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You’ve got to admire a man who regularly wore a cape. This goes doubly if that man is an economist. But Joseph Schumpeter was no ordinary economist. Ending up at Harvard in the early 1930s, Schumpeter was an exile from the tumult of Central Europe, an orphan of the Austro-Hungarian Empire. He lost his mother, wife, and infant son all within a few months of each other. It was not difficult for Schumpeter to see the world as tragic, arbitrary, capricious.

Like Marx, Schumpeter didn’t think that capitalism would last. But unlike Marx, the inevitable demise of capitalism made him sad. Schumpeter didn’t think that capitalism would create a revolutionary class that would rise up to destroy it. He instead thought that capitalism was so inherently insane that the elites of society would simply get tired of the damn thing.

Schumpeter — and here is where the cape comes back in — admired the insanity. He saw capitalism as an immense innovation machine driving a process he named with the now-famous phrase “creative destruction.” He wrote in his epochal work, Capitalism, Socialism and Democracy:

Similarly, the history of the productive apparatus … is a history of revolutions…. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

The entrepreneur, the agent of this process of creative destruction, was his hero. Yet Schumpeter’s entrepreneur was a dangerous fellow. His innovations would inevitably mean death to the industries that were being rendered obsolete. Capitalism, for Schumpeter, is always ahead of itself, always creating new crises and dislocations, always finding new techniques to create profit, new spaces in which to exploit risk. The boom and the bust were central to Schumpeter’s vision of capitalism; that was how the beast worked in its essence.

A lot of talk centers on Keynes these days and for good reason. It was Keynes who convinced a generation that the market mechanism had no inherent tendency toward full employment. In short, capitalism is just as happy being in a bust as being in a boom. Keynes saw himself as the beast master, marshalling the forces of government in order to get the monster to behave. The entrepreneur, whom Schumpeter was always trying to encourage in his reckless behavior, was in Keynes’ eyes a rather uncouth fellow who ought to be taught how to take his afternoon tea. Keynes was the guy trying to turn the party down just as Schumpeter was coming in from the kitchen with another bottle of tequila.

In these renewed days of the beast, we look to the heroes of old to march forth again into battle. We want Keynes (never allowed to rest long in his grave) to save us from Schumpeter’s drunk maniacs of capital one more time. But Schumpeter will always be watching from up there somewhere on the cliff, cape flapping in the wind, doing his best impression of a Casper David Friedrich painting. Schumpeter never believed that his monster genius could be tamed. He loved his terrible entrepreneur for being so incorrigible, for his audacity in making the world anew over and over again even at the risk of blowing the whole thing up.

Schumpeter could never stomach Keynes because Schumpeter was smitten with the extremes of creative destruction, even as he recognized that these extremes were inherently self-undermining. The great paradox for Schumpeter was in his grudging acceptance of the idea that to save capitalism you would have to destroy it. The entrepreneur would have to be shackled up again on Mount Caucasus.

Well, the great historical drama is at center stage again, the monster versus his keepers. So far, the 21st century is Schumpeterian — volatile, wild, careening toward the abyss. The crazy old bastard would be enjoying the ride. • 24 February 2009