Starting to read Schumpeter

by Sebastian Benthall

I’ve started reading Schumpeter’s Capitalism, Socialism, and Democracy (1942).

Joseph Schumpeter ekonomialaria.jpg
It’s Schumpeter.

Why? Because of the Big Tech anti-trust hearings. I’ve heard that:

(a) U.S. anti-trust policy is based on a theory of monopoly pricing which is not bearing out with todays Big Tech monopolies,

(b) possibly those monopolies are justified on the basis of Schumpeterian “creative destruction” competition, wherein one monopoly gets upended by another in sequence, rather than having many firms competing all at once on the market,

(c) one of the major shots taken at Amazon in the hearings is that it would acquire companies that it saw as a threat, indicating a strategic understanding of Schumpeterian competition on the part of e.g. Bezos, and also how one can maintain a monopolistic position despite that competition,

(d) this idea of capitalism and entrepreneurship seems both fundamentally correct, still somehow formally undertheorized, and tractable with some of the simulation methods I’ve been learning recently with Econ-ARK and NYU’s ABM Lab

All good signs. But who was Schumpeter and what did he think? I can’t really say I know. So I’m returning to my somewhat antiquated method/habit/hobby of Actually Reading the Book.

A few striking things about the book based entirely on its Prefaces (1942, and the later one from 1946):

  • Schumpeter is quite consciously trying to make accurate descriptive claims without normative policy implications, and his kind of annoyed by readers who think he’s doing anything but objective analysis. His enemy is ideology. He apparently gets misunderstood a lot as a result. I think I can hang with this dude.
  • The first section of this book is dedicated to a long treatment of the work of Karl Marx. This opens with the idea that Karl Marx is a great theorist not so much because he’s right or wrong, but because his ideas survive from generation to generation. This view of theoretical greatness prefigures, I think, his view of economic greatness; as an evolutionary battle of competing beings whose success is defined by their Darwinian survival. Schumpeter takes on Marx with great respect. I expect him to be involved in a dismantling of him, though he agrees with Marx that capitalism ends up destroying itself with its accomplishments. He says this as a pro-capitalist, which is interesting.
  • He points out, somewhat amusingly, that Marx is popular (at the time of his writing, the 1940’s) in Russia, where it has been misinterpreted by the Bolsheviks, and for some reason that mystifies him in the United States, but not in the place most deeply familiar with Marx, which is Germany. German socialists, he notes, reason just like economist everywhere else. Since I find that in academic circles Marxist ideas are still fashionable, but other forms of economics, let alone socialist economics, are less so, I have to see Schumpeter as making yet another enduring point here.
  • In the 1946 preface, he mentions an objection by professional economists to his work, which is the objection that while Schumpeter predicts that profits in capitalism will fall over time, this view is critiqued since this does not apparently take into account the return on salesmanship or something like that. Schumpeter then says something interesting: sales is considered as the wages of management. What he’s talking about is the profitability of new goods, new productions methods, new processes, etc: i.e., the sort of stuff that would be actually valuable, directly or indirectly, to consumers. This is interesting. Because given a Herbet Simon view of organizations, management process are precisely what have been changing so dramatically with the “tech economy”–all this AI stuff is really just about streamlining management processes, sales, etc. SO: what does it mean if Schumpeterian competition winds up being nullified by monopolies of managerial power, as opposed to monopolies of something more substantive? This whole complex of information technology and management being produced and marketed as commodities or securities or something else, what we might in a very extended sense call capital markets, is just the sort of thing that neither Marx nor most early economists would get and what actual dominates the economy now. So, let us proceed.