Blog author: dpahman
by on Monday, October 14, 2013

Among many other bizarre claims in his most recent article at The American Conservative, Patrick Deneen writes,

Today’s conservatives are liberals — they favor an economy that wreaks “creative destruction,” especially on the mass of “non-winners,” increasingly controlled by a few powerful actors who secure special benefits for themselves and their heirs….

Pace Inigo Montoya, I actually have no idea what Deneen thinks creative destruction means in this context.

Setting aside the question of whether or not it is a bad thing (or accurate, for that matter) to say that “[t]oday’s conservatives are liberals,” I am far more concerned with how Deneen thinks creative destruction is “wreaked” upon “non-winners.” This is further complicated by his implication that creative destruction supports, rather than threatens, “a few powerful actors.”

The term creative destruction was coined by the economist Joseph Schumpeter precisely to describe the phenomenon of how innovation displaces one economic order with the next in a process that, though causing serious short term losses, historically has proven to raise the quality of life for all. Writing in Capitalism, Socialism, and Democracy (1947), Schumpeter observed,

[T]he contents of the laborer’s budget, say from 1760 to 1940, did not simply grow on unchanging lines but they underwent a process of qualitative change. Similarly, the history of the productive apparatus of a typical farm, from the beginnings of the rationalization of crop rotation, plowing and fattening to the mechanized thing of today — linking up with elevators and railroads — is a history of revolutions. So is the history of the productive apparatus of the iron and steel industry from the charcoal furnace to our own type of furnace, or the history of the apparatus of power production from the overshot water wheel to the modern power plant, or the history of transportation from the mailcoach to the airplane. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.

Perhaps one of the best examples of such creative destruction since Schumpeter’s time would be the advent of the internet and the displacing of print newspapers by primarily web-based news and opinions, such as Deneen’s own column at The American Conservative. In the process, some people have lost their jobs, some papers have gone out of business, but at the same time many web developers and social media marketers found work, and many new venues have been created all as the reach of readership has expanded to anyone with internet access. Does Deneen really think we ought to lament this?

And that is not all. Despite Deneen’s worry that creative destruction somehow serves and preserves “a few powerful actors,” Schumpter coined the term to demonstrate precisely the opposite. Creative destruction is a force that mitigates the ill-effects of imperfect competition because it continually threatens the control of those “few powerful actors.” Schumpter wrote (again, in 1947),

Economists are at long last emerging from the stage in which price competition was all they saw…. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance) — competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly; the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff.

While Schumpeter may be overstating his point here, the basic idea is true and easy to grasp. Suppose someone was a CD and DVD manufacturing tycoon in the 1990s and 2000s. One factor that mitigates them from taking full advantage of their large share of the market is the future prospect of creative destruction, for example in the forms of Spotify and Netflix. Through creative destruction the “few powerful actors” of today always must fear the entrepreneur of tomorrow, who uses his/her God-given creativity to find new, more efficient, and more affordable means to serve others through enterprise.

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