Several articles have come out wondering how it is that the world’s richest man (at least as measured by the valuation of owned business assets, not paper) sleeps on the floor and otherwise couch surfs? It’s an interesting flip on the usual rap against the rich. They have been traditionally denounced for their yachts, many homes, and high-end luxury car collections.
Not Elon: he is just a regular guy who works all the time. He tries to put in 100 hours a week but hardly ever works less than 80 hours. Sometimes it reaches 120 hours. As for fancy yachts and homes, he has no time to use them. He mostly likes to work. This is said to be a dramatic flip of a narrative from the old days.
He says that this ultimately comes down to a notion “popularized” by Joseph Schumpeter, who believed that “creative destruction” was the key to capitalism’s power. The more they wreck, the more they produce, and the entrepreneurs who do this are the key to driving forward progress. In Baker’s view, Schumpeter is rendered as a kind of champion of industrial destabilization and hyper innovation, the prophet of the slogan “move fast and break things.”
Having spent years in Schumpeter’s careful and subtle writings, this whole theory strikes me as a caricature that misunderstands his thinking. For one thing, Schumpeter never “popularized” anything. He was a rather quiet academic who had few colleagues, no real followers, no real school of thought, and never wrote a book that became a bestseller. He was in his life and remains today the study of a few thoughtful people who appreciate his broad vision, non-partisanship, and even non-ideological seriousness as a historian and theoretician of ideas.
Schumpeter’s first writing on the topic of business innovation came during a dark period in his life as war was descending in Europe and he was teaching at Harvard. Born in the waning years of the 19th century, his heart broke from what had become of his homeland in Germany and Austria and what had become of intellectual culture too. He felt isolated at Harvard, surrounded by highly intelligent but naive socialists who never understood that the battle between socialism and fascism was no battle at all because they agreed on all the essentials.
His earliest book on economic development as a young academic (1911) had made a splash but nothing he had written since made much of an impact. He decided to set his mind to solving the critical issue of the day, namely the cause of business cycles. The old Austrians had a theory and so did the Keynesians and many others besides. But there was no real consensus in the profession. He got to work on a huge book on business cycles that ended up in two volumes. It appeared in 1939 and went largely unread.
His theory of business cycles was different from all prevailing theories. He imagined that a stationary economy largely exists within a state of equilibrium, with prices and interest rates coordinating production and consumption sectors alongside loan and financial markets. So long as everyone continued to do the same things over and over, there was never going to be a large shift in resource use, including in labor resources. The economy grows at a stable rate in a way that are consistent with the return on capital, which is identical to the interest rate.
This is the general equilibrium model, which if you don’t understand it, fine, because it is mostly the stuff of fantasy. The main point is that stability was his starting point, something he drew from classical economics. His hunt was for sources of disruption or what he called exogenous shocks. He found these in the form of innovation. Innovation comes about when creative individuals test out new ideas in the marketplace. When they catch on, resources are completely reallocated, causing some sectors to rise and others to fall, while rearranging the use of labor resources.
Schumpeter traced out the modern history of business cycles and found this pattern over and over. Each big innovation fits with large industrial disruptions, with old industries dying out and new industries drawing in new attention from loan markets, labor resources, and physical capital. This happened with railroads. It happened with the commercialization of steel. It happened with internal combustion. It happened with flight, communication, and munitions. Each time we see the rise of some groundbreaking practical art, we also witness wild swings in output, ultimately leading toward a new state of settled and stable production.
Schumpeter’s books appeared in wartime. But it was bad timing: they did not get much notice at all. For the most part, scholars had forgotten about the business cycle and the Great Depression in any case because the war had absorbed all attention. Within the economics profession, his new theory gained few adherents because the prevailing schools of thought had already found another theory around which to rally. The books that he believed would be his great contribution to the world rather died on the vine, neglected and ultimately forgotten.
Was he right or wrong? There are points to make on all sides but the main problem with the theory is that while it seemed to account for large sectoral shifts in production patterns, it did not really account for economy-wide drops and rises in output overall, which is precisely what was seeking to be explained. So there was that problem. Beyond that, his theory left too much unexplained; for example, the place of money and credit in creating booms and busts.
In the bigger picture, history shows that it is not technology that brings forth the largest and most devastating of exogenous shocks but government in the form of war, lockdowns, and arbitrary policy upheavals.
This is the book in which he predicts the doom of capitalism due to the rise of bureaucracy, the overproduction of intellectuals, the consolidation of business, and the decadence that causes prosperous societies to forget what caused them to become this.
Buried in this large book we find the following passage.
“In dealing with capitalism we are dealing with an evolutionary process. ... [It] never can be stationary. ... The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” A vibrant capitalism “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”
Why should this point be so shocking? Because at the time when it was written, economists were busy modeling economic forces as if they were engineers building a large-scale machine. All modeling assumes a world without change, or change only with permission. But Schumpeter was describing something else, something that cannot be controlled, predicted, channeled, or managed, much less inspired from above. It comes from within the market process itself, a product of disruptive risk-taking by people who are willing to break from the norm.
The capitalist process is a vast motion picture that never stops moving, has no intermissions, and has no end.
By the way, Schumpeter’s description here was not one that pertained in 1942. He had a gloomy outlook. He saw the fashion for state planning and regulation as essentially blotting out and strangling the entrepreneurial impulse. He foresaw a future in which there never would be much in the way of “creative destruction” because the system simply would not allow it. The economists were increasingly working with the state to throttle new ideas, new investments, and new ways of living.
What’s fascinating about Schumpeter’s theory, further, is that it departed from conventional theory in discerning the motivation for entrepreneurship. For great innovators, it is never really about the money. It is about the dream. It is about achieving. It is about using profitability metrics not as a means of accumulation but as signs and symbols of a job well done in serving the consuming public.
This is a crucial point that our author Dr. Baker misses. For generations, the left and center-left critics of markets have centered on the idea that rich people get that way in the market due to greed. But with Musk and others, it is not that at all in a rivalrous market. Truly great entrepreneurs have more than enough money.
What they are seeking is real achievement, the chance to make some kind of dent in the universe toward the betterment of the experience of life on earth. This is the motivation that Schumpeter explains, along with its effects on the social order.
His phrase “creative destruction” stuck because it beautifully highlights a paradox in economic forces. It underscores that stability is not enough to sustain growing prosperity. More is needed but that requires work, vision, risk, and adventure.
It’s a beautiful way to render the vocation of entrepreneurship, and probably an accurate one in a vibrant market that is untethered from regulation, taxation, and corporatist cartels. The world needs to be safe for all creators, whether in literature, art, architecture, philosophy, or business life. It is all part of the same working out of what it means to be free.
