Joseph Schumpeter - Issue 4
Published by Ross Doran on 8 Feb 2021 at 19:10
Joseph Schumpeter was an Austrian political economist who was perhaps best known for popularising the term “creative destruction” in the early 20th century which highlights the importance of an entrepreneur and their ability to innovate for economic growth. Although Karl Marx theorised that capitalism is unstable which leads to its destruction, Schumpeter argued this same instability is why it works. The instability of which Schumpeter is speaking is when innovation in an economy renders a previously viable form of technology obsolete, hence the term “creative destruction”. Schumpeter argues that as industry leaders are driven by profit then they must constantly innovate in order to drive economic growth and attempt to increase profits. However, his theory raises the question of how one should regulate new technologies. If regulation attempts to protect a currently viable industry then innovation is impeded, but then if regulation favours new technology it may also limit the space for which innovation can occur again as Schumpeter’s theory assumes that whatever is on the cutting edge of technology now will be replaced in the future. Schumpeter presented a solution to this problem, put simply, he said that capitalists should be left to innovate without regulation while the state’s role was to tax those who were the “winners” and compensate those who were the “losers”. However, one must also consider the incentives which are likely to see politicians stall innovation as overseeing the loss of jobs in sectors that have been made redundant without sufficiently replacing these jobs is not electorally viable.
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