The Process Of Creative Destruction

The theories of monopolistic and oligopolistic competition show in 2 ways that capitalism is unfavorable to maximum performance in production.

1. A belief that it always has been so.

This believes that output has been expanding despite the secular sabotage from the managing bourgeoisie.

Advocates of this proposition would have to produce evidence that the rate of increase is from favorable circumstances unconnected with private enterprise, strong enough to overcome the latter’s resistance.

2. Capitalism once favored maximum productive performance but the later spread of monopolist structures killed competition, reversing that tendency.

This belief involves the ideas that:

• the creation of an imaginary golden age of perfect competition that at some time somehow metamorphosed itself into the monopolistic age.
• the rate of increase in output did not decrease from the nineties
• there was no “break in trend”
• most importantly, the modern standard of life of the masses evolved during the period of relatively unfettered “big business.”

If we list the budget items of the modern workman from 1899 based on the hours of labor that will buy them, the rate of the advance was greater than before

If we economists were given less to wishful thinking and more to the observation of facts, doubts would immediately arise as to the realistic virtues of a theory that would have led us to expect a very different result.

If we go into details of the individual items, the trail leads not to the firms in free competition but to the large concerns such as agricultural machinery.

It shows that big business created that standard of life instead of keeping it down.*

The conclusions at the end of Chapter 6 are almost completely false.

Yet they follow from observations and theorems that are almost completely true.

The essential point is that in dealing with capitalism we are dealing with an evolutionary process.

It may seem strange that anyone can fail to see so obvious a fact which was long ago emphasized by Marx.

Capitalism is by nature a method of economic change.

It is never and can never be stationary.

Economic life goes on in a social and natural environment which changes (wars, revolutions and so on).

• These changes alter the data of economic action and often condition industrial change.
• But these changes are not the not the prime movers of economic life.

The evolutionary character of the capitalist process is not merely:

• from such [social] changes.
• due to a quasi-automatic increase in population and capital
• due to the vagaries of monetary systems which are also affected by changes

The fundamental impulse that sets and keeps the capitalist engine* in motion comes from:

• the new consumers’ goods
• the new methods of production or transportation
• the new markets
• the new forms of industrial organization that capitalist enterprise creates.

The contents of the laborer’s budget from 1760 to 1940 did not simply grow on unchanging lines.

Instead, they had a qualitative change.

Similarly, the history of the productive apparatus of a typical farm is a history of revolutions from:

• the start of crop rotation, plowing and fattening
• to the mechanized thing of today

So is the history of the productive apparatus of the iron and steel industry from the charcoal furnace to our own type of furnace, or the history of the apparatus of power production from the overshot water wheel to the modern power plant, or the history of transportation from the mailcoach to the airplane.

In the steel industry, I call this qualitative change as industrial mutation.

It includes:

• the opening up of new markets, foreign or domestic
• the organizational development from the craft shop and factory into U.S. Steel

This incessantly:

• revolutionizes the economic structure from within
• destroys the old one
• creates a new one

This process of Creative Destruction is the essential fact about capitalism.*

This affects our problem in 2 ways.

1. Every element of this process takes considerable time in revealing its ultimate effects.

This means there is no point in appraising the performance of that process ex visu of a given point of time.

Instead, we must judge its performance over decades or centuries.

A system might focus on short run performance. In the long run, it might become inferior to a system that focuses on long-run performance.

2. This is an organic process.

Every business strategy:

• is significant only against the situation that created it
• must be seen in its role in the perennial gale of creative destruction
• cannot be taken without that gale on the hypothesis that there is a perennial lull.

But economists who, ex visu of a point of time, look for example at the behavior of

An oligopolist industry consists of a few big firms.

An economist might see that the well-known moves and countermoves within it prove a perennial lull.

They:

• accept the data of the momentary situation as if there were no past or future to it
• interpret the firms’ behaviors through the principle of maximizing profits with reference to those data and think they understand it

The usual theorist’s paper and the usual government commission’s report practically never try to see that behavior, on the one hand, as a result of a piece of past history and, on the other hand, as an attempt to deal with a situation that is sure to change presently—as an attempt by those firms to keep on their feet, on ground that is slipping away from under them.

In other words, the problem that is being visualized is how capitalism administers existing structures.

Whereas the relevant problem is how it creates and destroys them.

As long as this is not recognized, the investigator does a meaningless job.*

As soon as it is recognized, his outlook on capitalist practice and its social results changes considerably. 3

The first thing to go is the traditional conception of the modus operandi of competition. Economists are at long last emerging from the stage in which price competition was all they saw.

As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position. However, it is still competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organization in particular, that practically monopolizes attention.

But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)—competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly; the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff.

It is hardly necessary to point out that competition of the kind we now have in mind acts not only when in being but also when it is merely an ever- present threat. It disciplines before it attacks. The businessman feels himself to be in a competitive situation even if he is alone in his field or if, though not alone, he holds a position such that investigating government experts fail to see any effective competition between him and any other firms in the same or a neighboring field and in consequence conclude that his talk, under examination, about his competitive sorrows is all make-believe. In many cases, though not in all, this will in the long run enforce behavior very similar to the perfectly competitive pattern.

Many theorists take the opposite view which is best conveyed by an example. Let us assume that there is a certain number of retailers in a neighborhood who try to improve their relative position by service and “atmosphere” but avoid price competition and stick as to methods to the local tradition—a picture of stagnating routine. As others drift into the trade that quasi-equilibrium is indeed upset, but in a manner that does not benefit their customers. The economic space around each of the shops having been narrowed, their owners will no longer be able to make a living and they will try to mend the case by raising prices in tacit agreement. This will further reduce their sales and so, by successive pyramiding, a situation will evolve in which increasing potential supply will be attended by increasing instead of decreasing prices and by decreasing instead of increasing sales. Such cases do occur, and it is right and proper to work them out. But as the practical instances usually given show, they are fringe-end cases to be found mainly in the sectors furthest removed from all that is most characteristic of capitalist activity.4 Moreover, they are transient by nature. In the case of retail trade the competition that matters arises not from additional shops of the same type, but from the department store, the chain store, the mail-order house and the supermarket which are bound to destroy those pyramids sooner or later. 5

Now a theoretical construction which neglects this essential element of the case neglects all that is most typically capitalist about it; even if correct in logic as well as in fact, it is like Hamlet without the Danish prince. inescapable limitations, he can never adapt him self to the methods of competitors who can afford to sell at the price at which he buys.