Book Review: Can Capitalism Survive?

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Schumpeter, Joseph A. Can capitalism survive? : creative destruction and the future of the global economy. Harper Perennial, 2009.

A role of economists is to provide economic analysis of recessions such as the current one created by the financial crisis and provide strategies for restoring economic growth and prosperity.

Leading up to the current recession, The Federal Reserve lowered interest rates to make housing more affordable, and Fannie Mae and Freddie Mac developed a federal program enabling people to qualify for homes that ordinarily would not.

Subsequently, people purchased homes they could not afford and some lost their jobs due to the recession. Wall Street banks invested too heavily in risky loans rather than diversifying, accumulating toxic assets leading to tremendous losses.

Hayek goes as far to say that central banking destabilizes the economy. In the recent recession, government intervention led to inflation, over building, a housing bubble, and then economic indicators became unrealistic.

In addition to the destabilized housing market, the financial crisis had a ripple effect on travel, retail, the automobile and oil industries, and led to significant number of lost jobs.

Can Capitalism Survive? is excerpted from Joseph Schumpeter’s 1942 classic Capitalism, Socialism, and Democracy. This is where he proposed business cycles are caused by technological innovation, referred to as creative destruction. In Capitalist economies, markets eliminate obsolete technologies and utilize innovations to create new avenues for economic growth.

Technology can incrementally overhaul industries, for example, the news industry changing from print to web or the music industry evolving from records, eight tracks, cassettes, and CDs to iPods. The transition can also involve a radial transformation. At the turn of the twentieth century, the transportation industry employed hundreds of thousands of carriage makers and blacksmiths.

Subsequently, automobiles replaced horses and now the automobile industry is transitioning to electric cars and biofuels. During technology transitions, some individuals are worse off due to layoffs and bankruptcies.

In the free market model where economic disruptions are created by technological change, economic indicators are not necessarily predictive of how the economy is performing, rather just points in the business cycle. In this scenario, government intervention is not necessary since markets are self correcting.

Businesses that do not adapt successful business practices or employ creative people will not survive. In contrast, dominant companies such as Wal-Mart which revolutionized retailing with computerized inventory management and Microsoft which revolutionized computer software are so successful at adapting to the business environment, they can stifle innovation.

Guest reviewer Randy Mayes is a Duke Alumni, author, science writer and science policy analyst, and a Fellow at the Institute for Ethics and Emerging Technologies.

© Reviewer: Randall Mayes & Ford Library – Fuqua School of Business.
All rights reserved.

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