City Journal Winter 2016

Current Issue:

Winter 2016
Table of Contents
Tablet Editions
Click to visit City Journal California

Readers’ Comments

Guy Sorman
Schumpeter in the White House « Back to Story

View Comments (35)

Add New Comment:

To send your message, please enter the words you see in the distorted image below, in order and separated by a space, and click "Submit." If you cannot read the words below, please click here to receive a new challenge.

Comments will appear online. Please do not submit comments containing advertising or obscene language. Comments containing certain content, such as URLs, may not appear online until they have been reviewed by a moderator.

Showing 35 Comment(s) Subscribe by RSS
I have to disagree with your characterization that "The ultimate enemies of capitalism, in Schumpeter’s view, were intellectuals..."
While he had no love for intellectuals, Schumpeter made very, very clear in "Capitalism, Socialism and Democracy" that he believed the "ultimate enemy" of capitalism was capitalists themselves: "Since capitalist enterprise, by its very achievements, tends to automatize progress, we conclude that it tends to make itself superfluous—to break to pieces under the pressure of its own success... The true pacemakers of socialism were not the intellectuals or agitators who preached it but the Vanderbilts, Carnegies and Rockefellers" (CSD 134).
Would Schumpeter have avoided paying taxes like Romney has, by parking his money offshore?

By doing so he has been derelict in his civic duty. Thus, he is not the type of person who should be in the White House due to his setting such a poor moral standard.

"Schumpeter believed that progress in a capitalist economy requires that the old give way constantly to the new: production technologies in a free economy improve constantly..."

Yeah. Well, lately the "improvements" seem to be in the form of cheap labor, with most production jobs moving overseas, accompanied by no job growth here, and most US companies are opting for making their employees work longer and harder, in lieu of hiring more workers.

And we really see no end to this...
At present there is a Schumpeter in the White House.

If Sorman thinks that Obama isn't one he is wrong. Obama applied creative destruction when he let General Motors and Chrysler collapse, go into bankruptcy and emerge as renewed entities.

"Today, they raise capital from cash-rich investors—pension funds, insurance companies, wealthy individuals—or borrow it from commercial banks and other financial institutions. Then they invest in various companies. The goal of the private equity fund is to sell those investments—often to another private equity fund—and turn a profit."

People with modest income, from both private and public sector, are now players. To what degree, relative to the impact of their loss, I can't say. But we're not morons, and rich rhetoric, after Obama, is likely to be antipathetic. Mitt Romney needs to tell it like it is, along w/the safety net you describe most especially unemployment insurance, retraining and health insurance subsidy.

The conservatives, who in Orwell's words, refuse to accept irreversible facts reason that the Roberts Court ruling is treasonous. Roberts is an epileptic. Do you know how expensive medication for this condition can be?

Creative destruction isn't just a matter of a man losing his job, it's a matter of caring for his epileptic child as well.
Excellent and very illustrative article about the dynamic of capitalism.
Yes, either Schumpeter or the incumbent Luddite, that is the choice.
Balanced analysis.Very informative.
Why would government perform the job of contingency planning better than each person can individually? What Mr. Sorman is proposing is merely another inefficient wasteful government program that would mostly benefit the political class, and on balance harm the people.

A better solution is to enable a free-market economy, rule of law and sound money to work its magic unrestrained. Competition for human resources will raise wages. Sound money will encourage and reward savings. And surplus capital will be directed to charitable purposes by the numerous charitable organizations that would thrive when government restraints are lifted.

In such a society, most workers and entrepreneurs would understand that no job lasts forever and plan accordingly. The few than failed to do so, either out of some personal failing or just bad luck, would find both an abundance of new opportunities to support themselves and many diverse sources of private charity to help those who truly cannot help themselves.

On the other hand, voters who believe that the free market cannot operate humanely without reallocation of capital imposed by the force of government will get the government they deserve. That government is one that increasingly interferes with the free market for political ends, until it is principally the political class that controls the diminishing capital stock of the people. Sound familiar?
Excellent article. Thanks.

I think you asked the key to the riddle of the American political economy: how does the religious community, even the religious right, square their values with the Social Darwinism that is capitalism today? I think that Wendell Berry was asking, without the direct religious overtones, a very similar question about the values which drive our economy.

