Creative Destruction?

A while ago I wrote a piece called Stray Observations of Joseph A. Schumpeter. Now I want to make another stray observation.

I am currently reading Jörg Guido Hülsmann’s Mises: The Last Knight of Liberalism [or the first of their return]. Hülsmann devotes a section in the beginning of the book to presenting Schumpeter’s views. (It follows after presentations of Menger, Böhm-Bawerk and Wieser, and the point is to show where Mises stands in relation to his predecessors and contemporaries.) I quote:

First, Schumpeter argued that economic development was exclusively the result of pioneering “entrepreneurs” – a special breed as different from the rest of mankind as greyhounds are from poodles. Innovative entrepreneurs are the true driving force of social evolution. They impose unheard-of products and methods of production on a reluctant society of mere adjusters. (P. 172.)

So far, so good. One cannot contest that great innovators drive society forward. Think Edison. Think Steve Jobs. Or, for that matter, think Hank Rearden. Or go pre-historical and think Prometheus. Those innovators are the Atlases that carry the world on their shoulders. Objectivists have to agree with Schumpeter here. (I find it slightly exaggerated to call them the exclusive driving forces, but this is a nit-picking criticism.) Hülsmann continues:

It was this thesis in particular that roused the admiration of Schumpeter’s friends and colleagues. Twenty years later, Mises listed the book [Theory of Economic Development] as one of the top four German-language contributions to economics. It has continued to fascinate some of the best Austrian economists to the present day. (Ibid.)

But there is a second thesis, so I continue the quote:

Second, Schumpeter portrayed entrepreneurs as essentially resourceless market participants. They needed new fiduciary bank credit (“credit out of thin air”) to finance their projects because all other investment capital was already tied up in other projects. For Schumpeter, capital was essentially “purchasing power” rather than a quantity of real goods that could sustain workers in the production process. Bankers could therefore create “capital” out of nothing by simply printing additional banknotes. (P. 173; italics mine.)

What this means, to put it bluntly (and how else should I put it?), is that those innovative entrepreneurs, those Atlases that carry the world on their shoulders, are dependent on counterfeit money! Or, to put it in other words, they are dependent on inflation. If it weren’t for the creation of credit out of thin air and its inevitable consequences – higher prices, not to speak about business cycles – we would not be able to enjoy such things as the electric light, automobiles, radio and TV, computers, mobile phones, etc., etc. Those inventions would have stayed in the heads of the innovators, and they would never have materialized because of lack of funds. Sounds weird, doesn’t it?

Now I ask myself – a wee bit sarcastically – if this is the basis of Schumpeter’s famous phrase “creative destruction”. Is inflation and business cycles the price we have to pay for progress? Is monetary destruction the price we have to pay for enjoying the innovations of the creative geniuses?

Well, I guess your guess is as good as mine.

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