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Washington CEI Speech: Is Schumpeter’s Vision of the End of Capitalism Relevant?

English Pages, 28. 5. 2008

Mr. President, Ladies and Gentlemen,

It is really a pleasure for me to be here. I mean it seriously. Therefore, I should begin with expressing my sincere thanks:

- thanks for giving me the opportunity to participate in this annual event and to address this distinguished audience, where I am proud to see so many friends;

- thanks to the Competitive Enterprise Institute for publishing the English translation of my book Blue Planet in Green Shackles which is devoted to the critique of environmentalism, of an ideology I consider the most dangerous threat to freedom and prosperity in the current era;

- thanks for honoring me with the Julian Simon Award. This great man was an economist and thinker I really admired and learnt a lot from. He dared to oppose the fashionable views and did it on the basis of a serious theoretical and statistical work. I hope his legacy will have a lasting influence and this award helps to guarantee it;

- thanks to Fred Smith for proposing an inspiring topic for my tonight’s speech which – I must confess – I wouldn’t have chosen myself – Schumpeter and his Vision of the End of Capitalism;

- and, finally, thanks to all of you for giving me such a good reason to again visit your great country which – with all the so much needed and in many respects more than justified criticism – remains to be the most free country in the world and the inspiration for all of us. I emphasize it here and now mainly because of my growing frustration with the developments on the other side of the Atlantic where I’ve just come from.

It is interesting that you came up with the name Josef Alois Schumpeter (to intentionally use the Czech pronunciation). I don’t expect all of you to know that this great economist was born in 1883 on the territory of my country – the Czech Republic – in the small Moravian town of Třešť, belonging at that time to the Austro-Hungarian monarchy. He was part of an important group of Austrian Moravians which includes names such as Sigmund Freud, Gustav Mahler, Karl Kautsky, Ernst Mach, Robert Musil, and many others. He became an Austrian economist after he had completed his university studies in Vienna and an American economist after he had fled Europe in the Nazi era. He was the only economist who could – in the first half of the twentieth century – compete with Keynes in international prominence.

As regards the economic methodology he used, Schumpeter was not an orthodox exponent of the Austrian school of economics (and he could not have been because it was impossible to be one at Harvard in the thirties and forties – Gottfried von Haberler being an exception). Fritz Machlup, another important Austrian who lived in America at that time, found in Schumpeter “a methodological tolerance or methodological pluralism.” It is, in my view, a correct statement.

I probably have to add that I was the first one to get the Schumpeter Prize from the Schumpeter Gesellschaft in Austria at the beginning of the 1990s (and it was my very first international award) and that I am proud to be the honorary President of the Czech Schumpeter Society which – among its other recent activities – helped to reconstruct the house where he was born.

When I started my formal economic education in the late fifties, in the very dark communist days, Schumpeter was not on the agenda. I myself discovered him in the middle of the sixties when – during my postgraduate studies – I was lucky to have been forced to devote several weeks of my time to his great book History of Economic Analysis. With all the irrationalities of communism, this was possible in Prague in our, at that time already in many respects relatively soft and not consistently functioning system.

After having studied only Marxist political economy at the Prague School of Economics in my undergraduate years to suddenly have Schumpeter’s book in my one hand and the sixth edition of Samuelson’s textbook in the other was a true revelation. I know that the American classical liberals and libertarians tend to be puzzled when they hear something like that, but I have to insist that without this it would not have been possible to sufficiently appreciate Chicago and Milton Friedman, Mises and Hayek, or Buchanan and Tullock later on. Schumpeter’s book helped me to understand the true substance as well as the enormously wide-ranging domain of economic analysis. His expertise seemed incredibly large, for normal human beings unimaginable and beyond reach.

At that time, that means more than forty years ago, I worked at the Institute of Economics of the Czechoslovak Academy of Sciences. We tried to get acquainted with, explain to others and popularize non-Marxist economic theories to the general public and were impressed – among many other concepts and theories – by the Schumpeterian doctrine of innovations and of an entrepreneurship, as well as by his concept of “creative destruction”. They were formulated as early as 1912 in the German version of his – later published also in English – Theory of Economic Development. According to Schumpeter, innovations, entrepreneurs and a creative destruction represent the real basis of capitalism and the moving force behind economic development.

Reading his Capitalism, Socialism and Democracy, which was published in England in the 1940s along with books such as Hayek’s The Road to Serfdom and Orwell’s Nineteen Eighty Four, one comes across a slightly different story, which is his evolutionary theory of the demise of capitalism based on its very success. His main argument – as I remember it – was that innovations would become a matter of routine, progress would be mechanized, problems would be “simply solved” by means of reason and science, entrepreneurship would be replaced by mere calculation, individual motivation would subside, collectivistic mentality would prevail and the growing importance of teamwork in modern large corporations would lead to the gradual obsoleteness and at the end disappearance of the crucial player (or perhaps mover) of capitalism – of the entrepreneur. That was his vision of the end of capitalism. He regretted it, but did not see it as the end of history, progress and development. His view was not Hayekian or Orwellian. Their views are closer to mine.