I invite readers of this article to consider a small book I wrote, with the title "The Costs of 'Creative Destruction': Wendell Berry vs. Gene Sperling," which is very germane to this discussion. Gene Sperling is one of the President's top advisors, and your readers may be surprised to learn that he is wholeheartedly on the side of creative destruction.

Wendell Berry criticizes the economy we have now from a conservative, Classical-Christian-Humanist's perspective.

Here is a link to Part II:

I would just add, in a broad but true generalization, that the hardest thing for the Center and Right to recognize about today's economy is not the central role of creative destruction - whose benefits and costs are displayed all around us, but the fact that this modern economy no longer has a use for 15-25% of the eligible workforce. The Right's anwer to this problem is to reduce "Western" wages to the Asian level, and see what entrepreneurs come out of hiding when the prevailing wage is $5.00 per hour. That's the clear direction of austerity.
D. Xavier Morris May 31, 2012 at 10:38 AM
"In the simplest sense, private equity investors reallocate capital where it will be most effective—from less productive uses to more profitable ones."

So, private equity investors lack any need for the "omnipotence to anticipate, let alone invent, the paradigm shifts" of a better economy; despite being heir to human frailties, they simply produce better economic results because, unlike bureaucrats, they can and will set fires in the forest to clear out the gathering trash? Is that all? Will not someone, then, simply suggest that bureaucrats and politicians be driven to devote less concern for votes and lobbies, and spurred to a greater affection for the axe and the torch?
An analogy here can be the creative destruction of forests where the ecosystem has reached a point of unsustainability. The population affected has no say in the matter.

In the case of the economy, the view is presented that capital—with the corporation at its core—is the basis for the ontology of being and all else is a corollary to that. The individual is a minor actor in the scheme of being and has to pay homage to the vagaries of capital formation at all cost. I wonder how the religious right reconciles this with their belief in the supremacy of the individual soul.
Wha? Huh? Did you mean REPUBLICAN Mitt Romney, or some other Mitt Romney that didn't socialize health insurance in Massachusetts and defend federal stimulus spending?
Unfortunately Mitt Romney is not a talented rhetoritician
Mitt Romney is an economic creative destructionist. But in the social sense he isn't, clinging to old fashion and restrictive social values. In fact he wants to turn the clock back on social advances. Can he be both and serve the best interests of the nation?

George W. Bush was also an economic creative destructionist but not a social one. Moreover, he tried to put the brakes on certain scientific research when it didn't suit his administration or his morals, virtually manipulating and distorting the nature of scientific creative destruction. (You put a stranglehold on scientific research you put a stranglehold on economic development.) There was, thus, a serious disconnect in the Bush administration. The results and fallout became clear in the crash of 2008 and the subsequent economic Recession.

Does the US need or want another selective creative destructionist like Romney, who is in favor of creative destruction when it suits only his agenda and that of his cronies, like was with the Bush&Co.?

Now, 9/11 was an event of creative destruction but few want to view it that way. It did revitalize New York City and reaffirmed it place in the global economy. It rejuvenated and reaffirmed the the prominence of capitalism and made clear that globalization was here to stay.

Schumpeter sure stumbled onto something with his idea of "creative destruction".

However, he didn't invent the concept. It was out there in the cosmos, so to speak. He discovered it like Newton discovered the existence of gravity. It, like the opposite poles of electricity, is one of the paradoxical, push-me-pull-me dynamos that built the universe and life. Freud also latched on to its fundamentality when he realized the two aspects involved represent the basic instincts of humankind, which together constitute the building blocks of human action and behavior. Also, the tension and sparks that arise from this dynamo's interplay is fundamental to life, if it is to perpetuate and be maintained.

Schumpeter can be forgiving for thinking that capitalism would eventually die due to the creative destruction it embraces and embodies. But had he lived to see capitalism become the preeminent economic system it is today he'd understand why, because of its uniqueness and capacity to harness and manage in the best possible manner the natural creative destruction found in both humans and nature.

Wars and violent revolutions used to be the creative destruction of the past. Today, though, wars and other violent social upheavals no longer are feasible or cost effective. The devastating destruction they'd cause today would leave nothing much for creativity. However, we can't survive if we don't maintain a certain level of destruction in life so that we can renew and reinvent ourselves. (Renewal is an imperative of life and creative destruction is how its achieved.) Capitalism today is the alternative to War. The creative destruction it brings on is better - productive and peaceful, better balanced. Creative destruction is a churning inevitability. Capitalism structures it in a way that a semblance of civility and continuity remains.

