Showing posts with label Joseph Schumpeter. Show all posts
Showing posts with label Joseph Schumpeter. Show all posts

Monday, July 28, 2014

Book Review: Capitalism, Socialism, and Democracy by Joseph Schumpeter

Joseph Schumpeter’s book Capitalism, Socialism and Democracy brings forward some interesting concepts pertaining to the nature of economics and governmental forms. He believes that Socialism will eventually outstrip Capitalism as a system once the owners of production reject the capitalistic system that made them successful (1).  The early period pure competitive methods that fostered growth will become stagnated as the system fails to change.   

The book seeks to reconcile in part the differences between democracy and capitalism. The best method is the rule of people to create collective governance of society. However, as capitalism grows the average citizen doesn’t have much say in day-to-day politics and becomes more of a support to the legitimacy of others (2). 

To this point it is important to understand that the very core nature of society is to allow some to move forward while others to stay in followership. Difficulties can arise when those with the basic skills and abilities are inherently locked from moving up the social ladder thereby creating two separate societies of existence. As the divide between the two societies grow so does the problems. 

Democracy works when people have sufficient power to vote out and demand changes by elected officials (3).  The official becomes a type of business owner that seeks to find customers to his/her leadership focus. When customers are serviced properly they will re-elect their officials thereby creating opportunities for proper societal alignment. 

The biggest fear capitalism faces is, “the very success of capitalist enterprise paradoxically tends to impair the prestige or social weight of the class primarily associated with it [i.e., the entrepreneurial class] and that the giant unit of control [i.e., large corporations] tends to oust the bourgeoisie from the functions to which it owed that social weight”.

Larger entities will naturally write the rules that lead to the destruction or damage of small business that foster economic freedoms. Without the developing of new and revolving businesses, within the circular creative destruction explained by Schumpeter, the nation will turn to socialism. 

There is much to agree and disagree with in the book. It should be remembered that the book was produced in the 1930’s when world wars were raging, capitalism was threatened, and change was rampant. 

To further Schumpeter’s ideas it is beneficial to include a couple of concepts beyond this book that lead to the success of Capitalism and its governing form called Democracy.

-Upward Social Movement: It is important to foster small business and upward financial movement to encourage motivation in society as well as the development of new ideas and concepts. New businesses and intra or inter-organizational entrepreneurial activities lead to greater innovative and economic growth. 

-Open Dialogue and Information: Democracy requires the voting in and voting out of governmental representatives through proper information and open dialogue. Information should be free flowing, provide alternative points of view, and foster critical thinking. 

-Enhanced Legal Structures: All legal structures should enhance the population and encourage upward social movement. By encouraging greater human advancement it lowers the incentives of crime and costs of dealing with that crime.   Legal structures should not unnecessarily protect monopolies or unjustly restrict human advancement.

-Political Aeration: Allowing new members to enter the political sphere offers the opportunity for continuous adjustment to the will of the people as well as better decision-making matrices among leaders. Stagnated political networks damage long-term development by failing to adjust to world realities.

Wednesday, June 25, 2014

Book Review: The Theory of Economic Development by Joseph Schumpeter

Joseph Schumpeter is known as the “Prophet of Innovation” and published his work The Theory of Economic Development at 28 years of age (1). As an economist he didn’t receive much attention because he wasn’t in alignment with the popular Keynesian Economics of the time (2).  His greatest achievement being the meshing of sociology with economics to make a system of development.
The chapters of the book are:

(I) The Circular Flow of Economic Life as Conditioned by Given Circumstances;

(II) The Fundamental Phenomenon of Economic Development;

(III) Credit and Capital;

(IV) Entrepreneurial Profit;

(V) Interest on Capital;

(IV) The Business Cycle.

Schumpeter believed in a perfect equilibrium where there are no profits, no savings, no new products, no voluntary unemployment, or need. It is a system of economic flow where there is no need to adapt, adjust, or change because everything is running smoothly. This perfect equilibrium either never existed or only exists for a short time before the system changes again.

The economic system is forever in constant flux. It is being destroyed and rebuilt to adapt to new situations. Combinations occur to help solve economic problems through the use of innovation. As a system adjusts it must then readjust through innovation. This innovation pushes the system to new heights.

Entrepreneurs are the catalyst to change. When they innovate a new product or service it forces the system to adjust again. Entrepreneurs rely on credit and must be productive to pay that credit effectively. Their production encourages copycat adaptations not only in the field in which the product was produced but also in other fields as well leading to wider innovations that further the system.

As products become adapted they will naturally experience a reduction of value as the market becomes saturated. This saturation offers a lower return on investment and in turn forces companies to innovate the product again. Failure to innovate the product means that companies cannot pay their loans or earn profits. Capital must be available to start anew.

In this book I find three main concepts of significant importance 1.) Sociology as part of the economic system, 2.) A flow of interconnected elements and 3.) Combinations. To me economics is about fulfillment of human need and when it fails to fulfill human need the economic system collapses and changes. Schumpeter touched upon the wider impact of disruptive technology that forces related components to adjust and reshape themselves within the market. Finally, combinations is literally the combination of one idea to the next even though it is seen in the Schumpeterian model as the combination of physical elements to create new products.

Beyond Schumpeter we find that societies are contracts between the governed and those doing the governing. All systems must allow for the manifestation of knowledge and motivation for maximum growth. When political, economic, or legal systems block that effort the system starts a slow decline. That system should encourage effort among the masses to speed up the economic elements and allow for the combinations of thought to be realized as the combinations of physical elements in the creation of new products and services. Maximum freedom in human effort should be encouraged beyond that which is necessary to protect the system, the people within the system or the environment in which they live.