Prophet of Innovation

Prophet of Innovation is a biography of Joseph Schumpeter by Thomas McGraw.

In the chapter on this economist’s most famous work, Capitalism, Socialism and Democracy, the author notes Schumpeter’s psychological insight into the reasons why Marx had become so fashionable in the 1930s.

People embraced his “message of the terrestrial paradise of socialism” not only because it seemed such an improvement on current conditions but also because it addressed “that feeling of being thwarted and ill treated which is the auto-therapeutic attitude of the unsuccessful many.”

Schumpeter’s insight is elegantly worded but not new: it is another way of saying that a great many people blame their failure to achieve success (and to reap the economic benefits derived from it) on "The System" or on others rather than on themselves, as a way of avoiding to face the painful truth, which is their own inadequacy.

What is interesting is that Schumpeter uses this psychological truth to explain the popular appeal of Marx’s message.

Capitalism and the free market reward energy, focus, entrepreneurship, risk-taking and creativity, qualities that are found only in a small minority of individuals. It results in great inequalities of income, and in the frustrated ambitions of the many who entered the race without the personality, character and other attributes required to win it.

Socialism, which makes the utopian promise to take from every individual according to his abilities and to give to every individual according to his needs, has a great deal of appeal, because it implies that needs will be fulfilled even for those people whose abilities and exertions are insufficient to satisfy their needs on their own.

But the satisfaction of personal needs by the State has unfortunate consequences: a constant expansion of those needs, which become rights, and a loss of the personal sense of responsibility to provide for oneself (why should I work harder, since the State will provide for me?). The net result is a reduction in the total wealth of a nation, for sharing wealth through taxes on “the rich” (or the not so rich, for, as needs expand, it becomes insufficient to tax just the rich) does not create wealth, it just redistributes it, and it reduces incentives for further investment and risk-taking, which do create wealth.

It also results, in the worst case, in a totalitarian political system and, in the milder case of social democracy, in a loss of individual freedom, for, in order to give to some, the State has to take from others, and, as the scope of the government's activities and responsibilities constantly expands, it regulates in increasing detail the lives of the governed.