Creative destruction seems a contradiction. It is. But as Hericlitus once observed, if you do away with it you do away with reality. Communism ignored this reality and banished it from its economics. Hence its collapse.
Sorman gives the impression that the Obama administration is still meddling in the affairs of GM when it is not. Yes, at the beginning of its rebirth, to get it back on its feet. But once business took hold the government backed off, to let the mechanisms of "creative destruction" do its work. And America has benefited from it.

I fully agree with Sorman that the revitalizing powers of creative destruction were absent under Communism, hence its demise as a governing/economic system.
I think Mr. Sorman is totally wrong about GM and the Obama administration. In the classic sense creative destruction did occur there. The company did self-destruct and then did rebuilt. Yes, it did happen under the auspices of the government but with minimum interference. Because of the administration's pragmatic interference GM emerged healthier, with an improved business culture, less overheads and better products. The proof is in the pudding, in its sales, profitability and improved market share. And most of the governments investment has been paid back.

If the company had been left totally adrift as Sorman would have wanted it there would have been a domino affect that most likely would have produced an unemployment rate of 20% in America, and a social upheaval that would have caused 'way' more destruction.

I think there is a resentment among some, that the Obama administration was so creative and adapt in rebuilding GM. They would have liked to seen more destruction instead, to make the government look bad.
Albigensian responds to my points by saying he 'does not understand what (I)am saying here.' Perhaps he does, and would be well off rereading his own analysis. My point is that US capitalists have done a superb job without government help insulating themselves from creative destruction. And not all state sponsored capitalism ends up recreating the Soviet Union.

He claims ATT was a state sponsored monopoly which nevertheless made a capitalist triumph by licensing private technology to Japan. Nonsense! ATT created itself -- it was never a government owned enterprise. If it were, antitrust lawsuits to break it up would have been unnecessary. On the other hand, the research arm known as Bell Laboratories owed most of its existence to government projects and research grants, such as those for the Sidewinder missile. That was a lot of proprietary research into electronics and electrophysics which many US private companies didn't emulate or fight for. Neither did many fight for themselves, like Ampad, for the VCR.

A regulatory attitude undid Bell Labs in some ways, because when the time came to cut it loose as Lucent, the big research was being done in Japan. But guess who resisted cutting it loose when it had value in the 60's? Guess who asked for regulation against competition in phone billing, research, or manufacture? Why ATT, that's who!

Somewhere Albigense gets caught in the trope about lower costs overseas, as the triumph of creative destruction. After all, we still own the patents. Two points. Patents ultimately expire, get superseded, or get stolen by foreign governments. Second, the purported cost advantage is way overstated. A harvard Business Review article from the 80's cites internal research from semiconductor manufacturers that Taiwan at the time only had a 4% cost advantage over the US in manufacture -- statistically insignificant. On the other hand, articles as recently as this year show that this one country acted as a virtual trust in the ways it marketed motherboard manufacture as a way to eventually offshore PC manufacture. This was not premised on competition between a US and a foreign manufacturer, nor between US shored manufacturers. Rather, this reflected a mutual desire by US entrants to effectively take all manufacturing outside the US, to enlarge a handful of large competitors. Beware of so-called "strategic alliances" that actually strengthen US monopolies without providing the modal diversification, both internal to the corporation or to domestic industries as a whole, which are generally viewed as benevolent in the annals of capitalist history.

Finally, if creative destruction is the thing, what would our readers make of our current defense establishment?
"a fantasy that, were it ever to become reality, would limit access to many goods to the wealthy alone."

This is the reality today ... it's called socialism for the rich. Guy Sorman touches on the main issue of inherent contradictions of capitalism as a system but makes the wrong conclusion. It's not the intellectuals fault but a failure of the system itself.
Excellent article. Concise and to the point. As the article correctly states, the real difficulty is for a candidate ( Romney) to get this message across in an understandable way to a general public that is more interested in last nights baseball scores.

My guess is that our only hope is for Obama to discredit himself before November. But that is a forlorn hope a since so many so want to believe in him. Can someone explain why?
This is related:

I read Freud’s assertion to Einstein that man is driven by two powerful instincts, one of creation and one of destruction. In other words, man has an inherent urge to create and then destroy. Freud was knowledgeable in the perversion of man.

