Dead Economists, the Auto Industry, and Entrepreneurship





Creative destruction of auto industryYou can’t read a magazine or newspaper or go online these days without reading an article about whether we should or shouldn’t bail out the auto industry. 

There are a lot of arguments for a bail out and a lot of arguments against it.  I don’t think I can provide anything new on the debate so I’m not going to weigh in with my opinion on what we should do.  Instead, I want to use this discussion to point out that we seem not to be talking very much about our belief in entrepreneurial capitalism when we talk about the auto industry today.

The evidence for my opinion on this point comes from two dead economists: John Maynard Keynes and Joseph Schumpeter.   

Keynes was the intellectual leader behind interventionist economic policy.  In particular, he advocated the use of fiscal stimulus — government spending — to get an economy out of a recession. 

Schumpeter was the intellectual leader behind the study of entrepreneurship. In particular, he coined the expression “creative destruction” to explain the rise of new companies to replace old ones in response to changes in technology, the economy, and other forces that affect industries.

My very unscientific evidence for the idea that we are not talking enough about entrepreneurial capitalism and creative destruction in the discussion of the auto industry right now comes from a Google search.  I took a look at the number of pages that came up if I searched for “John Maynard Keynes” and “Joseph Schumpeter.” The search brought up 996,000 pages for Keynes and 281,000 pages for Schumpeter, a ratio of 3.5:1 between the dead economists.

Then I did a search on “Schumpeter” and “auto industry” over the past month and compared it to “Keynes” and “auto industry” over the same period.  I got 8,020 hits for Keynes and 589 hits for Schumpeter, a ratio of 13.6:1.  This very unscientific analysis suggests that in the past month in discussions of the auto industry, reference to Schumpeter has been far less than the ratio of the reference to him and Keynes over all would suggest it should be. 

In simpler terms, people aren’t talking very much about Schumpeter’s concept of creative destruction when discussing the problems of the auto industry.  Instead, they are talking a lot about Keynes concept of fiscal stimulus.

Does this mean that we are shifting away from a philosophy of entrepreneurial capitalism and a belief in creative destruction as a fundamental force behind our economy?  Does it mean that we believe in entrepreneurial capitalism except when confronted with the destruction part of creative destruction? (Or does it mean I have too much time on my hands to play around on Google?)

I’m interested in hearing your thoughts.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

9 Reactions

  1. Scott,

    This is a very interesting observation but I feel has more to do with the sheer popularity of Keynes as a historical figure rather than the increase in popularity of one economists’ theory over the other. I hold a degree in Economics so naturally these are two figures I am familiar with but if you look at it from a sheer typical American understanding of economics, Keynes is a much more popular and influential figure. His philosophies are tied with some of the most popular historical moments and trends in American history including the great depression which has great parallels to today’s economic crisis.

    This is not to say that Schumpeter is a forgotten foe but the fact that Keynes is discussed and written about more than Schumpeter, even outside of this context.

    I certainly do hope this is not a trend as I fear the loss of Entrepreneurial Capitalism that has fueled the vast growth of innovation and prosperity in our economy. My hope is that we can use this opportunity to instill the importance of competition and creative destruction into American auto manufacturers to better prepare them for the future. With that said, I do not believe this can occur without some sort of short term stimulus, even if I whole heartedly disagree with an auto bailout in principle.

  2. Anita Campbell

    Here’s my thought about automakers: we are already seeing creative destruction taking place. You have only to compare the market capitalization of a company like Google ($97 Billion as of today) with that of GM ($2.3 Billion as of today), to see that the auto industry is no longer the big dog in the United States.

    Creative desctruction is a process that normally takes years, and doesn’t happen in one fell swoop. I look at what is happening in the economy right now as something artificially created, not the natural decline of an industry being replaced by new entrepreneurial approaches.

    But, maybe that’s just me and how I feel …

  3. Martin Lindeskog

    Scott,

    I agree with Nick and think it is due to Keynes “popularity”, especially by college professors and journalists. The average joe doesn’t know much about Keynes, but he has indirectly got influenced by the ideas by reading newspapers and watching TV.

    The positive sign is that my favorite author and philosopher, Ayn Rand, is winning against John Maynard Keynes at GoogleFight.net. 2,440,000 results versus 1,170,000 results. If you add the term “auto industry” the Ayn Rand gets 44,500 results and John Maynard Keynes get 27,400 results.

    In today’s financial crisis, I am pessimistic journalistic speaking, but optimistic in a philosophical way. I think that this situation will lead to that people will search for better ideas. One first sign will be that the sales of the book, Capitalism: The Unknown Ideal, will increase! 🙂

  4. Hi Scott,

    How does a creative destruction takes place?