Schumpeter’s theory had a special meaning for us then. We lived in a world where the official doctrine was socialist revolution and central planning, not spontaneous evolution or private initiative, and where the end of capitalism was expected to happen due to its failure and ever-deeper crisis. You will probably not find it heroically courageous here and now, in the relative safety of Washington, D.C., but I must say that to argue – in a communist country – that capitalism would eventually come to an end due to its success was a heresy of unheard of proportions. To say that sufficiently loudly was possible in my country only in the relatively promising atmosphere of the second half of the sixties, in an era which culminated in the well-known Prague Spring of 1968 and was very soon brought to an end by the Soviet invasion and occupation.

It should be made clear that we used Schumpeter’s theory of the end of capitalism as an argument in our discussions with the exponents of Marxist political economy and Communist ideology. For that specific purpose – and I am sorry to say that – we did not have the ambition to subject it to any serious criticism. We had, nevertheless, some doubts about it already at that time.

How to look at it now? At first sight, this theory seems to be too pessimistic. The first problem this theory has is its connection with the reality because the world has not followed Schumpeter’s predictions. We do not have centuries of experience so far, but more than six decades have passed since the moment Schumpeter formulated his futurologist scenario. Capitalism, e.g. free market economy based on private property, not only does exist, but flourishes in more countries of the world now than in any moment of the past and its process of “creative destruction” and the endless flow of innovations are as strong as ever.

We are, of course, aware of many serious constraints on its functioning but the issues brought to the fore in the thirties and forties, in the Schumpeter’s American years – big business, monopolistic or imperfect competition, separation of ownership and management, the weakening of the animal spirit, the demotivation connected with “the affluent society”, as well as the collectively organized innovation activity – did not become an impassable barrier to the further functioning of capitalism.

Other issues became more relevant: the expansionary welfare state, the growing aspirations of governments to regulate society in an attempt to avoid all kinds of market failures (and more often of would-be market failures), the imposition of costs enhancing and some economic activities practically prohibiting “standards”, the green ideology and its most aggressive contemporary version – the global warming alarmism, etc. It seems to me that these issues were not explicitly envisaged by Schumpeter in his theory of the dynamics of the capitalist system.

One other issue is worth-mentioning. As someone who in my country actively participated in the dismantling of communism and in the building of a free society, I have to refer to another important argument against the validity of the Schumpeterian vision – the collapse of communism and the explicit acceptance of capitalism almost all over the world. With all due respect, this is clearly incompatible with Schumpeter’s hypothesis.

The second problem is theoretical. We should look at the Schumpeterian argumentation also from the economic theory perspective and raise due questions. Was the whole idea of innovations a theory at all? Wasn’t it only a colorful description of a more or less well-known and easily observable phenomenon that ought to be explained? Should it instead be taken as an explanation of such a complicated and multidimensional process as the dynamics of capitalism?

I am a mere humble head of state, not a scholar who could afford to spend his days and nights diligently digging in the economic literature. These questions have certainly been answered before. I don’t know the answers but I have always had a problem when trying to explain this theory to my students. The non-economists usually loved it, the economists did not. They found it rather empty and superficial. And untestable.

To say that is a daring statement from someone who has always argued that Schumpeter understood economic science better than anyone else. In Capitalism, Socialism and Democracy he, however, moved too far away from economics and from its so powerful and human mind disciplining methodology. I am convinced it was a mistake to do so, as it always is.

Nowadays, we should pay attention to other factors and processes, by means of which capitalism could be brought to an end, such as the traditional, but in the current “brave new world” of postdemocracy enormously expanding and growing disbelief in the ingenuity of man and in the advantages of the market process. It is, of course, not new because there have always been radical attacks on the market system, but I see a difference now. In the past, the market was attacked mostly by means of the socialist arguments and with the slogan about “the immiseration of the masses”. Now, it’s been replaced by a more dangerous slogan: the immiseration (or perhaps destruction) of the Planet.

It has many similarities but one important thing is different. The evidence that the people are better and better off (not worse off) could have been amassed in a shorter time, in a time – to turn the famous Keynes’s dictum upside down – when we all are not yet dead. Now, it will take centuries to come up with a convincing proof that the Planet has not been destroyed or does not find itself on the brink of destruction.

The free riding this new horse is therefore much easier. The ambitious politicians who try to mastermind the world and their fellow-citizens have been dreaming for decades to find such a marvelous, from reality immunized doctrine. Years or decades of cold weather will not disprove it – to my great regret. It is almost religious. My certainty that this ideology becomes the main vehicle for the destruction of the free market was the main reason for writing the book which was introduced here yesterday.

Schumpeter was, hopefully, wrong in his predictions. And, in addition to it, he has been dead now for almost six decades. Al Gore is, however, very much alive.

Václav Klaus, The Competitive Enterprise Institute Annual Dinner, 28 May 2008, Washington D.C.