Okay, so let's set the scene. I want you to picture
it. It's the turn of the 20th century. Right.
We're in Vienna. It's this incredible moment,
the twilight of the Austro -Hungarian Empire,
and the city is just... It really is a pressure
cooker of ideas. Totally. I mean, you've got
Freud in one coffeehouse completely redefining
how we think about the human mind. And in another,
you've got Klimt basically inventing a new kind
of art. Exactly. And, you know, Trotsky's supposedly
playing chess in the corner somewhere. And walking
through this city, this absolute hotbed of intellect,
is this young man. And he isn't just confident.
He is... Well, he's spectacularly, almost aggressively
arrogant. That's a very fair description. Arrogant
might even be putting it mildly for the person
we're about to discuss. I think so. So this young
man, he decides to set three life goals for himself.
And he tells people this. He announces them.
This is what's going to define his legacy. Okay.
Goal number one, to be the greatest economist
in the world. Which is an incredibly high bar.
I mean, especially given the company he was keeping
in Vienna at that moment. Right. Goal number
two, to be the best horseman in all of Austria.
A very different ambition. A pivot to the physical,
the aristocratic. And then goal number three,
to be the greatest lover in all of Vienna. Of
course. The classic tripartite. The mind, the
body, and the heart. It's like something out
of a novel. It really is. And this is where the
story gets so good. Decades later, when he's
an old man, he's teaching at Harvard. He reportedly
tells his students he'd successfully achieved
two of those three goals. Wow. But he never said
which two. He never explicitly said which two.
But he did let it slip with this very coy, winking
admission that, well, there were just too many
fine horsemen in Austria for him to really claim
that particular title. So he leaves us with a
rather stunning implication that he believed
he'd conquered both global economic theory and
the romantic scene of Vienna. precisely. But
today, we are going to focus mostly on that first
goal. We are doing a deep dive into the life,
the mind, and the legacy of Joseph Alois Schumpeter.
And I just want to frame this right from the
top. This is not some dry, dusty academic we're
talking about. This is a story about a flamboyant,
tragic, and deeply influential figure who saw
economics not as a set of equations, but as a
A violent living, breathing process. And that's
the absolute key to understanding him. You know,
he's often called the prophet of innovation.
And if you look around today in the 21st century,
our obsession with startups, the way tech giants
seem to rise and fall overnight, this constant
churn of the market, we're basically living in
a world that Schumpeter described over 100 years
ago. He saw it coming. He saw the chaos of capitalism
and he understood its engine, maybe better than
almost anyone before or since. So here's the
mission for this deep dive. We've got a mountain
of sources, biographies, his own incredibly dense
economic work, modern analyses. And we're going
to try to unpack his most famous concept, creative
destruction, which I. I feel like everyone uses
that phrase now. It's a buzzword. Oh, it's completely
a buzzword. Yeah. And it's one of the most misused
terms in, I'd say, all of business history. I
think so. We're also going to look at his theory
of the entrepreneurial spirit, that great German
word Unternehmergeist, and importantly, how his
view of that actually changed over his lifetime.
Mark I versus the Mark II. Exactly. And then
maybe the most surprising part of his entire
legacy, his prediction about the death of capitalism.
Because he didn't think it would die from failure.
He thought it would die from its own success.
It's a really dark paradox, but it's essential.
You have to get your head around that to understand
his worldview. He wasn't a cheerleader for the
system. He was more like a pathologist, you know.
examining a patient that he loved, but whose
prognosis he was deeply, deeply worried about.
I like that analogy, a pathologist. Okay, so
let's start with the man himself, because I think
with Schumpeter, more than most, you have to
understand the psychology to understand the theory.
He was born in 1883 in a town called Triesch
in Moravia. Right, which back then was part of
the Habsburg Empire. Today, it's in the Czech
Republic. And his life starts with a really significant
trauma. It does. His father, who was a factory
owner, a cloth manufacturer, he died when Joseph
was only four years old. Wow. And that, you know,
that creates a huge void. But his mother was
this incredibly determined, very ambitious woman.
