Capitalism Is Chaos - The Visionary Joseph Schumpeter

The future belongs to those companies that continuously challenge and reinvent themselves. Does this sound to you like it came from a recent executive seminar? It is certainly possible that it could have. But did you know that this idea was formulated more than a hundred years ago by a 28-year-old economics wunderkind, who was without a doubt one of the most important economists of the 20th century? Did you know that many of his ideas are perhaps even more current and present today than they were in his own time? The Austrian economist Joseph Schumpeter (1883–1950) brought us concepts such as “innovation,” “venture capital,” and “corporate strategy.” Decades before innovation became a buzzword for managers, Schumpeter expanded the field of modern economics with these concepts – at a time when people were still talking about national economics. His concept of “creative destruction” enriched the three classic factors of production – land, labor, and capital – with an essential fourth dimension: entrepreneurship.

Schumpeter’s core idea is that markets tend not toward order but disorder, which then invariably generates new, innovative entrepreneurs. Disorder is therefore productive rather than threatening: Progress and growth emerge from “creative destruction.” This view put Schumpeter far ahead of his time: Today, by contrast, creative destruction and innovation are more relevant than ever. In an era when the framework conditions are in constant flux, the strength of a company is no longer determined by its size, but by its speed and adaptability.

His logic of “creative destruction” is radical, its consequences brutal: In Schumpeter’s view, all rules, systems, processes, products, and services will eventually have served their purpose and require renewal – or will not have served their purpose and therefore need replacing all the more. Schumpeter was the first to interpret the modern economic order scientifically, as an evolutionary development without end, a constant flow that evinces progress through revolutionary inventions and fitful bursts of innovation.

At the same time, his economic theory brings a touch of individual psychology to the economic debate by amending the doctrine that the main driver in commerce is homo oeconomicus – the rational actor. Instead, it is the mavericks and inventors who bring about disorder and change, those actors who go beyond the conventional path. Schumpeter rejects the conventional, liberal equilibrium thinking about supply and demand. The problem in practice is that innovation is never accepted wholeheartedly; creative destroyers are usually not welcome in companies, even if the corporate mission statement promises otherwise. Companies are geared more toward recognizing risks and then bringing them under control. But activists of innovation will not stand for avoiding risk through risk management.

This makes Schumpeter the first important economist to think consistently in processes, forgoing models. But this economics wunderkind made enemies, too: Schumpeter was intentionally provocative. He considered science an ongoing attempt to “produce, improve, and pull down analytical structures in an unending sequence.” This is how he takes swipes at the giants of economics, reproaching Adam Smith for describing a largely pre-capitalist world that is no longer applicable today, Marx for having understood the dynamics of capitalism but nothing of the psychology of prosperity, and Schumpeter’s own contemporary John Maynard Keynes for concerning himself with only shortsighted prescriptions, in the form of political instruction manuals. But Schumpeter is not immune to criticism either: He believed – perhaps overly naively – in the social permeability of the capitalist system. Thus, he considered success and wealth to be ephemeral values specific to the individual: “The upper strata of society are like hotels which are indeed always full of people, but people who are forever changing.” But the practice is different in the present day, when we are instead experiencing the emergence of a heritable, moneyed aristocracy around the world, the feudalization of the political class and the financial markets, and the re-proletarianization of the workforce.