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Session 6(10/12): Schumpeterian Competition and Industry Dynamics
Capitalism, Socialism, and Democracy
Schumpeter, J. A. (1942). New York, London: Harper & Brothers. Chapter 5-7 (61-86)
Hyo Jung Lee
Graduate School of International Studies
International Management Program
[Introduction]
The purpose of the chapter 5, 6, and 7 from the book “Capitalism, Socialism and Democracy” written by Joseph Schumpeter is to analyze the nature, development and extinction of capitalism based on the economic evolutional aspect.
On the basis of “Part II: Can Capitalism Survive” of the book, Schumpter views that capitalism will form corporatism and the success of capitalism economically will lead the failure of capitalism politically. In result, capitalism willcollapse and be replaced by socialism. Schumpter’s view is sympathetic to Marx's theory in terms of capitalism will collapse, however, unlike Marx, Schumpter used the notion “creative destruction” to explain the political failure of capitalism.
[Summary]
From the chapter 5 “The Rate of Increase of Total Output”, Schumpter explained the social structure economicallyin order to propose his idea of development and extinction of capitalism. To suggest the essence and process of capitalism, he used the index which shows the performance of capitalism such as total output, technology efficiency and so on. He used the historical data from 1780s to 1840s to explain the periodical pattern which fluctuates from time to time. The fluctuation of the periodical pattern is related to thebooming industry based on the Industrial Revolution and also the depression afterward.
In the chapter 6 “Plausible Capitalism”, Schumpter identified the characteristics of capitalism. He claimed the issue of “the repetition of past performance” of capitalism to discuss whether the engine of capitalism will operate continuously. From his point of view, corporations have tendencies to monopolize the market to get the competitive advantages.
In the chapter 7, the term “creative destruction” explains the process of forming capitalism on the basis of innovating economic structure. Creative destruction describes the innovations of entrepreneurs who pursue the sustaining growth of their firms. From his view, innovative companies are able to destroy the competitiveness of existing companies and to attain the monopoly power. Schumpeter analyzed that the innovative quality contributes to capitalism to get the capable economic system.
[Main Contributions]
The notion “creative destruction” in the chapter 7 is the famousterm developed by Schumpter and the process of creative destruction is the essential part for the development of capitalism. Creative destruction is the process of incessantlydestroying the old one, and incessantly creating a new one. After Schumpter developed his term creative destruction, numbers of scholars and businessmen developed the notion and adopted it to their academic theories and practical innovations. His belief on the fundamental impulse that sets and keeps the capitalist engine is still useful to explain the capability of capitalism. To create the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization, the capability of entrepreneurs in the capitalist engine acts as the key success factors.After Schumpter’s identification and analysis of the term “creative destruction”, the term has been developed to define economic innovation and progress by various other scholars and has been used within neoliberal or free-market economics to describe the increase of the efficiency and corporate dynamism and also innovative capability.
[Critiques]
Schumpter’s analysis on “creative destruction” was based on the historical data from 18th, 19th and the early 20th centuries including the Industrial Revolution period. He assumed that the long-term periodical pattern contains the performance of the Industrial Revolution but I doubt thatthe periodical pattern still have the correlation with the success and failure of innovation firm in high-tech industries. If the periodical pattern is still valid to explain the performance of firms, it is possible for firms to predictthe environmental transformation by technological changes.
Schumpter argued that capitalism willcollapse and be replaced by socialism.However, in terms of the historical view after the cold war, his explanation on the process on the collapse of capitalism seems to be revised. Inaddition, after the global financial crisis began in 2008, there are arguments that the super capitalism of the US met the crisis. Based on these arguments, the fundamental background of the global financial crisis caused by the US financial system could be considered as the evidence of weakened capitalist engine. More detailed analysis on linking creative destruction and the crisis of economies in these days caused by capitalist countries needed to be researched for the further studies.
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