was a 20th Century economist of the Austrian School
; a group of mostly Jewish economists who made a journey from Vienna
to the USA during the interwar period
. As thinker of the Austrian School, Schumpeter's theories were abstract
and rooted in Marginalist
patterns of thought. On the other hand, there were highly critical of the equilibrium
theories associated with the neo-classical school and later Keynes
Creative destruction is a classic example of Austrian thought. Under earlier classical and neo-classical theories, growth was a smooth process of accumulating land, labour and capital. When inputs increased, outputs increase. Insofar as the existence of technological innovations were recognised, they were entirely exogenous to the process, and were smoothly adapted into the system as a feature of best practice.
Schumpeter, perhaps driven by his early involved with Marxist theorists, rightly poured scorn on this idea. Rather, he argued, growth and technological advance were chaotic and violently destructive processes intimately linked with the process of competition. The role of competition in classical and neo-classical theories was downplayed, limited to being a method of the market allocating resources in the most efficient way and finding equilibrium. Not so for the Austrian School.
Like his contemporary, Hayek, Schumpeter engineered a different theory of competition for economists. Competition worked by destroying old firms so that new firms could take their places. It did not just work through price competition – firms competed through quality and aggressive means of sales and marketing. The economy revolutionised itself from within. Change was ever present as economic actors competed with each other with the advent of every new product, technology, source of supply and form of organisation. Change required the obstacles holding back progress – i.e. the old firms; to be destroyed, the entrepreneurs made bankrupt, the workers redundant, the machines salvaged for scrap, to make space for the new. This was not Capitalism’s Achilles heel – this was its strength, the only reason it worked at all. The catastrophic waste involved in the collapse of companies was a necessary sacrifice, the fertiliser from which more efficient systems of production would grow.
It can be noted that in the style of the Austrians, the model of creative destruction is abstract and theoretical rather than mathematical or empirical, and fits awkwardly with attempts of other schools to measure economic progress with tools such as national statistics. It does lend itself more easily to economic theories based on institutional change. It does also bear pondering how though the Austrian School is usually seen as a right wing bastion of crusaders against socialism, Schumpeter’s theories were heavily influenced by Marxist thought, and can be easily co-opted into justifications for government to remedy the worse excesses of capitalism with social democratic welfare policies.