And in 1893, she moves them both to Vienna. And
she manages to marry a very high ranking general
in the Austro -Hungarian army. So this is a huge
step up socially. It's catapult. It takes young
Joseph from this sort of provincial middle class
background and drops him right into the heart
of the Viennese aristocracy. So he's growing
up in this world of, you know. Rigid hierarchies,
military uniforms, strict etiquette. But he has
this wild outsider intellect. Exactly. He goes
to the University of Vienna and his main teacher
is a man named Eugen von Bumbowerk. Now, for
anyone listening who isn't deep in the weeds
of economic history, Bumbowerk is a giant. He's
one of the godfathers of what we call the Austrian
School of Economics. He absolutely is. And the
Austrian school had a very specific flavor. They
were very philosophical, very focused on logic
and the idea of human action. And they were generally
pretty skeptical of using a ton of math to describe
human behavior. Why? They just felt the economy
was too complex, too subjective. You know, human
choice couldn't be reduced to a neat little formula.
But Schumpeter didn't quite buy into that, did
he? He was a bit of a rebel in his own school.
He was the black sheep. I mean, he respected
his Austrian teachers immensely, but he became
obsessed with a rival school. the Lausanne School,
and particularly a French economist named Leon
Walrus. And Walrus was the opposite of the Austrians.
Completely. Walrus's dream was to turn economics
into a hard science, like physics. He built these
incredibly complex, beautiful systems of equations
to show how an economy could reach a general
equilibrium, where everything, supply, demand,
prices, all perfectly balanced out. And Schumpeter
loved this. He adored it. He famously called
Walrus the greatest of all economists. So Schumpeter
himself is this kind of bridge. He's got the
sociological depth of the Austrians. He understands
history, institutions, human psychology, but
he craves the mathematical precision of Walrus.
He wants to explain the messiness of the world
with the elegance of an equation. That's a perfect
way to put it. That tension, that desire to synthesize
two opposing worldviews, it really defines his
entire career. But here's the thing that sets
him apart. Unlike most economists who are content
to just sit in their study and theorize, Shepard
wanted to be a man of action. He wanted to get
out there and actually play the game. And this
is the part of his story that I find just endlessly
fascinating because it's a catalog of. Frankly,
spectacular failure. It really is. We're talking
about a man who literally wrote the book on how
the economy works and then got absolutely run
over by the real economy. A tragic comedy is
the best way to describe it. So it's 1919. World
War I is over. The Austro -Hungarian Empire has
shattered into pieces. There's this new, fragile
republic of German Austria. And Schumpeter gets
appointed. Minister of Finance. His big moment.
His big moment. He walks in with all these grand
theories, you know, ready to stabilize the currency,
pay off the war debt and fix the world. So how
did that go? How long did he last? He lasted
less than a year. Oh, wow. It was a complete
debacle. He proposed a capital levy, a big tax
on wealth to pay down the war debts. That made
all the wealthy industrialists and aristocrats
hate him. Okay, that makes sense. But at the
same time, he vehemently opposed the socialist
plan to nationalize major industries, like the
Alpine Mountain Plan. So the socialists hated
him too. So he managed to alienate everybody.
The left and the right. Simultaneously. It's
a rare political gift. He was fired. But he didn't
give up. He thought, OK, politics is too messy.
It's irrational. I understand money. I'll go
into banking. A logical next step. So in 1921,
he becomes the president of a private bank, the
Biederman Bank. And let me guess, this did not
go well either. This went even worse. The bank
got caught up in the hyperinflation of the era.
It made a series of terrible investments. Schubert
himself engaged in some pretty wild personal
speculation that went completely south. So he
was in debt himself. He ended up in massive personal
debt, which took him years to pay off. And by
1924, the bank had to be bailed out and taken
over by another institution. And one of the explicit
written conditions of that takeover was that
Joseph Schumpeter had to resign immediately.
That is just crushing. It has to be so humiliating.
I mean, you've positioned yourself as the great
theorist of the entrepreneur, the man who understands
the very engine of capitalism, and you just personally
bankrupted a bank. It was beyond humiliating.
It was a defining failure. But I would actually
argue that this failure is the secret key to
his genius. Think about it. Many other famous
economists of that era, people like Ricardo,
even Keynes, they were successful investors.
They made fortunes. So they tended to see the
market as something rational, something you could
master if you were smart enough. Right. A puzzle
to be solved. Exactly. Schumpeter learned the
hard way that the market is not a puzzle. It's
a beast. It's a wild, unpredictable force that
can chew you up and spit you out no matter how
brilliant you are. So he understood risk in his
bones. He felt the consequences. He felt it.
He realized the economy isn't a smooth, predictable
machine. It's inherently dangerous. It's volatile.
And that personal failure gave his later theories
a kind of weight. and a darkness that you just
don't find in the work of his more successful
peers. So he's battered, he's bruised, he's in
debt. He retreats back to the one place that
will have him, academia. He teaches in Bonn,
Germany, for a while. But then, you know, the
1930s start to roll around. The political climate
in Germany is getting very ugly. The shadow of
Nazism is falling over Europe. And he looks west.
