Horror Quote from Joseph Schumpeter

Joseph A. Schumpeter was one of Eugen von Böhm-Bawerk’s star pupils; another one was Ludwig von Mises. A couple of years ago I wrote a piece called Stray Observations on Joseph A. Schumpeter, where I tried to sort the wheat from the chaff in his book Capitalism, Socialism and Democracy. I also read his The Great Economists (in a Swedish translation), a series of monographs on some economists, from Marx to Keynes. One thing that struck me was that he lavishes as much praise on Marx and Keynes as he does on Menger and Böhm-Bawerk. This should be enough to establish that I regard Schumpeter as a “mixed bag”.

But there is some real poison in the mixture. From a Mises.org article by Gary North[1]:

Felix Somary records in his autobiography a discussion he had with the economist Joseph Schumpeter and the sociologist Max Weber in 1918. Schumpeter was an Austrian economist who was not an Austrian School economist. He later wrote the most influential monograph on the history of economic thought. Weber was the most prestigious academic social scientist in the world until he died in 1920.

Schumpeter expressed happiness regarding the Russian Revolution. The USSR would be a test case for socialism. Weber warned that this would cause untold misery. Schumpeter replied, “That may well be, but it would be a good laboratory.” Weber responded, “A laboratory heaped with human corpses!” Schumpeter retorted, “Every anatomy classroom is the same thing.” [Felix Somary, The Raven of Zurich (New York: St. Martin’s, 1986), p. 121.]

Schumpeter was a moral monster. Let us not mince words. He was a highly sophisticated man, but he was at bottom a moral monster. Anyone who could dismiss the deaths of millions like this is a moral monster. Weber stormed out of the room. I don’t blame him.

I don’t blame him either.

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[1]) Gary North is a new acquaintance to me, but Wikipedia informs that he tries to combine “Austrian” economics with Christian beliefs.

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.

Paul Krugman’s Dishonesty

One should not expect honesty from Paul Krugman, but this blog post takes the price.

Krugman starts out by trying to be funny:

One line I’ve been seeing in various places, including comments here, is the claim that the real way to deal with Wall Street is laissez-faire economics: no more bailouts! On this view, policy makers should raise their right hand in the air, place their left hand on a copy of Atlas Shrugged, and swear in the name of A is A that they will never again step in to rescue failing banks. And all will be well with the world.

And then goes on:

First of all, bank regulation is important even in the absence of bailouts. Don’t trust me, trust Adam Smith. Scotland invented modern banking; it also invented modern banking crises; and Smith, having witnessed such a crisis, favored bank regulations.

And then quotes Smith as follows:

Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.

Krugman doesn’t supply a page reference for this quote, and with good reason. If people read this quote in its context, they would quickly see through Krugman. (If anyone wants to look it up, it is on p. 308 of the Cannan edition of Wealth of Nations.)

If one bothers to read the whole chapter, or at least the surrounding paragraphs, one would know what kind of restrictions Smith has in mind: they are all about restraining the issue of paper money! What view of paper money could be farther away from Krugman’s views on this subject?

So what does Smith say? This is the very next paragraph in Wealth of Nations:

A paper money consisting in bank notes, issued by people of undoubted credit, payable upon demand without any condition, and in fact always readily paid as soon as presented, is, in every respect, equal in value to gold and silver money; since gold and silver money can at any time be had for it. Whatever is either bought or sold for such paper, must necessarily be bought as cheap as it could have been for gold and silver.

In simpler words: Bank notes with 100% gold or silver backing are as good as gold or silver. What about notes with less than 100% backing? One paragraph later:

It would be otherwise, indeed, with a paper money consisting in promissory notes, of which the immediate payment depended, in any respect, either upon the good will of those who issued them; or upon a condition which the holder of the notes might not always have it in his power to fulfil; or of which the payment was not exigible till after a certain number of years, and which in the mean time bore no interest. Such a paper money would, no doubt, fall more or less below the value of gold and silver, according as the difficulty or uncertainty of obtaining immediate payment was supposed to be greater or less; or according to the greater or less distance of time at which payment was exigible. [“Exigible” is an old word which, according to my dictionary, means “able to be exacted; demandable; requirable”.]

Again in simpler words: Bank notes with less than 100% backing (or where the gold/silver backing for some reason is uncertain) are not as good as gold or silver.

So how can modern Keynesians – who dismiss gold as a “barbarous relic” – invoke Adam Smith and pretend he was on their side? Krugman is simply counting on his readers’ ignorance.

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It is a fashionable game among “social liberals” to quote Adam Smith out of context in order to insinuate that he was in favor of interventionist measures. Here is another example, which I routinely encounter in Sweden. They take the following quote (from p. 128 in the Cannan edition):

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

This sentence is taken to mean that Adam Smith was well aware of “market failures” and would approve of such interventions as price controls and anti-trust laws. But in this case, they do not even bother to ignore some earlier or later paragraphs in Smith’s text; they ignore the very next sentences in the same paragraph:

It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though they cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. [Emphasis added.]

Smith then goes on to describe in some details how such assemblies are rendered necessary. But the main point here is that Smith advocates less government intervention, not more.

(Scandinavian readers may read this essay of mine on this subject from 1982.)

Late update (April 6, 2012): Stuart Hayashi blogged on this subject on the same date this was published with a link to this post. I didn’t see this until today.