Analysis Of Joseph A. Schumpeter's Ideas
Length: 1496 words (4.3 double-spaced pages)
The main point which Schumpeter emphasizes is that capitalism is an evolutionary process. He describes how it is an always moving concept and it "not only is but never can be stationary." Schumpeter goes on to state that the evolutionary process of capitalism is not due to the fact that the "economic life goes on in a social and natural environment," meaning that the main reason for capitalism’s constant evolution is not because of the things like wars and revolutions that pick up or bring now the economy. The reason capitalism is an evolutionary process, he says, is because of the constant spew of new consumers’ goods that are put on the market, new systems of production and/or transportation of all goods, creation of new markets, and new methods of industrial organization. All of these things are creating new goods, or different ways of using and handling them. Schumpeter states that all of these things are ways that capitalism transforms the formation of the economic structure "from within," which continuously creates new structures of the economy while at the same time destroys the old, previous structure that stood before it. Schumpeter emphasizes that this happens every time something new is created or a new way of producing, packaging, transporting or organizing something is created. He coins the term Creative Destruction for this process that he describes and believes it is "the essential fact about capitalism." Furthermore, Schumpeter believes that one cannot assess the economy or capitalism "ex visu" or at one certain point in time. This is because everything that happens does not always make it’s effects clear right away, changes in the economy take "considerable time" to expose their true effects, and he believes that when theorists or government commissioned reports are created they do not try to see the effects of the situation over a period of time. He believes most of these reports only try to understand how "capitalism administers existing structures" but what they should really be doing is understanding how capitalism creates and destroys the existing structures. It is more powerful to understand the capitalistic economy through how something is created and replaced or destroyed over a period of time then it is to understand how it is run when it is existing.
Also, he believes a problem is that economists for too long have only considered "modus operandi" for competition, or the same old mode of operation for competition, which is focusing only on price competition. Schumpeter thinks that when "quality competition and sales effort" are put into the equation then price will not seem as important in comparison. This is because price competition, might be the "textbook" competition that is normally studied in the economy but it’s the new goods, more effective production, creation of new supply sources that will effectively destroy the competition to make room for the new. Essentially, price competition can only be effective so far, it takes the creation of these new things to bring about the Creative Destruction that is capitalism, and in the end it is this which will control the prices, usually going down, rather than price being the main factor by itself. Lastly, Schumpeter believes that Creative Destruction will make the capitalist economy prevail because it is an omnipresent threat to every good, person and company in the economy. This is because even though there may be a person in a certain field that has no competition at one point there is always the possibility or threat of something or someone coming out with something better, or a more effective way of producing that good. This keeps competition constantly on its feet, in fear of never knowing when the next strike of a better good or service will pop up and destroy the pervious good or service.
2. Summarize what evidence the paper itself presents to support this claim.
Schumpeter does not have any concrete data or numbers to support his ideas. With this said he does, although have a few examples and his ideas could be applied to relevant situations of the economy, as it was then. This article was written originally in 1942 when there were many monopolies and oligopolies at the time,(i.e. car manufactures, gas and electric companies, telecommunications companies) which could have been applied to his theories of Creative Destruction through entrepreneurship, although he does not mention the word entrepreneurship it is implied, in a capitalistic economy compared to monopolies and “their popular varients.”
3. Comment on whether you personally find this evidence compelling.
4. Comment on whether you think the idea always holds true, or might vary for different times, countries or groups of people. Explain why that would be the case, if apporiate.
Although there is no specific evidence on to directly support his claim, I would like to comment that I do find his theories and claims extremely interesting. If I would have read this article not knowing when it was written I would have believe that it was written in the present day. I think it is extremely interesting that Schumpeter wrote this in the early 1940s because I think it is tremendously relevant today and in a way it seems like he almost predicted the future. The idea of Creative Destruction, which is essentially entrepreneurship, holds as the today’s process of new technology, goods and the other ways Schumpeter described. It was not from the large existing companies that created, computers, cell phones or any other of the many new technologies of the last two or three decades, but individuals like Bill Gates and the creators of things like eBay that created new products and technology for the world. Although they went on to establish huge corporations they can still be put into Schumpeter’s model that they must beware of the constant threat of someone else coming into their market with something better, more effective and cheaper then what they have. This further motivates them and others to constantly be on the edge of market, trying to have the best service or good available with the most effective production and sale at the best price. It is a constant competition with not only others but themselves if they want to be on the top of their game and their market. So, I think it shows that because this was written over 65 years ago and it can still be applied almost exactly as Schumpeter saw it back then to today, it can be applied for different times. I believe this can be applied to different groups of people because age, race and gender have all been diverse in who has created what in the economy. There is no reason that any of these factors should place an advantage or disadvantage in the free market, because it is whoever can come up with the best and most effective idea or good that will prevail in the capitalistic economy. This may vary for different countries because of the fact that cultures are different and not every country may be as free of a capitalist economy as America or other developed countries. If the countries can establish capitalism, with little corruption or outside disturbance like America I believe that Creative Destruction can prevail in most countries and economies around the world. For the most part, I think Creative Destruction can be applied in most situations, with a few slight changes based on cultural and moral beliefs in different regions; most factors will not affect the base that is Creative Destruction in the capitalistic economy.
5. If you do not find the evidence presented completely compelling, suggest types of evidence that might help sort out whether the idea is valid or not.
Although I believe that this argument is compelling, I think it would help prove his claims if Schumpeter could find some solid evidence or data to complement his paper. I do understand that part of the reason he did not put hard evidence in his paper is because of the very fact that he states the economy cannot be judged at one point in time or a small period. It takes a while to understand certain effects of different things that are placed in the economy, therefore making it difficult to find evidence from a certain time. I think it would be interesting if someone could update this paper and find data on different strategies that were put in place when the paper was written and see their effect it has had in the market since then. I think it would also be interesting to follow entrepreneurs and large monopolies to compare each other in their new production methods, good and other facets which Schumpeter describes.
Schumpeter, J. Harper Brothers. New York, New York: 1950. Excerpt from Chapter VII in
Capitalism, Scoialsim, and Democracy. (The Process of Creative Destruction).