He looks west. He emigrates to the United States
in 1932 to take up a prestigious post at Harvard
University. But before we get to his American
career, we have to talk about what happened just
before he left. This is the personal tragedy
that really defined the rest of his emotional
life. This part of the biography is just brutal.
It's hard to read. It's almost too much to comprehend
in one go. Around 1926, while he was still in
Europe, his mother died. And she had been his
rock, his champion, his whole life. Okay. Then,
just a few weeks later, his second wife, Anna
Reisinger, who's 20 years younger than him, and
by all accounts the absolute love of his life,
died in childbirth. Oh. And then the newborn
son died as well. All within a matter of weeks.
All within a single season. He lost his past,
his mother, and his entire future, his wife and
his child, all at once. He was completely hollowed
out by it. I can't even imagine. And friends
said he was never the same. He reportedly never
spoke their names out loud again to anyone, but
he channeled that grief, that immense pain, into
his work. He threw himself into it with this
manic, almost terrifying intensity, working 80,
90 hours a week. He basically used economic theory
to try and outrun his own sorrow. So when this
guy arrives at Harvard in 1932, he's not your
typical, quiet, tweed -wearing professor with
elbow patches. Oh, not at all. He was a character,
a diva. He still wore these immaculate custom
tailored European suits. He'd sweep into the
classroom, hold court, take an entire hour to
answer a single student's question and just dazzle
everyone with his erudition. And he. taught some
future giants. He taught titans. I mean, his
students included people like Paul Samuelson,
Robert Salo, James Tobin, Alan Greenspan. He
fundamentally shaped the next generation of American
economic thought, even though he was always seen
as a bit of an outsider, always viewed with a
bit of suspicion. Suspicion because he was European.
Because of his accent. That was part of it. But
it was also his politics. He was a staunch conservative
who absolutely detested Franklin D. Roosevelt
and the New Deal. He thought it was dangerous
government meddling in the economy. And this
was during the Great Depression and World War
II. That must have been a very unpopular position
to hold at Harvard. It was an incredibly lonely
position. In fact, he was actually investigated
by the FBI during the war, along with his third
wife, Elizabeth Booty, for potential pro -Nazi
sympathies. Seriously, was there any truth to
that? No, not at all. It was completely baseless.
He despised the Nazis. He saw them as thuggish
barbarians. But he was an old -world European
aristocrat who criticized American populism in
the middle of a patriotic war. He just didn't
fit in. Okay, so that's the man. Flamboyant,
tragic, a failure in the real world, but a giant
in the world of ideas. Now let's get into those
ideas. Because if you say the name Schumpeter
at a dinner party, the first and probably only
thing the person next to you is going to say
is creative destruction. It's his great legacy.
Yeah. It's one of the very few economic terms
that has truly crossed over from academia into
pop culture. But I feel like it's used so loosely,
it just gets used to mean breaking things. You
know, a tech CEO lays off a third of his workforce
and puts out a press release talking about embracing
creative destruction. What did Schumpeter actually
mean by it? He meant something much more specific
and much more biological. Schumpeter's core argument
was that capitalism is not like a building that
you construct once and then live in peacefully.
Right. He said it's a living organism. And it's
essential fact, his words, is that it is an evolutionary
process. It is constantly mutating from within.
Mutating from within. I like that. Yes. It incessantly
revolutionizes the economic structure from within,
incessantly destroying the old one, incessantly
creating a new one. Think of it like a forest.
For a forest to stay healthy and vibrant, old
trees have to fall and die. Sometimes a fire
has to sweep through. Right, the forest fire.
Clears out all the dead undergrowth. Exactly.
It clears the brush, it releases nutrients back
into the soil, and it makes space for new, stronger
saplings to grow. If you prevent all the fires,
if you try to prop up every single old dying
tree, the forest eventually stagnates and dies.
So in the economy, the fire is innovation. A
new technology. Correct. And this is what leads
him to his most controversial and I think most
brilliant point, which is about competition.
If you open a standard economics 101 textbook,
what does it tell you is the ideal state of the
market? Perfect competition. Perfect competition.
Right. Where you have a thousand little lemonade
stands all selling identical lemonade and no
one has any market power and the price gets driven
down to the absolute bare minimum cost of production.
Exactly. And Schumpeter looked at that model
and said. That's nonsense. That's death. He argued
that perfect competition is static. It's a stalemate.
