Joseph Schumpeter (1883-1950) was an Austrian political economist. After a distinguished career in Germany, he emigrated to the US in 1932. He taught at Harvard for the remaining 18 years of his life. In 1942 he published his best-known work Capitalism, Socialism and Democracy.
He is famous for creative destruction a term he borrowed to denote an endogenous replacement of old ways of doing things by new ways, which will ultimately undermine and destroy the capitalist structure. Schumpeter believed that capitalism would gradually weaken itself and eventually collapse. Specifically, the success of capitalism would lead to corporatism and values hostile to capitalism, especially among intellectuals.
“Intellectuals” are a social class in a position to critique societal matters for which they are not directly responsible and to stand up for the interests of other classes. Intellectuals tend to have a negative outlook on capitalism, even while relying on it for prestige because their professions rely on antagonism toward it. The growing number of people with higher education is a great advantage of capitalism, according to Schumpeter. Yet, unemployment and a lack of fulfilling work will lead to intellectual critique, discontent, and protests.
Parliaments will increasingly elect social democratic parties, and democratic majorities will vote for restrictions on entrepreneurship. Increasing workers’ self-management, industrial democracy, and regulatory institutions would evolve non-politically into “liberal capitalism”. Thus, the intellectual and social climate needed for thriving entrepreneurship will be replaced by some form of “laborism”. This will exacerbate “creative destruction” (a borrowed phrase to denote an endogenous replacement of old ways of doing things by new ways), ultimately undermining and destroying the capitalist structure. Schumpeter was not in favor of the process, he just thought it inevitable.
Schumpeter’s ideas are complex and beyond my explanatory powers and the scope of this article. Creative destruction can be summed up to describe the innovative entry by entrepreneurs as the force that sustains long-term economic growth, even as it destroys the value of established companies that have enjoyed some degree of monopoly power. Because of the significant barriers to entry that monopolies enjoy, new entrants have to be radically different: ensuring fundamental improvement is achieved, not a mere difference in packaging.
This process can easily be seen by examining the dominant corporations of the mid-20th century compared to today. I’ll pick two from both eras. In 1950 Ford and GM were so dominant that the CEO of the latter firm confidently proclaimed that what was good for GM was good for the country. He likely was correct.
Of the nine corporations with a market cap of $1 trillion or more eight are American. Of these eight all are engaged in businesses unheard of in 1950. The ninth is also in a relatively new occupation. Ford and GM are struggling for survival; dominance is a memory.
I’ll discuss two of these mega-corporations to see if they fit into Schumpeter’s formulation – they are Amazon and Microsoft. Jeff Bezos founded Amazon on July 5, 1994 in his garage in Bellevue, Washington. Microsoft was founded on April 4, 1975, by Bill Gates and Paul Allen in Albuquerque, New Mexico.
Amazon dominates retail trade in a way never seen before. Walmart which previously held that position has a market cap one third of Amazon’s. It struggles, mostly unsuccessfully, to keep up with its online rival. Though there’s still a lot of life left in the bricks and mortar firm. Of course, Amazon now does a lot more than retail sales. Similarly, Microsoft has branched into a long list of endeavors virtually all of which involve computers. The two giants compete in a variety of services such as cloud computing.
I’d need a degree of clairvoyance not granted to a casual observer to predict if either Amazon or Microsoft will dominate their respective fields 50 years hence, but Schumpeter’s analysis suggests that they may well not.
What might cause them to become less relevant? Obviously, the advent of a completely new type of commerce. They have diversified in an attempt to guard against such an event. If the next big thing is unanticipated, diversification might do more harm than good. Shear size might cripple corporate governance.
Signs of a buckling performance are already visible. They may turn out to be trivial or harbingers of decay to come; it’s too soon to tell. Amazon which is famous for its outstanding service is starting to show signs that its standard may be slipping. Part of this problem, assuming there really is one, is that too many customers may be taking advantage of the company through a variety of nefarious schemes. When you contact Customer Service it may take a while to shed a computer-generated voice and and a series of menus before you get a human. The human may then require a series of verification steps routed through text and email before working on your problem. The service rep may ask for a photo of a damaged or broken item. Many of Amazon’s older customers who only use their phones for calls, texts, and email may be unfamiliar with taking photos with their phones and then sending them to the service rep. Eventually, your problem likely will be resolved, but you wasted 45 minutes to get a refund for a broken $7 glass jar of coffee.
Microsoft’s problem is a bit different. They essentially have no customer service or if it’s available it’s disguised to invisibility. They have cornered the market on the operating system for a PC and feel little need for one-on-one contact with their customers. Their near-monopoly frees them from providing much customer service. It also allows them to make huge profits from a mediocre system – Windows in all its iterations.
When Microsoft does have competition as in the browser market they suffer. Internet Explorer killed the first graphical browser – Netscape. When Google entered this market with Chrome they relegated IE’s successor Edge to irrelevance.
As I said above, I have no idea what technology and commerce will be like in half a century. My guess is that today’s giant companies will be gone or greatly diminished. Schumpeter probably would agree were he still around. But he’s long gone and so will I in 50 years.
