Remora

In these days of shadow war and shadow recession, the Bush administration is suddenly turning on a Keynsian dime -- or is it 120 billion dollars? with a vengeance. Question is: does this mean that the reign of Schumpeter, of creative destruction, was all a big mistake?

The Web, in its wisdom, offers up a digital festschrift in honor of Peter Drucker that contains Drucker's essay, Modern Prophets: Schumpeter and Keynes?

It's a brilliant piece. I disagree with Drucker's summary dismissal of Keynsian economics, which makes especial use of two time periods and, at least as he glides over the 81-82 period, is magisterially unfair; on the other hand, Drucker draws a mean geneology. He does net the connections between Keynes and the whole classical school, and unlike other conservative economists, gives the devil (aka Marx) his due as an economist. But since Drucker's heart is in Schumpeter's differance; the meat of the piece is laying out, with maximum compression, what Schumpeter's work is all about.

Here's two grafs about Schumpeter that are worth reading even if you don't follow my link to the piece (but do -- it is the weekend, right? And there's a 120 billion dollar economics proposal floating around D.C. And, like, that's a chunk of change. It makes, what, four Gates. Which I do believe should be some kind of official metric).

"Classical economics considered innovation to be outside the system, as Keynes did, too. Innovation belonged in the category of "outside catastrophies" like earthquakes, climate, or war, which, everybody knew, have profound influence on the economy but are not part of economics. Schumpeter insisted that, on the contrary, innovation - that is, entrepeneurship that moves resources from old and obsolescent to new and more productive employments - is the very essence of economics and most certainly of a modern economy.


He derived this notion, as he was the first to admit, from Marx. But he used it to disprove Marx. Schumpeter's Economic Development does what neither the classical economists nor Marx nor Keynes was able to do: It makes profit fulfill an economic function. In the economy of change and innovation, profit, in contrast to Marx and his theory, is not a Mehrwert, a "surplus value" stolen from the workers. On the contrary, it is the only source of jobs for workers and of labor income. The theory of economic development shows that no one except the innovator makes a genuine "profit"; and the innovator's profit is always quite short-lived. But innovation in Schumpeter's famous phrase is also "creative destruction." It makes obsolete yesterday's capital equipment and capital investment. The more an economy progresses, the more capital formation will it therefore need. Thus what the classical economists - or the accountant or the stock exchange - considers "profit" is a genuine cost, the cost of staying in business, the cost of a future in which nothing is predictable except that today's profitable business will become tomorrow's white elephant. Thus, capital formation and productivity are needed to maintain the wealth-producing capacity of the economy and, above all, to maintain today's jobs and to create tomnorrow's jobs."

This is the shit. But it's implications for understanding business unfold when one understands that innovation can be tied to multifarious forms of profit-making -- including using the power of the State in various ways, from promoting regulation to using the judicial power, to make money. This simple fact of business life is systematically overlooked by the right and most of the left, who define themselves with regard to a false picture of state-private enterprise interactins.

Drucker goes on to talk about how WWI monetized economies. Read the essay. When the Web offers you stuff like this for free, you have to admit, it is pretty cool.