Selected Essays of Peter Drucker

chapter 5 Modrn Prophets: Schumpeter or Keynes ?

The two greatest econoists of this century:Joseph A Schumpeter(1883-1950,was born in Austria)  and John Maynard Keynes(1883-1946,was born in England).And yet it is becoming increasingly clear that it is Schumpeter who will shape the thinking and inform the questions on economic thoery and economic policy for the rest of this this century( *1983),if not for the next thirty or fifty years.

Schumpeter's doctoral dissertation——it became the earliest of his great books, The Theory of Economic Deveopment——starts out with the assertion that the central problem of economics is not equilibrium but structural change.This then led to Schumpeter's famous theorem of the innovator as the true subject of economics.

Schumpeter's "innovator" with his "creative desturction"is the only theory so far to explain why there is something we call "porfit"——in contrast to Marx and his theory, is not a Mehrwert, a "surplus value" stolen from the workers, it is the only source of jobs and labor income.no one except the innovator makes a genuine "profit", and the innovator's profit makes obsolete yesterday's equipment and capital investment.the more an economy progress, the more capital formation will it therefore need.

Thus what the classical economist——or the accountant or the stock exchange——considers "profit" is a genuine cost, the cost of staying in business, the cost of a future which nothing is predictable except that today's profitable busin-ess is become tomorrow's white elephant.Indeed, in the equilibrium economics of a closed economic system there is no place for profit, no justification for it, no explana-tion for it. the classical economists had pointed out that profit is needed as the incentive for the risk taker.but is this not really a bribe and thus impossible to justify morally? this dilemma had made it easy for Marx to fuse dispassionate analysis of the "system" whith the moral revulsion and at once to condemn the capitalist as wicked and immoral and his demise is "inevitable".

As one shifts from the axiom of an unchanging, self-conained,closed economy to Schumpeter's dynamic,growing,moving,changing economy, what is called profit is no longer immoral.it become a moral imperative.the question in Schumpeter's economics is always,is there sufficient profit? is there adequate capital formation to provide for the cost of the future,the costs of staying in business,the cost of "creative destuction"?

This alone makes Schumpeter's economic model the only one that can serve as the starting point for the economic policies we need. Clearly the Keynesian——or classicist——treatment of innovation as being "outside" and in fact peripheral to, the economy and with minimum impact on it, can no longer be maintained(if it ever could have been).the basic question of economic theory and economic policy, especially in highly developed countries,is clearly: How can capital formation and productivity be maintained so that rapid technological change as well as employment can be sustained? What is the minimum profit needed to defray the costs of the future? What is the minimum profit needed, above all, to maitain jobs and to create new ones?

Schumpeter gave no answer;he did not much believe in answers.

In 1942, when everyone was scared of a worldwide deflationary depression, Schumpeter published his best-known book, Capitalism, Socialism and Democracy, in it, he agrued that capitalism would be destroyed by its own success.This would breed what we would now call the new class: bureaucrats, intellectuals, professors ect, all of them beneficiaries of capitalism's economic fruits and yet all of them opposed to the ethos to wealth production,of saving and of allocating resources to economic productivity.

And then he proceeded to argue that capitalism would be destroyed by the very democracy it had help create and made possible. For in a democracy, to be popular, goverment would increasingly shift income from producer to nonproducer, friyn where is would be saved and become capital for tomorrow to where it would be consumed. Government in a democracy would thus be under increasing inflationary pressure. he prophesied, inflation would destroy both democracy and capitalism.

When he wrote this in 1942, almost everybody laughed. Nothing seemed less likely than an inflation based on economic success.Now, this has emerged as he central problem of democracy and of a free-market economy alike, just as Schumpeter had prophesied.

In some ways, Keynes and Schumpeter replayed the best-known confrontation of philosophers in the Western tradition——the Platonic dialogue between Parmenides, the briliant, clever, irresistible sophist, and the slow-moving and ugly, but wise Socrates. No one in the interwar years was more brilliant, more clever than Keynes. Schumpeter, by contrast, appeared pedestrian——but he had wisdom. Cleverness carries the day.But wisdom endureth.