Creative Destruction

The future of capitalism is in danger if it is not based on values. Otherwise, for the sake of stability, people will demand various forms of socialism.

Creative destruction—or “creation by destruction”—is a phenomenon linked with capitalism; it denotes its revolutionary character. It tends to be used in three main notions.

The first such notion is established and popularized by an Austrian-American economist Joseph Schumpeter in his opus Capitalism, Socialism and Democracy (1942).

What he meant by it was the dynamic character of capitalism, where all of a sudden obsolete goods and services are replaced by new ones. This also means that industry processes, companies, jobs, and modes of transportation no longer up to date are being confined to history while new ones are constantly being born. In this way, capitalism revolutionizes the economy from the inside. Old structures are being constantly removed as they make place for new ones. Thus, society as a whole is being constantly renewed.

Schumpeter was a proponent of capitalism; he considered it a better alternative and superior to socialism. Nevertheless, he was in agreement with Karl Marx regarding the future of capitalism; he too came to conclusion that due to its inherent contradiction its demise is inevitable and the ascent of socialism is imminent. Although he did not welcome such development, he prophesied it.

Marx’s line of thinking was: the inherent contradiction of capitalism that will have brought about its downfall is the tendency to concentrate wealth into the hands of the few, widening material gap between them and the increasingly dispossessed majority. According to Marx, capitalism will be its own undertaker.

According to Schumpeter, capitalism will generate more wealth than any other alternative system, including socialism, and its “innate contradiction” will be paradoxically the ability to create wealth. Intelligentsia will have had guaranteed a comfortable lifestyle but it shall despise capitalism (due to the feeling of being under-appreciated) and thus it will do its utmost to discredit it in the public eye and to change it towards socialism via corporatism. It will succeed because people, longing for stable lives, resent capitalism’s rapid creative destruction.

Thus not an economic inefficiency of capitalism shall be the cause of its downfall, but, according to Schumpeter, the far too great capability to create wealth.

And this might be the second possible meaning of the notion of “creative destruction:” that capitalism’s main feature will be the one responsible for its downfall.

The third interpretation of the term “creative destruction” was coined by an American neo-conservative publicist Michael Ledeen in his book The War against the Terror Masters, from 2002, in which he interprets the cause of Islamist terror attacks against the West, in general, and specifically, against the USA. This is what he has to say about the next course of action:

“Creative destruction is our middle name, both within our own society and abroad. We tear down the old order every day, from business to science, literature, art, architecture, and cinema to politics and the law. Our enemies have always hated this whirlwind of energy and creativity, which menaces their traditions (whatever they may be) and shames them for their inability to keep pace. Seeing America undo traditional societies, they fear us, for they do not wish to be undone. They cannot feel secure so long as we are there, for our very existence—our existence, not our politics—threatens their legitimacy. They must attack us in order to survive, just as we must destroy them to advance our historic mission.“

If I understand him correctly, Ledeen’s position is that the very existence of liberal political and economic order poses threat to traditional societies, other civilizations, because it destroys them; the only possible mode of coexistence is that of war, until the liberal political and economic system globally prevails. Capitalism, or liberal democracy, is a threat for traditional values, and in the end it destroys them.

I also need to mention another American neoconservative author, “the Godfather of neo-conservatism” Irving Kristol, who put forward a theory fundamentally different from Ledeen: for capitalism’s (and liberal democracy’s) long-term survival it is necessary to cling to traditional values (for the West those are Judeo-Christian). Without them the capitalism is doomed.

Let us examine these three notions (four with Kristol’s).

Yes, capitalism is an incredibly dynamic, revolutionary system in which the above-mentioned Schumpeter’s creative destruction takes place. It rapidly changes the economy and society; just take a look at the construction industry. Many people have a problem with it. The same goes for foreign competition or multinational chains. People, who are in general split between a want of change and development, and that of peace and stability, do have a negative reaction to this sort of change. English conservative thinker Roger Scruton deems capitalism to be of more revolutionary nature than communism and that is why he would think it prudent to impose certain limitations; mainly in prohibiting multinational food chains and setting barriers to unlimited free trade. He is a prominent locavore; that is except for the French wine. But France is, of course, his adoptive spiritual motherland. Not in religious sense, but in inspiration, which he gets to draw when indulging in the wines of France. (I Drink Therefore I Am: A Philosopher’s Guide to Wine, 2009.)

Schumpeter was also right in a sense that capitalism is an amazingly efficient wealth-creating system, which in mid-term to long-term perspectives manages to increase living standards of all, including the poor. In this aspect capitalism (defined as a system of private ownership and free market) empirically defeated socialism (defined as a system of state ownership and controlled economy). Socialists used to blame capitalism for its purported inability to lift people from poverty and pushed for socialism in its stead. The fact that socialists’ accusations have shifted towards alleged surplus of wealth creation that morally corrupts people and promotes spiritually empty lives is an evidence of one fact: when it comes to wealth creation and lifting people from poverty, socialism is defeated.

The original, populist position of “Capitalism, you do too little for the poor,” has morphed into snobbish, elitist “Capitalism, you saturate low desires of vulgar plebs, and you promote consumerist lifestyle…”

Only few people have noticed this small, subtle shift in the Leftists’ argument against capitalism.

