Friday, May 06, 2011

Unemployment and Creative Destruction

I am reading Schumpeter's Can Capitalism Survive?, and in it he says, "I do not think that unemployment is among those evils which, like poverty, capitalist evolution could ever eliminate of itself" (17). But, as he points out, neither does unemployment really increase over the long run, even if it can be high for long periods due to various interventions (17-20). He also points out that, while this is true, it is also true that under capitalism, within capitalist countries, poverty has been effectively eliminated (even more so now than when he was writing, around 1942), as each round of creative destruction improves peoples' material conditions. He also points out that efforts to reduce unemployment can in fact have the effect of increasing poverty. This is because it stagnates the process of creative destruction, which is the engine of capitalism for Schumpeter.

I certainly have little doubt, considering what Schumpeter says about the nature of creative destruction, that he would oppose bailouts, deficit spending, etc. during a recession, as these things only bolster already-existing firms that need to be swept away. He argues that unemployment would be expected to rise during a recession, because those people being laid off are being laid off from companies that need to go away, to make room for the new companies on the rise. Schumpeter's macroeconomics is thus about as anti-Keynesian as one could imagine. Not surprisingly, it is also much more accurate to economic reality.
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