By Art Carden
The Fraser Institute in Vancouver, British Columbia, has put together a series of very useful introductions to the key ideas of some great thinkers in their Essential Thinkers series. They started with The Essential Hayek (by Donald J. Boudreaux) and then moved on to The Essential Adam Smith (James Otteson), The Essential John Locke (Eric Mack), and The Essential Milton Friedman (Steven Landsburg). Their most recent contribution to the series comes from Russell A. Sobel and Jason Clemens. They introduce us to The Essential Joseph Schumpeter in yet another volume that can be downloaded for $0 and, at just a few dozen pages, read very quickly.
Schumpeter (1883-1950) was a brilliant economist and, apparently, quite a character. He is said to have boasted that his goal in life was to become the world’s greatest economist, the world’s greatest lover, and the world’s greatest horseman. When someone asked him how things were going, he said that things weren’t going so well with the horses. Between that kind of sly wit, his brilliant mind, and his disciplined work ethic, you can see how Schumpeter became one of the twentieth century’s most interesting economists. Fortunately, his ideas (and not just his quick wit) warranted it.
Schumpeter was very prolific, but four key works stand out: The Theory of Economic Development (German edition 1911, English edition 1934), Business Cycles (1939), Capitalism, Socialism, and Democracy (1942), and the posthumously published, incomplete but still very important History of Economic Analysis (1954). Schumpeter was the complete scholar, asking and answering very big questions while appreciating and understanding their intellectual history and context.
This has some important implications for cottage industries about what this or that thinker really meant or the nature of social processes very generally. Understanding all this stuff at a very deep level requires more than just knowledge of what has been published in the American Economic Review in the last year. Schumpeter argued that to really understand Karl Marx one must read all three volumes of Capital, the entirety of Theories of Surplus Value, and have a strong working knowledge of British political economy, French socialism, and the German philosophical tradition. That’s a tall order, but the Bible exhorts us to “get understanding.” I think it’s worth it (I admit my view is idiosyncratic).
One of Schumpeter’s most important contributions is a rethinking of how we understand competition. As Sobel and Clemens point out, Schumpeter’s main criterion for whether or not a market was competitive concerned its contestability. The relevant question was not “how many firms are in this industry” but “what are the barriers to entry that are preventing firms from coming up with substitutes?” The workhorse models of perfect competition that economists use to understand so many things are of great value as models; however, if Schumpeter is right, then they are limited in their ability to tell us how the world should be.
Sobel and Clemens explain Schumpeter’s argument in the context of an interesting example: Hawaiian pizza, which, it turns out, is actually Canadian–”The creation of Hawaiian pizza is often credited to Sam Panopoulos, who first cooked one at the Satellite Restaurant in Ontario, Canada in 1962”–and is now the most popular pizza in Australia (p. 9). My wife and I have an inside joke referring to “feta cheese and spinach pizza” because early in our relationship I apparently told her repeatedly about the amazingness of the feta cheese and spinach pizza at Tut’s on the strip in Tuscaloosa, Alabama. The point Sobel and Clemens make is that there are many thousands of possible combinations of pizza toppings. Economic progress happens when we stand back and let innovators like Sam Panopoulos try something new and see if it works, where “works” is judged by the difference between consumers’ willingness to pay for dough, sauce, cheese, ham, and pineapple combined into a pizza and their willingness to pay for dough, sauce, cheese, ham, and pineapple used for literally anything else. Karl Marx and Friedrich Engels were right:
“The bourgeoisie cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and with them the whole relations of society. Conservation of the old modes of production in unaltered form, was, on the contrary, the first condition of existence for all earlier industrial classes. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind.”
One would definitely get the impression from online debates about the propriety of pineapple as a pizza topping that Panopoulos has in fact “profaned” something that is “holy.” Fortunately, he didn’t have to ask anyone’s permission–and as measured by market tests, he has improved his fellows’ “real conditions of life.”
Innovation, according to Schumpeter–his famous “perennial gales of creative destruction”–drive both economic development and business cycles. His arguments have been formalized and extended by Philippe Aghion and Peter Howitt, and economic historians like Joel Mokyr and Deirdre McCloskey have highlighted the importance of innovation and, importantly, a culture that embraces innovation. Economic progress doesn’t come about from there being an infinite number of price-taking buyers and sellers of products identical to the original iPhone. It comes from the fact that Apple introduces a newer, better iPhone every year. Competition, for Schumpeter, is not entry and exit or expansion or contraction of output in perfectly competitive markets. It’s the introduction of new products and new ways of doing things.
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