When it comes to the final part of Schumpeter’s prediction—capitalism causes its own downfall—he was only partly right. He was not mistaken in the fact that the majority of intellectuals are against capitalism, which nevertheless provides them with prosperity and comfortable lifestyles (Paul Krugman, George Soros, Joseph Stiglitz, etc.). But it has not lead to capitalism’s downfall and its replacement by socialism. Mainly due to two reasons.

First, the ghastly experience with socialism in the former Eastern bloc. Second, innovations and technologies; an amazing ability of capitalism to produce them. Who would, in his right mind, completely reject a system which brings you cell phone networks, email communication and Internet?

So that part of Schumpeter’s pessimistic prediction has not come true; capitalism is still alive, though looked down upon by a whole “class” of intellectuals.

And their criticism of capitalism has some truth in it, though not all of it. Capitalism does not force people to lead spiritually empty, consumerist lives, only enables such lives.

Capitalism does not provide—and is not equipped to do so—people with the meaning of life. Neither does democracy.

And that leads us to Kristol’s thesis expressed in his essay “The Cultural Revolution and the Capitalist Future” published in 1992 at The American Enterprise Institute.

His position was: just as old Christian fathers did not refuse the Jewish Bible (the Old Testament), but added new, Christian part (the New Testament), so the fathers of liberal, political, and economic order in the second half of the 18th century, Anglo-Scottish Enlightenment political scientists, such as Adam Smith, did not refuse the Judeo-Christian moral and religious tradition, but merely added their own liberal, Enlightenment views in politics and economics.

And it did work. However, they did not realize how much the Judeo-Christian ethics depend on Judeo-Christian religion.

Capitalism needs bourgeois ethics, stressing values such as diligence, self-reliance, and postponement of indulgence. Judeo-Christian religion helped to propagate these values.

The problem lies in contemporary Western “culture”—more anti-upturn, to be correct— which refuses bourgeois virtues, along with Judeo-Christian religion. And thus capitalism is still in danger; threatened more by Western “culture” or feminism, than by socialism or unions.

I tend to agree with Kristol that society without bourgeois virtues of diligence, self-reliance, and independence leads to ethos: “State, take care of me,” in other words, to the return of socialism through the back door.

But it can be formulated like this: people need stability in their lives, they need to be anchored. Somewhere.

If the political and economic system is liberal, i.e. turbulent, and they are not anchored in a moral system, people will crumble; creative destruction of capitalism will grind them.

Or, in other words, orthodox believers, whose source of values and life’s goals are not of this world (of capitalism and democracy), are able to withstand the “creative destruction” of capitalism and their lives remain intact.

When it comes to the famous thesis of Max Weber about protestant roots of capitalism and the following discussions on whether he was right, whether the beginnings of capitalism are in Calvinist Geneva, Netherland, Britain, North America, or if the origins can be traced to Catholic merchant cities such as Florence, Venice, Bruges, or Antwerp, I was mostly surprised that no one had mentioned the most capitalist oriented community in the Western societies—Orthodox Jews?

We might say that any orthodox community can also be capitalist community: the Protestant US, the postwar Catholic German South, and West and Italian North, as well as Orthodox Jews, or entrepreneurial Chinese all over the world professing Confucian values.

If people are anchored by their values, “creative destruction” will not upset their lives and capitalism can work. And people need some stability in their lives.

Society has three main inner systems: political, economic, and moral. Each and every one of them can be either static or dynamic. At least one of them must be static if people are to psychologically manage.

Static political system, i.e. authoritarian regime refusing liberal democracy, such as in today’s Russia, is not a good idea for Western society. We want to have a political system that is liberal and democratic, in other words dynamic and turbulent.

What is left are economy and values. And here we have two choices: if we want a capitalist economy, i.e. dynamic and turbulent, then life’s anchor ought to be in the moral order. If people desire to have moral order of liberal and permissive nature, than they will come to expect stability from the economy. There, they will want peace and quiet, a form of state paternalism, in other words a form of socialism.

It pretty much follows the division between the political Right and Left in a democratic society.

It is then apparent that Ledeen’s thesis of mutual incompatibility between a liberal political and economic order on one hand and traditional values on the other does not bear closer scrutiny. He is right in one point: Islamism is incompatible with liberal society, it sees it as a threat, it attacks it—and that is why liberal society must destroy it.

But apart from Islamism, the communities and societies professing traditional values are compatible with capitalism, whether they be Evangelical, Orthodox Jews, Chinese adherents of Confucianism, or Indian Hindus and Sikhs. When we examine closer the main political parties in India and Israel, the parties more liberal in social values tend to be more socialist in the economic sense (India’s National Congress, Israeli Labor Party), whereas more socially conservative parties tend to be more liberal in their economic outlook (India’s People Party, Likud). Conservatism in moral values is not in conflict with capitalism; stability in one’s value system makes dynamism in economic realm bearable.

Irving Kristol was probably right, then. With no anchorage in moral values, capitalism finds itself in danger. In need of any form of stability in their lives, people will seek a degree of socialism instead.

Roman Joch

is the Executive Director of the Civic Institute in Prague. He is a commentator and lecturer on political philosophy, international relations, with an emphasis on US Domestic and Foreign Policies. He is the author of several monographs and expert studies including: American Foreign Policies and the Role of the US in the World (Studies OI, Prague 2000), Why Iraq? Reasons and Consequences of the Conflict (Prague 2003), and (together with Frank S. Meyer) Rebellion against the Revolution of the 20th Century (Prague 2003).

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