Russ Roberts

McCraw on Schumpeter, Innovation, and Creative Destruction

EconTalk Episode with Thomas McCraw
Hosted by Russ Roberts
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Thomas McCraw of Harvard University talks about the ideas of Joseph Schumpeter from his book, Prophet of Innovation: Joseph Schumpeter and Creative Destruction. McCraw and EconTalk host Russ Roberts discuss innovation, business strategy, the role of mathematics in economics, and Schumpeter's vision of competition embodied in his most important idea--creative destruction.

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0:36Intro. What drew you to Schumpeter? First as an undergraduate, read part of Capitalism, Socialism, and Democracy. Later when teaching at Harvard Business School, where everything is about Innovation. Schumpeter prolific writer. Math focus. "Failure of vision," Heilbroner. Art of War, Sun Tzu.
9:31Strategy issue, economists are not very interested in business, and certainly not in accounting. But the way business is often taught today is as a branch of game theory, lack of institutional detail would have bothered Schumpeter. Mathematical step but that becomes an end in itself. Schumpeter was not policy-oriented, pure academic, saw almost nothing as an end in itself. Early publications were about mathematics and need for more. Founder of the Econometric Society. Viner called him the last of the great polymaths. Ironic, in his youth very flamboyant, social, showman, despite his mood swings; hurt his impact. Principles leading to this irony: he never wanted to be a popularizer like Galbraith, Smith, or Keynes in Economic Consequences of the Peace. Also didn't want to be a policy person or politician. Leontief said, "What an ivory tower it was!" Schumpeter was most learned, and had fabulous memory and managed to make associations. Yeats, only connect. Schumpeter could make connections. Devoted to students and took care with his lectures. Prolixity he inherited from Hegel, Kant, Mill, social theorists, German tradition. Galbraith forms a bond with the reader, attitude of kind of sneering but you wonder how much "there is there"--Gertrude Stein phrase. Schumpeter not a popularizer.
19:04Capitalism. Second part of Capitalism, Socialism, and Democracy, is short, readable, and "just nails capitalism." He wrote it at a time when the world was concerned about big business, worried about the individual man being exploited. Schumpeter had a contrarian point of view: embraced idea of oligopoly, monopoly, and showed how it didn't matter. Let capitalism work its way through. Logic: It's a meaningless exercise to look at capitalism at any point of time. Why look at New England at a point in time? The weather varies over the course of a year. Can't judge the fate of the Titanic before it crosses the water. Doug North, put time back in. Schumpeter thought of economics as evolution, development. Look at information technology in last 20 years, music listened to in many evolving ways, all driven by entrepreneurial force. Schumpeter said you have to include time, not static supply and demand at a point in time. Over time, profits draw competitors into the market. Still somewhat radical even today, textbooks do a poor job of conveying the dynamism of capitalism. In the 21st century, most people live under some form of capitalism, but when Schumpeter was writing, seemed to be going in the opposite direction, fascism, Peron, communism, Mao in China--40-50% of the world, while democratic capitalism was only 30% of the world. Imagine a person from Mars landed to try to get a fresh look; Schumpeter was able to do this. Perhaps his having moved his household 30 times in 55 years, living in 5 different countries, including the Ukraine, England, Austria, Germany, etc. each for at least a year, gave him this broader perspective. By contrast, Keynes lived in Cambridge. Galbraith in a few countries. Their views of the world were naturally narrower.
31:50CSD is remarkably Austrian. He came to the U.S. in 1942. Spent time with Taussig, Tobin, Samuelson, yet he remains an Austrian. His most influential book is about capitalism as an evolutionary organ, not formally modeled. More similar in style to Mises, or to Hayek's The Road to Serfdom. Economics as a process, as an organic experience. Messages of CSD and The Road to Serfdom two books are similar, but methods very different. Hayek at the London School of Economics is looking more at Nazi Germany, book is pitched to everyday person (said later he hadn't wanted to alienate his audience by taking on the Soviet Union). Schumpeter is looking more at the Soviet Union, pitched not to general public. Schumpeter was not quite as emphatic in his opposition to government as Hayek or Hayek's teacher, Mises. Schumpeter closer to Böhm-Bawerk, Menger, and Weiser. In a seminar of Böhm-Bawerk's, there were Schumpeter, Mises, and the socialists, Otto Bauer, Rudolph Hilferding, Emil Lederer--all arguing about Marx. Schumpeter kind of agnostic. Israel Kirzner, who was also at that seminar, asked McCraw if he had evidence; discussion ending in Schumpeter being an Austrian economist.
40:44Role of the entrepreneur. Distinction between invention and innovation. Came out of studying the industrial revolution. Some people invent things but they never get implemented. Arkright, Cartwright, James Watt, Josiah Wedgewood--invented things but also had to organize a company to bring the thing to market. "Do the thing."--Schumpeter. In book Business Cycles gives examples. Thomas Edison, "2% inspiration, 98% perspiration"--you have to not only have the idea, you have to implement it; and you also have to do it at the right moment. Mike Dell, Bill Gates today. Yet we look with some disdain on the implementer. For Schumpeter it was someone who was interested in winning, maybe like a sports player. Compulsion. Destructive part of creative destruction--if you just keep running your business you will be overtaken by someone who is obsessing on the thing. The entrepreneur does not lead a balanced life. Companies try to sustain that fever. Gates keeps fires burning perhaps by worrying if company will make payroll. American capitalism had a free ride from about 1943, boom in employment right before war. High productivity, idea it would go on forever. Then come the Japanese, globalization; now no company is safe. China. Schumpeter came to see entrepreneurship as a function that could be performed by teams. Intel, coming from Fairchild, Robert Noyes, Andy Grove; do it as a team, technical combined with organizational. For Microsoft, Gates plus Paul Allen. Division of labor. Manufacturing in U.S.--shrinking employment but not shrinking output.
53:16Creative destruction. Oxymoron. What Schumpeter meant was that one thing would drive out another thing as surely as night follows day. Buggy whip will be made obsolete by the Model T Ford. Corporation drives out the partnership, which drove out the sole proprietorship. Evolutionary analog is helpful but also not helpful. Sometimes worse things can drive out the better things. Bad money drives out good. Key is the dimension of time. Newspapers filled with bad news, drives out good news, but over time, especially over long periods of time, GDP per capita is 20 times what it was in the 1800s, 6-9 times the 1900s--happened by creative destruction. Air travel drove out train travel, internet and video conferencing. Bastiat's seen and unseen--if you see a big corporation making a lot of money, people see that as taking the money from people, robber barons; but largest firms often had the lowest prices if you look at the evidence. Schumpeter's example: Queen Elizabeth's silk stockings. Schumpeter saw that it's not just the end of the story. Pace has picked up, history has accelerated. "This is the nature of capitalism." You don't find economic history courses in history departments. Obverse is that we can't all be dilettentes. Have to choose for yourself.

