Joseph Schumpeter described capitalism as a process of creative destruction, and an economic system that is always changing, never stationary. He called capitalism an evolutionary process and said the engine that keeps the economy advancing is entrepreneurship. In a capitalist economy, people get ahead by being entrepreneurial: looking for ways to create value for others.
In a capitalist economy, people acquire resources and build their wealth through voluntary exchange. Nobody is forced to transact in a market, so getting ahead means creating value for others so that those others want to buy what those who are striving to get ahead have to sell. Entrepreneurs are the creators who get ahead by enticing others to trade with them because they offer more value than buyers can find elsewhere.
This process of innovation creates new opportunities, but it destroys the old. Automobiles displaced horse-drawn wagons, telephones displaced telegraphs, and personal computers displaced mainframes. Now, tablets and phones are displacing personal computers.
Innovators thrive in free markets because free markets allow this creative destruction to take place—allow those innovators to get ahead.
Once individuals get ahead, they want to stay ahead, and the forces of creative destruction have different implications for those who want to stay ahead compared to those who want to get ahead. Those who want to get ahead are the creators. Those who want to stay ahead want to avoid being the victims of creative destruction.
Even the most successful entrepreneurs are prone to use some of their wealth to buy political influence so they can gain a competitive advantage through government policies that differentially benefit themselves, and that place barriers in front of potential rivals. Those who want to get ahead view free markets as offering an opportunity to advance; those who want to stay ahead view free markets as a threat to their current positions.
Those who want to stay ahead seek tax breaks, subsidies, regulations that hinder potential competitors, and trade barriers to limit foreign competition. Those who want to stay ahead push for policies that transform free-market capitalism into crony capitalism.
Schumpeter clearly saw this threat. He asked, “Can capitalism survive? No, I do not think it can.” He argued that those who have benefited most from capitalism—those who are trying to stay ahead—do not act to support it.
Successful businesses rarely use their influence to petition the legislature for freer markets. Rather, they ask for special-interest benefits for themselves, to give them advantages over potential rivals. Those who are trying to get ahead support free markets; those who are trying to stay ahead try to undermine them.
Can capitalism survive? If those who are trying to get ahead have more influence over public policy than those who are trying to stay ahead, there may be hope. One problem is that those who are trying to stay ahead typically have more influence than those who are trying to displace them.
In a sufficiently entrepreneurial economy, there may be a critical mass of individuals striving to get ahead who can prevail over those who are trying to stay ahead. But the more successful the crony capitalists are, the less entrepreneurial the economy will be. Cronyism leads to more cronyism. Any hope lies in undermining special interests before they become too firmly entrenched.
This article was published by The Beacon