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 3 of 3)

“Capitalism stands its trial before judges who have the death sentence in their pockets,” wrote Schumpeter. “The only success a victorious defense can possibly produce is a change in the indictment.” Thus the major indictment of capitalism by the socialists of the 1850s was for immiserating the working people. When this proved scientifically wrong, the socialists of the 1890s indicted it for imperialism. When that too proved wrong, at any rate by the lights of the best economic scientists who troubled to look into the matter (among them Joseph Schumpeter), the socialists of the 1950s indicted it for alienation. When this accusation seemed less fresh, the socialists of the 1990s indicted it for environmental decay. Schumpeter wrote that “such refutation,” rationally proving the latest indictment wrong, “may tear the rational garb of attack [on capitalism and all its work] but can never reach the extra-rational driving power that always lurks behind it.”

Schumpeter stressed the robustness of capitalism in the economy, the vigor with which new entrants dissolve the monopoly profits of the first mover, and the enormous dividend it leaves for the poor. Robust, yes, but in a certain important respect still fragile: “The emotional attachment to the social order,” wrote this conservative in an almost Burkean way, was “the very thing capitalism is constitutionally unable to produce.” No one loves a Rockefeller. Everyone loves a Virgin Queen.

But there’s still something missing. What both Schumpeter and Galbraith got right, and most modern economists have gotten wrong, is what the sociologists call capitalism’s “embeddedness” in a society.

The economy is nothing without the words supporting it, whether conventional wisdom or creative entrepreneurial projects. Schumpeter was mistaken about the future of self-doubt among the bourgeoisie. The bourgeoisie claimed back its self-confidence after Reagan and Thatcher, and, more to the point, after Hayek and Friedman—though there’s still work to be done in praising bourgeois virtues. Galbraith was mistaken in expecting the reduction of entrepreneurship to committees and the permanence of companies like General Motors. Entrepreneurship, even within a great organization, still matters. And as for the arrogant corporations, “nor is favor to men of skill; but time and chance happeneth to them all.”

What’s finally missing in both Schumpeter and Galbraith’s grim prognoses is a theory of language. Human beings swim in words. We’re just realizing this, after a long, long enchantment with Marxist or Freudian or behaviorist claims that secret or not-so-secret material interests rule everything, that the makers of the U.S. Constitution were driven by their property values, or that slavery was abolished to strengthen manufacturing. One quarter of national income is earned from sweet talk—that is, the persuasion a manager or teacher or salesperson or foreman exercises on the job.

“About the end of the seventeenth century,” Schumpeter wrote in his great 1939 tome Business Cycles, the English political world “dropped all systematic hostility to invention. So did public opinion and the scribes.” That’s exactly right. And it’s what is wrong with the materialist conviction since Marx that ideas are froth on deeper currents. Ideas, words, rhetoric, “reason”: the world is governed, another economist said, by little else.

McCraw argues that Schumpeter invented what business schools now call “strategy,” “an attempt by firms to keep on their feet,” as Schumpeter put it, “on ground that is slipping away under them.” It’s practical business stuff. And of what is the “attempt” constituted? Plans, words, sweet talk. An economics that doesn’t acknowledge talk and its creativity may be in some pointless sense “exact,” but it doesn’t illuminate the world we have, the world admired by Schumpeter and zinged by Galbraith, of entrepreneurs—in the market, the corporation, the government, the laboratory, the street. Capitalism, like democracy, is talk, talk, talk all the way down.

Deirdre McCloskey teaches economics, history, English, and communication at the University of Illinois at Chicago. Her latest books are The Bourgeois Virtues: Ethics for an Age of Commerce (University of Chicago Press) and, with Stephen Ziliak, The Cult of Statistical Significance: How the Standard Error is Costing Jobs, Justice, and Lives (University of Michigan Press).

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.