If everyone is selling the exact same thing for
the cheapest possible price, nobody makes any
real profit. And if there's no profit? There's
no money to invest in the future. You can't fund
a research and development lab on the margins
from a lemonade stand. There's no progress. So,
wait, he was actually an advocate for... Monopolies?
That sounds completely wrong. Not monopolies.
Temporary monopolies. This is the crucial, crucial
nuance that everyone misses. He argued that the
only reason an entrepreneur would risk their
life savings and years of their life to invent,
say, the first light bulb, is the promise that
for a few years, they will be the only person
selling light bulbs. The monopoly profit is the
prize. It's the reward for taking the huge risk.
It is the bait. Those abnormal profits are what
allow you to recoup your massive investment and,
more importantly, fund the next big thing. Schumpeter
said the competition that really matters isn't
price competition. It's not about one candle
maker selling their candle for 90 cents instead
of a dollar. It's the competition from the new
thing. It's the competition from the light bulb.
It's the competition for the new commodity, the
new technology, the new source of supply. It's
not about making a cheaper candle. It's about
making the candle completely obsolete. Yes. He
has this amazing line. He says, this kind of
competition strikes not at the margins of the
profits, but at their foundations and their very
lives. It's not a skirmish. It's a bombardment.
And sure, that's terrifying if you happen to
own the biggest candle factory in the world.
But for society as a whole, it brings us out
of the darkness and into the light. But this
does raise the modern question, right? What about
the tech giants today? People are terrified that
they become too powerful, that they're permanent
monopolies. Schumpeter would look at them and
say, just wait. His theory predicts that these
monopoly positions are inherently unstable. The
very moment you start making those billions in
profit, you paint a giant target on your back.
Everyone comes for you. Every ambitious engineer,
every hungry venture capitalist in the world
starts thinking, how can I build something that
makes that obsolete? The monopoly, in his view,
contains the seeds of its own destruction. That
is, unless the government steps in and passes
laws to protect it from competition. So he wasn't
afraid of a company like Standard Oil getting
big on its own. He was afraid of Standard Oil
using its power to get the government to outlaw
its competitors. That's the critical distinction.
He trusted the gale of creative destruction to
eventually blow down even the mightiest castle.
He just didn't want the government building a
permanent stone wall around it. This is a perfect
transition to the person who actually lights
the match for this fire, the entrepreneur. And
I love that Schumpeter really had two different
versions of this theory, which scholars call
Mark III and Mark II. It's like he saw the world
change and he had to patch his own software.
He did, which is the sign of a great thinker.
He wasn't dogmatic. He was an empiricist. When
the facts changed. He changed his mind. So let's
start with Mark Ford. This is the early Schumpeter,
right? The European Schumpeter before the failures
and the tragedy? Yes. This comes from his early
book, The Theory of Economic Development, published
in 1911. And in this version, the entrepreneur
is a true hero, a solitary romantic figure. And
he used that great German word. Unternehmergeist.
Entrepreneur spirit. It's more than just spirit.
It implies this incredible force of will, a drive.
In the Marx party, the economy naturally wants
to settle into what he called that Walrasian
equilibrium, that boring static state. The entrepreneur
is the wild spirit who comes along and shatters
that peace. They disrupt things. They disrupt
everything. They fight against social resistance,
against the bankers who say no, against the public
who says, we like our horses, we don't need your
noisy automobile. They are the Henry Fords, the
Thomas Edisons, the Steve Jobs of the garage.
They force the new thing into reality through
sheer personality and vision. It's a very romantic
view, almost a Nietzschean great man of history
theory of economics. It is. It's very heroic.
But then Schumpeter moves to America. He lives
through the 30s and 40s. He spends two decades
at Harvard and he looks at the American economy
and he sees General Motors. He sees U .S. Steel.
DuPont, General Electric. And these are not just
one guy in a garage. These are not wild spirits.
These are massive, sprawling bureaucracies with
tens of thousands of employees, committees, and
formal procedures. And so we get the update,
the patch, Mark II. Exactly. This is the view
that comes out in his later, and I think greater,
masterpiece capitalism, socialism, and democracy.
He had this profound realization that in a mature,
modern industrial economy, the process of innovation
itself becomes institutionalized. So it moves
out of the garage and into the corporate R &D
department. Precisely. He wrote that the trail
of modern economic progress leads precisely to
the door of the large concerns. He realized that
these giant corporations, which everyone at the
time was criticizing as stagnant monopolies,
were actually becoming the primary engines of
innovation. Why? Because they had the money.