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COMMENTS (5 to date)
Floccina writes:

2 comments:

1. I love the phrase "innovation destroys monopoly”.
2. Some data is the opposite if you look at it over time compared with static. One example is that earlier marriage correlates with higher divorce rate today but if you look back in time people married earlier and divorce less. This makes me question the meaning of the correlation of marriage and marrying late and stable marriages.

Jeff Henderson writes:

I like how Russell put in a plug for Shumpeter while liveblogging the Republican debate for the NY Times:

http://thecaucus.blogs.nytimes.com/2007/10/09/live-blogging-the-republican-debate/

Schep writes:

I started talking to Economists when I found myself arguing on the same side of a civic argument. It has lead me to search for podcast to listen to inform myself on Economics. Dr. Roberts' podcast provide a significant peice of what is needed in education: frank open discussions, where individuals seriously consider differing points of view.

For some creative destruction and advances in education I suggest this challenge. Take two groups an ECON 101 course taught in the typical fashion and provide 45 podcast(equivlent of a semester class) and the links to the suggested reading. I propose the thesis that 1 year after the class or podcasts that the podcast listener would have more economic skill. Dr. Roberts has suggested their is a value to the real life interaction and indeed there is. However if I remember my college undergradutate college economics there where 150 people in the room where half of the student never talk to the professor.

Russ Wood writes:

Russ,
Great podcast as usual.
As I listened to all the talk about entrepreneurialism, I couldn't help but think of Reuven Brenner.
Any chance you can get him for a podcast?
Thanks,
Russ

John writes:

"Destructive part of creative destruction--if you just keep running your business you will be overtaken by someone who is obsessing on the thing."

Great stuff right there. I have learned this from both sides of the aisle.

A very informative podcast - thanks.

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