Sunday, November 7, 2010

On Schumpeterian Ideas

The economist Joseph Schumpeter is known for a number of things. But for me, two of them stand out. He defined the role of the entrepreneur and he introduced the idea of growth as "creative destruction." Arts & Letters Daily recently had two links that focused on these ideas. Both are worth your consideration.

The first is a review of the book, American Colussus: The Triumph of Capitalism by H. W. Brands that appeared in The Wall Street Journal. It is a study of those entrepreneurs we first learned of as "robber barons" in early forays into American History. Reviewer Amity Shlaes finds fault with Brand's approach of pitting capitalism against democracy. And I understand why.

If we focus on "creative destruction" we may forget that it is the democratic choice (voting with dollars) of the majority that brings about true change, destroying one industry and creating another. While I have not read the book, I may have to add it to my holiday "wish list" despite Shlae's reservations.

The second link is an essay by Virginia Postrel on Big Questions Online. Postrel suggests that entrepreneurial spirit may be less about risk-taking and more about youthful optimism, or as she borrows it - irrational exuberance. That would seem to square with Schumpeter's views of the entrepreneur - one who opens a market, finds a new source of resources, develops a new product, develops a new product, or develops a new business organization. My only question is why Postrel didn't include him among the others she reference in her article. No matter - the idea is what counts in this case. And her article has an excellent idea.

I look forward to your comments.


Faizan Qadeer said...

Just like you, I have never read the American Colussus but Amity Shleas review did show some unique points about it. However, some of her positions lacked full support on some of the ideas. As she mentions, "political and market entrepreneurs", she failed to thoroughly support her reasoning on why Robber Barons were only political entrepreneurs and not both. In a way, both political and market entrepreneurs are able to use unfair practices and show insensitivity to the common worker.
In addition, her reference to "capitalism is a force of creative destruction" is something I don't completely agree with. The reason for that is because creative destruction is inevitable in any society that involves some sort of advancement through time in either technology or thinking. For example, a company that lost all of their profit because some individual made a better product than them wouldn't blame it on the structure that allows this person to do such a thing but would consider the "force" to be his higher thinking in their means of "destruction".
In the essay by Virgina Postrel, I believe that entrepreneur spirit involves equal risk-taking and dreaming not one more than the other. There are certain types of situations for entrepreneurs which involve great risk-taking and without the ambition involved it is not possible, e.g., Bill Gates, who dropped out of Harvard to persuade his goals risking a failure in life. On the other hand, people don't focus on the risk in our society because of the possible outcomes-Postrel's gambling reference and how people overstate the risk. So, it may appear to some that it's the motivation behind true entrepreneur characteristics but in reality the motivation along with risk is just some of the parts of what it takes to become an entrepreneur.
Overall, both of the links showed some great points about creative destruction and entrepreneurship.

Tim Schilling said...

Without having read Brands' book, it's hard to say. I have read work by Shlaes. I could see her putting the robber barons into both categories.

Many economists and economic historians place a lot of weight behind the power of institutions - the rules of the game that provide incentives to decisions.

It is possible that she is referring to these figures as political entrepreneurs because they shaped or took advantage of the institutions. This would make them political entrepreneurs.

Jack Horan said...

I do want to question one part of the comment- the concept of democracy being automatically linked to voting with dollars. Businesses are built or destroyed by the votes of majorities of dollars. That is not necessarily the same thing as the majority of people. In societies with very steep Lorenz curves of income or wealth distribution, the majority of dollars almost certainly reflects the choice of a minority of people. In societies with larger middle classes, the price of the products involved (e.g., very expensive medicines) may skew the identification of the dollar majority with the population majority.

Jack Horan said...

Faizan Qadeer's comment sparked a return of an idea I have been considering lately. He talks about the entrepreneurial spirit, and it leads me to wonder about discussions of tax policy, marginal tax rates, and economic growth.
I definitely agree that there is a strong entrepreneurial spirit in most people who start businesses, and I have a question about how much a rise in marginal income tax rates would dampen that spirit to the extent of keeping those people from opening businesses. For instance, would a rise in the marginal federal income tax rate on the highest earners from 35% to 38% make a real difference to someone who is ready to start a new business and believes in his or her own potential for great success?
For my own part (even though I am a teacher and do not have entrepreneurial spirit myself), I don't see that the prospective business owner would be deterred at all, but I would like to hear from others (especially entrepreneurs) on the issue.
By the way, the term "spirit" seems to indicate Keynes slipping in by the back door with his belief in the importance of "animal spirits" to growth and recovery...