Because they had the capital to absorb failure.
Think about it. If you're a lone inventor in
your garage and your one big prototype explodes,
you're done. You starve. But if you're Bell Labs
or IBM or Google X today and one project fails
spectacularly. You just shrug and move the funding
to the next project on the list. You can afford
to fail a hundred times to get one success. The
large corporation can manage a portfolio of risks
in a way an individual never could. So Mark II
is the corporate engine. The wild spirit gets
tamed. It's a salary, a security badge, and a
pension plan. And Schumpeter wrote about this
with a real sense of ambivalence, a kind of sadness.
He respected the sheer efficiency of the corporation.
He saw that it was what created the incredible
American standard of living. But he missed the
romance of the individual hero. He saw that innovation
was becoming just another bureaucratized job,
something a committee in a boardroom decides
to approve for the next fiscal quarter. We have
reviewed the proposal for market disruption and
have greenlit it for Q3. Exactly. It loses its
soul, even as it gains in power and efficiency.
Which is a perfect segue to how these innovations,
whether from the wild spirit or the corporation,
actually ripple through the economy. Because
Schumpeter didn't see economic growth as a nice,
smooth, straight line going up and to the right.
No, he saw waves, storms and seasons. The business
cycles. This is the really technical part of
his work, but it's so fascinating when you get
into it. He believed that innovations don't just
happen randomly, sprinkled evenly over time.
He said they cluster. They cluster in swarms.
Why do they cluster? Why not just a steady stream
of new inventions every year? It's about psychology
and finance. One pioneer takes the enormous risk.
Say, building the first... commercially viable
railroad. It's hugely expensive. Everyone thinks
they're crazy. But once it's proven to work and
make money, what happens? A herd of imitators
rushes in. A herd rushes in. Suddenly every banker
who said no is now desperate to lend money for
any project that has the word railroad in it.
You get this massive boom in investment, a speculative
frenzy, all centered on this one new technology.
And then, inevitably, the market gets saturated.
You have too many railroads going to the same
place, companies go bankrupt, and you get a bust.
Right. boom and bust but schumpeter's true insight
the thing that set him apart was that he didn't
think there was just one cycle he saw a whole
symphony of different waves all overlapping all
operating on completely different timelines.
This is the part of his work that really blew
my mind when I was reading the sources. He's
literally stacking cycles on top of cycles. Can
we try and break down the four main types that
he identified? Absolutely. Think of it like a
set of gears in a giant complex watch, all turning
at different speeds. At the bottom, the smallest,
fastest turning gear, you have what he called
the kitchen cycle. The kitchen cycle? This is
a short one. About three to five years. It's
driven almost entirely by... You know, a company
produces too much stuff, then they realize they
have too much in the warehouse, so they cut back
on production to sell off the stock. The economy
dips a little, then they sell it all, they start
ordering again, and it goes back up. It's the
surface noise of the economy. Okay, so that's
the smallest gear. What's the next one up? The
next gear is the juggler cycle. Yeah. This is
the one we're most familiar with. It runs for
about 7 to 11 years. This is driven by investment
in fixed capital, new machinery, retooling a
factory, companies replacing their fleets of
trucks. This is what we typically think of as
the business cycle when we see it in the news.
Okay, kitchen, juggler, getting bigger. Now we
get to the Kuznets swing. This is a much longer
wave, about 15 to 25 years. This cycle is tied
to big infrastructural projects and demographics,
building out the electrical grid, waves of immigration
that require new housing and schools, constructing
the national highway system, big generational
projects. And then there's the big one, the monster
wave that everything else rides on top of. That's
the Kondratiev wave, named after a Russian economist,
Nikolai Kondratiev. This is the long one, 45
to 60 years from peak to peak. This wave isn't
just about investment. It's about the fundamental
technological basis of the entire economy. So
like the age of steam and railways. That's one.
Then the age of steel and electricity. Then the
age of the automobile and oil. And the one we've
just been living through. The information age.
The age of the microchip. Each of these technological
revolutions drives a multi -decade boom. So at
any given moment, we could be sitting on top
of a little kitchen inventory dip inside a larger
juggler investment broom, but maybe at the very
tail end of a massive conjurative technological
wave. Precisely. All of these waves are rippling
through the economy at the same time, sometimes
adding to each other, making the boom feel incredible,
and sometimes canceling each other out, or worse.
