Economists’ ideas are judged by history as well as by their peers. The recent news about the downgrading of General Motors and Ford bonds to “junk” bolstered the reputation of one great 20th century economist but hurt that of another.
This humbling moment for two once-mighty automakers validated Joseph Schumpeter’s idea of “creative destruction.” It also exposed voids in John Kenneth Galbraith’s theory of modern corporations in his best-selling 1958 book, The New Industrial State.
Schumpeter was an Austrian-born and educated scholar best known for his groundbreaking work at Harvard on business cycles. When he died in 1950, many considered him one of the most important economists of the century, second only to John Maynard Keynes.
In his work, Schumpeter argued that capitalism is a process of “creative destruction.” That is, under capitalism old, sclerotic firms continually fade away and are replaced by new, innovative ones. This cycle is not caused by factors outside the economic system such as new technology or political events. Rather, the destruction is an integral part of the system itself.
Galbraith, a Canadian-born and Berkeley-educated Harvard professor, was born 25 years after Schumpeter and remains intellectually active 55 years after his colleague’s death. He was an articulate and charismatic adviser to John F. Kennedy, and his books have been on the New York Times best-seller list longer than those of all other economists combined.
Galbraith argued that corporate market dominance rather than competition was the salient feature of the U.S. economy. He saw a future in which large firms like GM, General Electric, Ford, U.S. Steel, AT&T, IT&T, Alcoa and IBM would — in a bureaucratic and perhaps benign way — hold sway over the U.S. economy in perpetuity.
Almost five decades later, most such iconic firms from the mid-20th century are only shadows of their former selves. The big telephony firms are virtually gone. The glory of IBM and U.S. Steel is departed. The big automakers’ long-term prospects look shaky. Only GE, Alcoa and a few other corporations have anywhere near the stature they enjoyed in the 1950s.
Schumpeter’s view that large organizations contain the seeds of their own destruction is clearly a better explanation of the past half-century than Galbraith’s vision of self-perpetuating industrial oligopoly.
Yet ironies abound. Despite Schumpeter’s admiration of capitalism’s dynamism, he thought socialism was the wave of the future. And many argue that Galbraith’s views on the behavior of monopolistic, noncompetitive corporations were highly influenced by the work of his older colleague.
Moreover, some argue that the brilliant success of East Asian economies like Korea, Taiwan, Japan, Hong Kong and Singapore owed more to government-fostered oligopoly of the type identified by Galbraith than to free markets. Yet it is Asia where the Schumpeterian dynamism of capitalism is most evident right now.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.