplace, namely, that it depends on invention, innovation, and entrepreneurship, all things counter, original, spare, strange. In Schumpeter’s famous phrase from Capitalism, Socialism, and Democracy, borrowed from the German economist and sociologist Werner Sombart, capitalism depends on “perennial gales of creative destruction.”

Beyond the insights into Schumpeter the economist and precursor of “strategy” courses in business schools, McCraw has dug out illuminating gossip. Schumpeter’s diaries, available in full, get us into the head of a work-obsessed man—work-obsessed, at any rate, after a terrible summer in Bonn in 1926 at age 43, when the beloved mother of this beloved only child died suddenly of a stroke and his adored second wife with her newborn son died in her only childbirth. He wrote to a fellow economist, “Everything now hangs on my ability to work. If so, the engine will keep running, even if my personal life is over.”

Schumpeter’s personal life was not quite over. In 1937 he married for a third time, to Elizabeth Boody, herself a brilliant scholar, who sustained this peculiar working machine until his death in 1950. The chapter detailing the FBI’s Keystone Cops pursuit of Joe and Elizabeth during World War II is alone worth the price of the book. Elizabeth Boody Schumpeter had correctly predicted that Japan would be no military pushover. That sufficed in the heat of wartime paranoia to draw the attention of the federal police. The agent reporting to J. Edgar Hoover about a volume on the Japanese economy edited by Elizabeth (the agent styled her maiden name and first-marriage name “aliases”) could, unhappily, find no information “which shows clearly any intention either to aid or to oppose the Japanese.”

Hoover shot back that on the contrary, “this case presents fairly good possibilities for eventually reaching prosecution.” After all, husband Joseph himself was suspect, as an Austrian native who had doubts that unconditional surrender was a wise policy to impose on Germany a second time, or that killing many hundreds of thousands of Axis civilians with bombs was worthy of British or American values. (It was Galbraith, by the way, who headed the inquiry after the war showing how ineffective the strategic bombing of Germany had been.) FBI agents swarmed over Cambridge, McCraw notes, and “inevitably, many of [the Schumpeters’] acquaintances began to view them in a different light,
and they suffered some cold shoulders.”

Galbraith thought of Schumpeter as “the most sophisticated conservative of this century.” The two got along well, trading wittily expressed opinions about capitalism. Both men had good senses of humor, whatever their disagreements. Schumpeter always thought of himself as a conservative, and planned a book on the matter, though he once said to Galbraith that “I am pretty sure that no conservative would recognize himself in the picture.” In fact he was a conservative libertarian, well before the word libertarian got much respect. That is, he was not radically libertarian, willing to turn the society upside down, abolishing the government into the margins in the style of Ludwig von Mises, his classmate in a little economics seminar with the great Eugen von Böhm-Bawerk at the University of Vienna in 1905.

“I am not in the habit of crowning our bourgeoisie with laurel wreaths,” wrote Schumpeter in his 1918 essay “The Crisis of the Tax State.” Notice the sneeringly aristocratic imagery, conventional by then in European rhetoric and prominent in all of Galbraith’s writings. As Schumpeter remarked a quarter of a century later, “The public mind has by now so thoroughly grown out of humor with [capitalism and the bourgeois life] as to make condemnation of capitalism and all its works almost a requirement of the etiquette of discussion.”

But Schumpeter was bowing in 1918 to anti-bourgeois etiquette in order to set up the opposite point, that in fact the bourgeoisie “can do exactly what is needed now” and should be given its head. The irony, McCraw points out, is characteristic of the man, and of his theory of political economy: Capitalism was wholly successful economically but doomed sociologically.

Galbraith, like many other economists of his generation, worried about private monopoly, though embracing public monopolies. Schumpeter never had such worries. Creative destruction, he argued, would take care of the trusts and pools and over-big corporations. In truth the list of companies that Galbraith held in awe as great forces in 1967 looks quaint now. U.S. Steel, AT&T, and General Motors belie his assertion “of great stability in [a great corporation’s] position in the planning system.” Eight years after the first publication of The New Industrial State, Bill Gates founded Microsoft. Let creative destruction rip.

McCraw himself italicizes a very unripping assertion of his own that “the two pillars that support all successful business systems [are] a modern concept of private property and a framework for the rule of law.” That’s nothing like Schumpeter’s idea. Laws are necessary, of course, but so are road mending and brick making. Private property and a framework for the rule of law have existed in written form since ancient Mesopotamia, and in every substantial civilization from third-century B.C. China to 12th-century A.D. Timbuktu. Roman law, with its detailed concept of private property, was worshipped in Europe for two millennia. Yet those civilizations, Schumpeter emphasized, never reached the standard of economic production and progress the modern West has. Not even close.

What was missing was the thing Schumpeter emphasized and Galbraith attacked, a thing unique about Europe since the Netherlands in 1600 and England in 1715: a business-dominated civilization. “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans,” Schumpeter wrote in his swan song, a 1950 essay grimly entitled “The March Into Socialism.” Capitalism also “means a scheme of values, an attitude toward life, a civilization—the civilization of inequality and of the family fortune.” The last touch, incidentally, is pure Schumpeter: “The civilization of inequality” makes the socialists’ case by adopting their words, yet Schumpeter politely disagrees on how we should judge the outcome.

The American “scheme of values” in the 19th century, Schumpeter said, “drew nearly all the brains into business”—witness, say, Mark Twain’s failed entrepreneurial projects—“and impressed the businessman’s attitudes upon the soul of the nation.” Schumpeter remembered wistfully the pre-1914 civilization of Europe itself as following “the beliefs and attitudes of the business class,” “essentially rationalist and utilitarian. It was not favorable to cults of national glory, victory, and so on” (though favorable enough, Professor Schumpeter, to start and sustain the Great European Civil War of 1914–1989).

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.