And this led Schumpeter to his most terrifying
realization. Which was what? What happens when
the troughs, the absolute bottom points of all
four of these waves, line up at the exact same
time? You get the perfect storm. You get the
danger zone. He came to believe that this synchronization
of the cycles is what caused the Great Depression
of the 1930s. It wasn't just a stock market crash
or bad government policy. It was the statistical,
mathematical inevitability of all the cycles
aligning in a downward phase at once. It makes
you feel very small. Like we're all just these
little boats bobbing on these massive, invisible
tidal forces that we have absolutely no control
over. And Schumpeter would say, that's right.
So don't even try to control them. He deeply
disliked the Keynesian idea that the government
could manage the economy and smooth out the waves.
He believed the depression, the bust, is a necessary
part of the process. It's the forest fire. It's
the forest fire. It's the cold shower that cleanses
the system of all the bad investments and inefficient
companies that grew up during the boom. If you
use government policy to stop the bust, you prevent
the adaptation. You create a zombie economy where
the old dying trees are kept alive on life support
and they crowd out the new saplings. That is
a very, very hard thing to sell to a voter who
has just lost their job and their home. Don't
worry, you're just part of the cleansing mechanism
of the condortee of wave. It is a terrible political
slogan. But Schemperer wasn't running for office
anymore. He was trying to describe the mechanism
as he saw it, no matter how brutal it was. Which
brings us to what is maybe the most provocative
and frankly, the most gloomy part of his entire
body of work. We've talked about how innovation
drives capitalism, how it creates these waves
of progress. But then in his 1942 book, Capitalism,
Socialism and Democracy. He asks a stunning question.
He asks point blank, can capitalism survive?
And his answer is equally blunt. No, I do not
think it can. No, when I first read that, my
immediate assumption was, OK, he means it's going
to collapse the way Karl Marx said it would,
you know, with riots in the streets, mass poverty,
the proletariat rising up to overthrow the evil
factory owners. And this is what makes Schumpeter
so unique and so unsettling. He actually agrees
with Marx on the outcome. He believed, just like
Marx, that socialism or something very much like
it would eventually replace capitalism. But he
disagreed 100 percent on the mechanism. On how
it would happen. Completely. Marx thought capitalism
would die because it failed, because it would
create so much misery and inequality that people
would violently tear it down. Schumpeter made
the exact opposite argument. He thought capitalism
would die precisely because it succeeded. OK,
you have to walk me through that. That seems
completely counterintuitive. How does winning
the game so thoroughly cause you to forfeit?
It's a brilliant and chilling sociological argument.
It happens in stages. Step one, capitalism works.
It works unbelievably well. It generates an unprecedented
amount of wealth and surplus. So much surplus,
in fact, that for the first time in human history,
we can afford to create a massive system of higher
education. We can send millions of people to
university. Okay, so far so good. We have a society
full of smart, literate, wealthy people. Sounds
great. But what do all these educated people
do for a living? A large number of them become
what Schumpeter called the intellectual class.
These are people who work with words and ideas.
Journalists, academics, pundits, artists, commentators,
but who, crucially, have no direct practical
responsibility for running anything. They don't
have to meet a payroll. They don't manage the
factories. They write essays critiquing the factories.
I feel like he's describing us right now. I feel
personally attacked. He absolutely intended it
as a critique. He argued that this intellectual
class develops a vested interest in social discontent.
Their status, their prestige, their very careers
depend on finding flaws in the existing system.
They analyze. They deconstruct. They chip away
at the moral foundations of the bourgeois order.
So capitalism generates the wealth that funds
the very people who then proceed to talk it to
death. That's it in a nutshell. This system pays
for its own gravediggers. The intellectuals slowly
but surely delegitimize the core concepts of
profit, of private property, of the very inequality
that drives ambition. They make entrepreneurial
success look less like a social contribution
and more like a form of theft. But it's not just
the fault of the intellectuals, right? It's also
something that happens inside the corporations
themselves. This goes back to the Mark II theory.
Yes. This is the second pincer in the attack.
The bureaucratization of innovation. Schumpeter
argued that as companies grow into these giant,
faceless, professionally managed corporations,
the owners, the actual capitalists, lose their
will to fight. What does he mean by that? Think
about it. A 19th century factory owner who built
his company from scratch with his own hands.
His name is on the building. He has a visceral
emotional connection to his property. He will
fight to the death, politically and physically,
if the government tries to take it away from
him. Right. But what about a salaried middle
manager, CEO of a massive publicly traded conglomerate
who maybe owns 0 .1 % of the stock? They don't
have that same connection. They're just an employee.
They want a quiet life and a good bonus. Exactly.