  5. Steve King

    Rob Atkinson, president of the Information Technology and Innovation Foundation (www.itif.org), talks about “Schumpeterian Keynesianism.” This is ITIF’s view that we should make sure our Keynesian stimulus efforts spur productivity and promotes innovation and growth.

    I really like the term and approach. I think it bridges the short term need for economic stimulus with a longer term view that market and entrepreneurial capitalism works best.

    I also think despite more government intervention the longer term, global trend towards market and entrepreneurial capitalism still exists.

  6. The auto industry is not at the center of this economic crisis, the financial system is. I am disappointed to see the Democrats so easily distracted from the real issues.

    We’ve not yet found the economist who can tell us what to do with an global economy awash in too large a money supply and too little regulatory structure — and a global economy where risk cannot be properly calculated so financial institutions hoard cash rather than make loans. Paulson is trying, but he’s politically tone deaf and missed a chance to put some teeth into the bailout money, so banks are just parking their bailout dollars in T-bills rather than making loans.

    Schumpter v. Keynes should be a “both-and”. The economy can’t restart with a shut-down financial system and shut down consumer demand, so something has to get things going again ala Keynes. But it has to be targeted so that it energizes capitalism, not substitutes for it. And we need to allow inflated assets to deflate to demand level, which means each of our houses, lest this turn into a long-term recession ala Japan.

    Maybe Larry Summers will emerge as the thinker and doer who can put it all together in an effective strategy.

    Nonetheless, we need to realize that we are staring down some pretty dark possibilities if this truly becomes a Depression, such as social unrest including riots, national security risks from attacks on our economic infrastructure, crime, even war, etc. So paying attention to political as well as economic issues is paramount.

    The bailout is paying attention to the wrong economic issues because the UAW has political clout in the Democratic party that outweighs the industry’s economic importance. And with all of government in the hands of the Dems….watch for more such distractions.

    At a less macro level, I see no small business expert on Sen. Obama’s economic team, nor any category for small business through which to submit policy recommendations on the transition website. It’s all lumped together as “business”, which suggests a lack of insight into how small business can play a role in our economic recovery.

    We are part of the solution, which I think will come from those businesses whose daily operations are less dependent on credit, and from individuals finding opportunities. Jobs will be much harder to come by.

    There is a lot to think about these days…I hope we also manage to turn to family and bigger things than money and business over the holidays. These are the things that will sustain us.

  7. Interesting post. I agree with some of the people who are pointing to the popularity of Keynes. I would add that I think that Keynes is a god in Washington. Of course bureaucrats love Keynesian economics because it can be used to justify intervention. Government bureaucrats want to be the people that solve the big issues whether it should be within their realm or not so Keynesian economic fits in perfectly.

    Also, remember that capitalism is very efficient but it is not pretty and nice. It is truly survival of the fittest and that is not popular in our PC society. So again Keynes theory better fits the mold.

    My personal opinion is that the time has come for the dinosaurs to die away. It’s going to happen one way or another and the government intervention will merely put them on life support. The industry has changed and the foreign automakers are taking over because of superior business models. Capitalism works as long as we allow it to and are willing to accept the consequences. Keynes had a view that we could manipulate the consequences through intervention.

    Anyway, I think that Keynes’s theories best fit the bureaucrats and the PC public’s view of how things should work. So, he will be the expert that everyone quotes.

    Good article.

  8. May I venture to say that one of the reasons why Schumpeter was never as popular as Keynes may have been that they came from very different worlds and cultures – Schumpeter was not an Anglo-saxon and may have been somewhat awkward at selling himself well enough to be become fashionable. Definitely, the concept of “Unternehmergeist” (entrepreneur spirit) would have probably picked up much better in an Internet economy than at the time. Thank you, Scott, for reminding people of such a great mind.

    As I was reading your piece, I was wondering if anybody made a simulation of what would happen if some of the billions that the auto industry will receive were given to entrepreneurs… willing to build cars that people want to buy.

    (Incidentally, I wrote a post yesterday that has something to do with the “Unternehmergeist,” in Michigan, but in biotech: When entrepreneurs fight back! Conversation with Roger Newton, co-discoverer of Lipitor, and President/CEO of Esperion Therapeutics, Inc.)

  9. If we had poured money into the wire telecommunications companies when they were floundering we would have killed off the wireless industry. Marlene make a very good point about what might happen if we poured the billions into companies who would produce relevant products. There was an age of dinosaurs and they were killed off because the ecosystem needed to readjust.

    Let these new dinosaurs die in peace.

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