Schumpeter’s Economic Troubles.

We learn about supply, demand and the price mechanism. We learn about the “invisible hand”, and how a market should work within the parameters of “perfect competition” – an unattainable ideal upon which most mainstream economic theories are based. But, unbeknownst to many in the classroom, there are other ways of thinking aside from the somewhat conventional “Neoclassical” school of thought. This article aims to be a very brief insight into the writings of Joseph Schumpeter, who approached economics from an entirely new perspective. Although his propositions have their flaws, it is his originality that makes him one of the greatest but most underappreciated economists of the 20th century.

Monopoly powers

In his work, ‘Capitalism, Socialism and Democracy’, Schumpeter declares that innovation, not competition, is the real key to growth in a capitalist economy. He replaces competition in the market with competition for the market – modern examples here would be Apple and Microsoft, who are the dominant players in their respective areas. Innovative new products or services create temporary monopolies, meaning that the company behind them can charge a price above the market equilibrium to further their profit.

Others might see this profit as an incentive to start making the same product, thus competition for the market begins – but what they don’t realise is that that margin would be imminently destroyed by their entering of the market. As soon as there are multiple corporations selling identical goods, they are forced to enter a competitive environment and prices spiral downwards. To combat this, Schumpeter outlines two solutions for maintaining a hold on the market.

First, a company can raise the barriers to entry – take, for example, Microsoft, which owns trademarks and patents, and offers irresistibly low prices to computer companies for its services. And if another company does decide to try and take it on, Microsoft can use its sheer market value to buy them, or at least pay them off. But most companies aren’t worth $290 billion, and so they don’t have unlimited credit in the bank to suit their financial needs. Therefore, a cheaper alternative is “product differentiation”, a way of advertising something as original or unique, to distinguish it from others available. Adidas, Extra and many other companies are guilty of this, branding shoes as “Adidas Originals”, or incorporating the word “original” somewhere in their slogan, when really they are no different from the rest.

All things in prolific abundance

Schumpeter was a socialist, but not in the revolutionary sense that Marx was. He believed capitalism was doomed, not as a result of a workers’ uprising against the state, but as a result of innovation. He wrote that socialism would arise naturally in the course of the development of the global economy, when all economic wants are satiated. For example, in the future there may be no need for work, because technology can already fulfil every need. When there is an abundant supply of everything, the incentives driving capitalism disappear, and so it inevitably reaches its demise, to then be followed by a socialist-structured society.

But this “socialist blueprint” is very unlikely to materialise in the real world, since the capitalist engine is fuelled not only by innovation, but by many other socio-economic and political factors. Schumpeter seems to exaggerate the role it plays in economic growth, and neglects other important issues such as macroeconomic policymaking and international trade.

Creative destruction

Despite this narrow focus, his propositions apply to other disciplines as much as they do to economics. “Creative destruction” – the process by which new technologies replace those that already exist – could refer to new scientific theories, mathematical methods, musical styles or artistic movements. For this reason, Schumpeter’s work becomes more compelling and convincing – and, with current political and economic situations, we must question whether we need an act of “creative destruction” of the ways we think today.

Contributed by Greg Tucker, Economics Editor

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