They lose that deep passion. passionate, almost
religious belief in the sanctity of private property.
So when the government comes along with new regulations,
new taxes, a slow creep of socialization, they
don't fight back. They just comply. They hire
a chief compliance officer and fill out the paperwork.
So the wild spirit of the entrepreneur gets replaced
by the checklist of the bureaucrat. And Schempeter
predicted that this slow rot from within the
external attack from the intellectuals and the
internal softening of the business class would
lead to a gradual, almost imperceptible drift
into what he called laborism. Parliaments will
be dominated by social democratic parties. Regulatory
agencies will multiply and grow more powerful,
will slide from liberal capitalism into a kind
of centrally planned bureaucratic state that
is functionally socialist, even if it doesn't
call itself that. Not with a bang, but with the
whimper of a thousand new regulations being filed.
That's the prophecy. And it's so haunting because
it feels so plausible. He is... essentially predicting
the rise of the modern administrative state that
we see all around us in the West. And the tragedy
of it is that he wasn't happy about this. He
wasn't advocating for it. He hated it. He was
a conservative who cherished individual liberty.
He was prophesying this future with a sense of
profound despair. He was basically saying, look,
this is the logical endpoint of the story, whether
we like it or not. So if the economy is this
complex, evolving and ultimately self -undermining
system, what does that mean for how we should
govern ourselves? This brings us to Schumpeter's
very cynical but very interesting views on politics.
And spoiler alert for anyone listening, he was
not a big fan of the will of the people. No,
he had absolutely no time for what he called
the classical doctrine of democracy. You know,
the one we're all taught in school. A fairytale
version. The fairytale version where the noble
informed citizens gather together in the town
square. They deliberate. They rationally identify
the common good. And then they elect wise leaders
to go and carry it out. The New England town
hall ideal. Schumpeter thought that was utter
nonsense. He argued pretty bluntly that the average
citizen is politically ignorant, irrational and
easily manipulated. They just don't have the
time or the mental bandwidth to understand deeply
complex policy issues like, say, the Kuznets
swing or international monetary policy. So if
democracy isn't the expression of the will of
the people, what is it to him? It's just a market.
That's all it is. He defined democracy as, and
I'm quoting here, an institutional arrangement
for arriving at political decisions in which
individuals acquire the power to decide by means
of a competitive struggle for the people's vote.
He's using that market analogy again. The politicians
are the sellers, the entrepreneurs. And the voters
are the consumers. The election is just the marketplace.
The politicians sell promises and brands and
the voters buy them with their votes. It's a
competition between elites for power. And what
about the common good? He didn't think it existed
as a tangible thing that everyone could agree
on, or at the very least he didn't think the
voters could ever identify it. His goal was to
lower our expectations of what democracy can
achieve. He said basically, stop expecting democracy
to produce wisdom or truth. Just accept it for
what it is, a useful, peaceful method to hire
and fire your rulers without having to resort
to a civil war. That is a very minimalist view.
It really strips all the glory and romance away
from it. Democracy isn't some holy communion
of the national spirit. It's just the H .R. department
for the state. Wow. But I guess it's also a very
stable view. If you accept that it's just a hiring
mechanism, you don't get quite as existentially
disappointed when your leaders turn out to be
flawed human beings. Exactly. It manages expectations.
Before we move to his legacy, I just want to
touch on his methodology one last time. We mentioned
he loved Walrus and his math, but in his huge
posthumous book, History of Economic Analysis,
he spent a lot of time attacking some of the
biggest names in economics for what he called
the Ricardian vice. What was that? This is such
a crucial point. For anyone who wants to understand
why economic models and predictions so often
get it wrong, the vice was named after David
Ricardo, a famous 19th century economist. But
Schumpeter also accused Keynes of it. It's the
habit of building these very neat, tidy, abstract
models of the economy. The kind of thing you
do on a blackboard. Exactly. The model builder
will say, okay, let's assume variables A, B,
and C are held constant. Now, what happens if
I just change variable D? Classic Ceteris Paribus,
all other things being equal. Right. And Schumpeter
hated that. He called it a vice because in the
real living, breathing economy, nothing is ever
constant. All other things are never equal. The
moment you change variable D, that causes A to
move, which makes B explode and C disappear entirely.
Everything is connected. Everything is in motion
all the time. So he thought those static models
were not just simplistic but actively misleading?
Yes. They give a false sense of precision and
control. He wanted a theory that was dynamic,
that captured the chaos in the evolution. He
wanted a video of the economy, not a single posed
snapshot. Because the moment you freeze all the
other variables to make your math easy, your
conclusion becomes irrelevant to the real world.