Even though Freud was not optimistic that man would or could ever stop making war, Einstein seemed to be encouraged by Freud’s instinctive explanation, perhaps because Einstein focused more on man’s creative aspect than the destructive. Perhaps Einstein thought that as man got more creative in his ability to destroy himself he would eventually lose his desire for war and use reason instead. And in a sense that is what happened, with the help of none other than Einstein himself. Ironically, his discoveries allowed the creation of the atomic bomb, which would stymie future world wars. Because of its destructive power it became a deterrent instead of a weapon. Nations have not gone to war with each other as they once did because of it.

I also thought of the economist Joseph Schumpeter, who labeled capitalism ‘creative destruction’. After WW2 and with the advent of atomic weapons, capitalism ascended around the world. Man still had his instinct for destruction, but now capitalism manifested and channeled this instinct in less harmful, more productive ways: with capitalism, man’s destructive instinct in combination with his creative instinct shifted to a more benign but peaceful form. Einstein’s optimism for mankind still triumphs over Freud’s pessimism.
“My job is to get America back on track to have a balanced budget,” he told attendees at a suburban Cleveland town hall event Monday. “Now I’m not going to cut $1 trillion in the first year,” he added — a clear jab at Paul’s plan.

“Why not, someone in the crowd apparently asked,” according to the Times.

“The reason,” Romney explained, “is taking a trillion dollars out of a $15 trillion economy would cause our economy to shrink [and] would put a lot of people out of work.”

This, of course, is pure Keynesian economics — the idea that the economy cannot grow without massive government spending.

Mitt Romney is the anti-free markets, more fascist socialism of the rich.

Voting Mitt Romney is a wasted vote leading to rising prices from a unbalanced low tax; high spend budget in which all american work longer.
"And while it’s true, of course, that socialism as Schumpeter feared it has all but disappeared, the Obama administration’s enthusiasm for economic intervention shows that American openness to creative destruction is not a given."

Schumpeter and the other members of the Austrian school of free market economics like von Mises and Hayek would be very familiar with the socialism of the Obama administration.

Mr. Obama nationalization (not bailout) of GM and Chrysler was classical socialism and a nearly identical replay of the British Labour government's nationalization of British Leyland in 1975. The administration bought the capital assets of the automakers with TARP money, appointed majorities of the boards and directed production and dealership policy.

Of more interest to the Austrians would be Obama's implementation of German Zwangswirtshaft socialism in his "clean energy economy" and Obamacare policies. Zwangswirtshaft allowed nominal private ownership of an industry, but used the government police, taxing and spending powers to direct industrial operations to redistribute wealth. The Reich implemented it during both world wars and it was the subject of a number of von Mises treatises.

Bart DePalma
Author of Never Allow A Crisis To Go To Waste

‘kalendjay’ said, “On the other hand, the US said "yes" so much to transistor research that Japan took over the consumer market with our technology. Is that actually a failure of state planning -- or a failure of imagination by American capitalists?”

I’m not sure what ‘kalendjay’ is saying here.

Japanese companies licensed the technology to make transistors from AT&T, which held the patents. The U.S. government required AT&T to license these patents at very low cost, as AT&T was a regulated monopoly and not permitted to compete outside the realm of telephony. This may have been an unwise decision, but it derived from government policy.

The failure of the U.S. consumer electronics industry has yet to be well explained; at least, I’ve been unsatisfied with books I’ve read on the subject.

U.S. companies were quick to develop and market transistor radios, but Japanese companies had lower production costs (and the U.S. companies did not then have the ability to offshore their production) and although the public perceived U.S. radios as being higher quality they were apparently unwilling to pay the price premium to obtain them.

The story with televisions seems more complex. Some U.S. companies may have had too much investment in vacuum tube production (e.g., RCA) to move quickly to transistor designs; others (e.g., Motorola) made poor design decisions. For example, Motorola’s “Quasar” transistor TVs had high failure rates because they were designed for easy repair (they were repaired by replacing plug-in circuit boards). The problem was, it was not economically feasible to put high quality connectors on these circuit boards with the result that the connectors often failed.

