Fifty years ago, I added a subtitle to the manuscript of my book, published the next year, Marx’s Religion of Revolution: The Doctrine of Creative Destruction (1968). I changed that subtitle two decades later in the revised edition: Regeneration Through Chaos.
There was a doctrine of creative destruction in the 19th century. Karl Marx’s rival, the revolutionary anarchist Michael Bakunin, promoted it. He was a revolutionary. He saw worker violence against the state as productive. But Bakunin was as hostile to the free market as he was to the state. He never described how the division of labor economy could operate with neither central planning by state bureaucrats nor the market’s process to guide resource allocation. Neither did Marx, who never described his supposedly inevitable final social order, communism.
The phrase “creative destruction” was popularized by the Austrian, but not Austrian School economist, Joseph Schumpeter. He was a contemporary of Ludwig von Mises. They both studied economics at the University of Vienna. Schumpeter described the entrepreneur in capitalism as a creative force in society. There was nothing new about this insight. Austrian School economists have long described the entrepreneur in these terms, including Mises. But the heart of entrepreneurship analytically is not destruction; it is customer satisfaction.
Schumpeter added the word “destruction” to describe entrepreneurship. Wikipedia’s entry for “Creative Destruction” says:
Creative destruction (German: schöpferische Zerstörung), sometimes known as Schumpeter’s gale, is a concept in economics which since the 1950s has become most readily identified with the Austrian American economist Joseph Schumpeter who derived it from the work of Karl Marx and popularized it as a theory of economic innovation and the business cycle.
According to Schumpeter, the “gale of creative destruction” describes the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. In Marxian economic theory the concept refers more broadly to the linked processes of the accumulation and annihilation of wealth under capitalism.
Marx had it wrong. So did Bakunin. So did Schumpeter.
BUY LOW, SELL HIGH
A successful entrepreneur buys low and sells high. But how can he do this if the free market pays full value to every factor of production, something that neoclassical economists teach? For him to buy low and sell high, there would have to be mispriced resources. The answer is simple if you are an Austrian School economist. The free market’s system of competition does reveal specific mispriced resources. Entrepreneurs perform this crucial service to customers. Austrian School economists begin with this presupposition: people are not omniscient. They do not recognize every mispriced resource. There is always ignorance in the market. Austrian School economists insist that economic theory must rely on a concept of market pricing that is based on incomplete and inaccurate information.
(For the rest of my article, click the link.)