Okay, so let's try to pull this all together.
We've covered the flamboyant man. The idea of
creative destruction, the symphony of waves,
the prophesied doom of capitalism and his cynical
view of democracy. What is his legacy today?
Because as we said at the start, after decades
of being in the shadow, he's kind of a rock star
in economics now. His influence is absolutely
everywhere. For a long time, he was totally overshadowed
by Keynes. Keynes gave governments a practical
toolkit to fix the economy, which, of course,
politicians loved. Schumpeter basically told
them, you can't fix it. The fire is necessary,
which politicians absolutely hated. Not a great
campaign slogan. No. But as we moved out of the
industrial age and into the information age,
with its rapid technological churn, Schumpeter's
theories suddenly felt incredibly relevant again.
You mentioned the Nobel Prize earlier. Yes. The
2025 Nobel Prize in Economics was awarded to
Philip Aguillon and Peter Howitt. Their entire
body of work is what's called Schumpeterian growth
theory. They essentially took Schumpeter's core
idea of creative discussion and finally built
the rigorous mathematical models that Schumpeter
himself always wanted to build but didn't quite
have the tools for. They brought him right back
to the absolute center of modern economic theory.
And it's not just in the ivory tower. It affects
real world policy. For sure. The World Bank,
for many years, published a very influential
doing business report, which ranked every country
on how easy it is to start a new business, enforce
a contract, and crucially, how easy it is for
a failed business to go through bankruptcy. So
clearing away the dead trees. That's pure Schumpeterian
thinking. The idea is that the government's job
isn't to pick winners, but to remove the barriers
and impediments to the process of creative destruction.
Let the new firms rise and the old ones fall
as quickly and painlessly as possible. The European
Union's Lisbon strategy for innovation had his
fingerprints all over it, too. And then, of course,
there's the entire culture of Silicon Valley.
Oh, Silicon Valley is basically a temple built
in his honor. The whole gospel of disruption
that is 100 percent Schumpeter. Every time you
hear a startup founder on stage talking about
eating the incumbent's lunch or moving fast and
breaking things, they are channeling the ghost
of Joseph Schumpeter. whether they know his name
or not. So if we had to synthesize this all down,
we have this incredible character who failed
at the practice of capitalism, but understood
its soul maybe better than anyone. What are the
big essential takeaways for you, the listener?
If you're at that dinner party and someone drops
his name, what are the core ideas you need to
have? I think you can boil it down to three main
points. First, innovation is not a smooth, gentle
process. It is inherently destructive. You cannot
have progress without pain. The candle maker
must go out of business for the light bulb to
illuminate the world. We have to accept the destruction
to get the creation. Okay, number two. Second,
the entrepreneur is the engine of the whole system.
Whether that's the wild spirit in the garage
or the highly paid R &D team at a massive corporation,
it is the constant introduction of new ideas,
new ways of doing things that drives our standard
of living forward. It's not just about competing
on price. It's about making the old way of life
obsolete. And the third and final takeaway. Third,
and this is the dark one. Capitalism is fragile,
not because it's weak or because it fails, but
because it's so successful that it creates a
culture and a social structure that might eventually
choose to dismantle it. It builds the comfortable
cage of bureaucracy that suffocates the very
entrepreneurial spirit that built the cage in
the first place. That brings me right to my final
thought for everyone listening. Schumpeter made
this prediction almost a century ago that the
intellectual class and the bureaucratization
of business would undermine the very foundations
of the system. I mean, look around today. We
see massive corporate consolidation. We see a
political and cultural climate that is often
deeply hostile to the disruption and inequality
that capitalism creates. You could argue that
in many sectors, compliance has become a bigger
and more profitable industry than invention.
It really does raise the fascinating and slightly
terrifying question. Are we living through the
slow, quiet transition that Schumpeter predicted?
Are we drifting toward that laborist, bureaucratized,
managed state where the fire of creative destruction
has finally been put out for good? Or is there
a new Kondratiev wave coming? Will a new swarm
of wild spirits, maybe in artificial intelligence,
maybe in biotechnology, maybe in space exploration,
maybe in something we don't even have a word
for yet, come along and prove his gloomy forecast
wrong and reset the whole chaotic, violent, and
brilliant cycle one more time? That's the beauty
and the terror of creative destruction. You never
see the tidal wave that's coming to destroy the
status quo until it's already towering over you.
And on that note, keep your eyes on the horizon.
Thanks for listening to The Deep Dive.