The Japanese approach- make the product reliable enough and you don't have to worry much about serviceability- was correct, as consumers would prefer a TV that doesn’t need to be fixed over one that’s relatively inexpensive to fix.

Part of the problem may have been sheer hubris- the U.S. companies’ managements were complacent for far too long, assuming the new competitors wouldn’t be able to move up-market and into the more profitable market segments.

It’s a complex story, and one that has yet to be well-told. But, surely U.S. consumer electronics manufacturers did not fail because of offshoring.

(And, BTW, the fruits of that “transistor research” did remain in the U.S. to the extent that many U.S. companies became (and remain) leaders in semiconductor devices (e.g. Texas Instruments, Intel, AMD, Xilinx. Even though the final (labor-intensive) final assembly of their chips is offshored.
Thomas McGonigle May 14, 2012 at 11:04 AM
Before Schumpeter the great anarchist Bakunin was saying that the urge to destroy is a creative urge and only Ron Paul and the libertarian wing of the Republican party understands this truly while the neo-cons and Romney (whatever does he believe today?) are for constant restriction as long as it favors their masters who embody fear of the free individual: a person free of the warfare state, the drug state, the security state
Really? Intellectuals are the problem? Boy, would Pol Pot have loved this article. What would Schumpeter have thought of corporate welfare - e.g., oil subsidies and tax breaks for compnies who turn billion-dollar profits?

You can't say "no welfare" and not include the vampire capitalists. It just doesn't wash.
Romney and Obama are both NWO plants. We are speeding down the road to Socialism. His "pro-big business" stance is just there to delude people and lead them off track. Free market capitalism cannot exist with big government regulations and burdensome taxes.
Interesiting view. How does it apply to SA?
I love reading the delusional pontificating of those who think the US is a free market capitalist society.
When any business, oil, autos, banking, widgets or whatever, is propped up, “bailed out”, or otherwise saved from its proper termination by a government, the society in which such an event happens is not capitalist, except in the sense of crony capitalism.
Crony capitalism [private profits and public losses] is not really very different from any other system of government interference in markets. Whether it is headed towards fascism or communism is debatable, but it is definitely headed away from capitalism.
"TBTF" is an erroneous dangerous delusion. The US led bank bailout circus [“protecting out-of-date ways of doing business”] has put a financial albatross around everybody’s neck, and crippled the very markets that might rebuild economies. Any child quickly learns that if an act or omission has no negative consequences, it is safe to repeat that act or omission as and when it suits the child. JPMorgan= QED.
"America in a second Obama term will probably continue to move in a European direction, with the government playing an increasingly activist role in the economy, protecting out-of-date ways of doing business. And without the liberating fire of creative destruction, America will follow Europe down the path of slow growth, high unemployment, and decline." SPOT ON. I am standing up shouting. Right on!
To have creative destruction, you must compete. To compete in industry, you must "throw s++t against the wall" from many industries until something sticks. This is how Japan and Korea succeeded in spite of the supposed drawbacks of state planning spelled out in this article.

Japan's pursuit of textiles was not mutually exclusive to electronics, the auto industry, computers, or even metallurgy, which demands ore and coal Japan does not have. In fact Japanese government planners never said "no" to Mitsubishi and their autos. It was the US that ultimately said "yes" to that company by way of ordering military vehicles during the Korean War. US consumers did the rest.

On the other hand, the US said "yes" so much to transistor research that Japan took over the consumer market with our technology. Is that actually a failure of state planning -- or a failure of imagination by American capitalists? The ones who supposedly know better than Obama about Schumpeter?

There is so little willingness of US industry to compete in the manufacture of the sum of components in any product, that we have been creatively destroyed, all right. What do you make of a business model that can't even cast metal components for turbines, nuclear reactors or steel bridges, without thinking of going to China first? Kind of adulating the destruction over the creative part, I think.
The premise that the fundamental economic philosophies behind Romney or Obama are different in any substantial way are false.

We understand Obama's idea is to support the existing over the new - but what is Romney's? Are we to believe his original position on the auto bailout (onward to bankruptcy) or are we to believe his current position? His position on the bank bailouts are as clear as Obama's as well and identical.

Sure when it comes to being involved in a company he can sell off pieces or the whole when necessary but presiding is not the same as managing for several reasons most notably the ability to print money at will and the ability to command income via force (tax).