The Economics Book

148

W

hen a recession bites

and companies and jobs

start to disappear, there

is often a demand for government

intervention to counteract these

effects. The Austrian economist

Joseph Schumpeter, writing in the

depths of the Great Depression in

the 1930s, disagreed. He insisted

that recessions are how capitalism

moves forward, weeding out the

inefficient and making way for new

growth in a process originally

described by Karl Marx (p.105)

as “creative destruction.”

Schumpeter believed that

entrepreneurs are at the heart of

capitalist progress. Where Adam

Smith (p.61) saw profit arising from

the earnings of capital, and Marx

from the exploitation of labor,

Schumpeter said that profit comes

from innovation—which does not

derive from capital or labor. He saw

IN CONTEXT

FOCUS

Economic systems

KEY THINKER

Joseph Schumpeter

(1883–1950)

BEFORE

1867 Karl Marx states that

capitalism moves forward

by crisis, repeatedly

destroying a whole range

of productive forces.

1913 German economist

Werner Sombart argues that

destruction opens the way for

creation, just as a shortage of

wood led to the use of coal.

AFTER

1995 US economist Clayton

M. Christensen distinguishes

between disruptive and

sustaining innovation.

2001 US economists Richard

Foster and Sarah Kaplan argue

that even the most exceptional

corporations cannot beat the

capital markets indefinitely.

CAPITALISM

DESTROYS THE

OLD AND CREATES

THE NEW

CREATIVE DESTRUCTION

To survive, capitalists

continually seek new profits

through the pursuit of

new markets.

As capital (money)

shifts to new markets

and innovations...

The pursuit of

new markets leads

to innovations.

... existing sectors of industry

are devastated.

Capitalism destroys

the old and creates

the new.