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The Problem of Poverty and Joseph A. Schumpeter’s Predictions

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Joseph Alois Schumpeter (1893-1950) was an economic philosopher of Austrian origin whose work integrated theoretical economics, history, and sociology, a background and approach that Donald McCloskey (1983) valued in the belief that economists, “argue on wider ground, and should” (p.482). As Schumpeter would agree, the study of economics can involve much rhetoric and debate but needs a broad approach in the hope of securing helpful predictions.

Like many German and Austrian intellectuals of his generation, Schumpeter resettled in the United States as Adolf Hitler came to power, and eventually taught at Harvard where his ideas on macroeconomic theory and society were not always popular. The 1940s were a time of much interest in John Maynard Keynes and the prospect of a Welfare State that did ensue in most developed countries from the 1950s. In the early 21st century, there has been new interest in what Schumpeter explained of the failings of Marxism and also, capitalism’s built-in defects. In fact, Schumpeter may have predicted the kind of poverty now seen in North America or Europe. Were he able to see the countries in question as they are now, he might have firm ideas on what must happen to address the nature of the poverty at hand. The mistakes would seem obvious, and a way of retaining passé ideas that perhaps do not suit what is at hand.

Growth & Poverty

An article by Erik Reinert (1994) explained how German economists over time viewed economic growth as an uneven process (Reinert, 1994, p.79). The English-speaking world has tended to see growth as steady, smooth and forwards under the right conditions. It is the latter understanding of growth that has prevailed towards what may be high-risk faith in high growth rates. Reversals such as periods of recession are seen as calamities and not as quite possible intervals of strain for which planners should be prepared, aware of the effect upon weaker sections of society.

Joseph Schumpeter was alert to the destructive forces of capitalism including those within that could create capitalism’s demise (Reinart, 1994, p. 139). The matter of capitalism’s decline had long interested German-speaking intellectuals in and beyond the followers of Marx & Engels. A particular difference on the part of Schumpeter involves his emphasis on entrepreneurship that he believed as essential to capitalism and growth. David A. Reisman (2004) summarized Schumpeter’s concept of poverty as a symptom of failed economic growth (Reisman, 2004, p.202).

In 1942, Schumpeter (2006) wrote that “economic growth, given time, will eliminate anything that could possibly be described as suffering or want” (Shumpeter, 2006, p. 38). What he meant, of course, was the presence of an entrepreneurial spirit as a necessary ‘good’ of capitalism. Important questions where there is great poverty, in Schumpeter’s view, pertain to how to promote creativity and entrepreneurship, aware that promoting constructive new growth is an anti-poverty policy. Of course, in some countries, entrepreneurs are not a driving economic force and inaction may be common. For example, where landholding or investment incomes form the basis of wealth and security, it is not likely that new business ventures or other creativity will be seen. Small or perhaps very large capital is idle, the mental orientation of people rather idle, too. Few will embark upon setting up small businesses to employ persons, or seek to do something about the worst results of poverty. Similarly, if Joseph Schumpeter were to visit a Canadian middle or upper middle class area in early 21st century Canada, he would notice a quite high standard of living with low evidence of new entrepreneurial activity. Persons one would hope to generate new economic activities and new employment for the poor, Schumpeter would see as a shrinking class beset by high taxation, yes – and a culture of high consumption of what had no future value, much disposable income spent on quite frivolous non-necessities.

Another interesting feature of Schumpeter’s thinking was his opposition in top-down economic planning or policy that was too narrow. For instance, he opposed utilitarian ideas of the greatest good for the greatest number, in his awareness of weaker groups to which one must look, and again, trying to inspire sectors able to engage in new economic activities that would come to benefit the poor (Moss, 2013, p. 44f). In a sense, Schumpeter saw innovation, perhaps more than growth, as the antidote to poverty.

Creative entrepreneurs can create the spirit of industrial or other progress. A problem lay in how growth could be stimulated and continued, an idea of obvious appeal to persons favouring neo-liberal economic models, implying notions of growth bringing a ‘trickle down’ effect of benefit to the poorer classes. Again, what is interesting in Schumpeter’s approach to capitalism and growth is his awareness of something other than ‘onwards and upwards’ expansion because the business cycle shall always have periods of recession, as well as a natural falling away of what has become obsolete en route to further capitalist development. The history of capitalism for Schumpeter seems to have had much to do with patterns of eventual slowdowns, removal, and recovery by promoting what is new and needed.

An idea of ‘creative destruction’ attributed to Schumpeter seems to have been usual among German intellectuals in a concept of schopferische Zerstorung that is sometimes discussed as ‘Schumpeter’s Gale’. One set of economic enterprises would naturally give way to another, according to Schumpeter, and on this process capitalism rather depended. A clear example is found in different shifts in the developed world that have owed to technological change. In western countries, for example, the cycle of steam power, gave way to electrification and in the later 20th century, much became obsolete with the economic effects of computerization. Of course, this change pertained to social and political changes, too, in the speed with which business or administration could be achieved, rapid information access and exchange, and different ideas of the possible. Businesses and social groups unable to make use of the new era have been rather left behind. Worse, little has been done by governments in developed countries to stimulate left-out classes other than a social welfare ‘solution’ that can keep millions of persons with no opportunity to improve their fortunes or use time creatively.

In contrast with current American neo-liberal thinking, Schumpeter’s view of society involved something other than a collection of individuals, in a group phenomenon. All members of a society can be understood as sharing the results of capitalist activity, for good or ill, as economic life is part of the public sphere and not the private; diverse citizens and institutions share specific economic experiences. Schumpeter presents the same organic view of a capitalist society whose classes do not necessarily struggle or resent one another as found in the theory of Karl Marx. His work reminds the reader that revolutions are rather rare and that citizens in a society undergo shared periods of downturn or abject recession differently, but in the same awareness of non-growth and slump. Schumpeter may have predicted social and economic phenomena that were seen in Europe later in the 20th century.

For instance, capitalism came to be challenged by the ‘intellectual class’ during periods of unemployment with criticism of free markets, private property and other basic features of capitalism. Critics of the kind were not the revolutionaries predicted by Karl Marx and their campaign against the institutions of capitalism, of course, subsides when unemployment is low or poverty subsides. Schumpeter seems to have expected the adjustments made by Sweden and other social democracies. Perhaps these experiments, in their features of both capitalism and socialism, have shown Schumpeter’s concept of ‘creative destruction’ in new approaches with the decline of the old. In Capitalism, Socialism & Democracy, Schumpeter (2006) referred to cooperative ventures within capitalist systems by which goods and services would attend to basic needs (Shumpeter, 2006, p. 200), as would make a contribution to removing the worst poverty. A cohesive capitalism, whatever its social gaps, would see to the basics of life in contrast with under- developed countries whose economies cannot produce basic goods and services, or the inefficiency of state socialist economies taking form after Schumpeter’s death that often did not provide these either. Again, Joseph Schumpeter would have definite opinions on the kind of poverty in ‘post industrial’ economies in North America or Europe.

As the ‘Fordist’ economy subsided – and as Schumpeter would argue, as all capitalist phenomena do – new enterprises and policies needed to include a sense of the greater society. For example, the shift to what is known as consumerism needed to bear in mind the imperative of a large class able to consume. There does not seem to have been preparation for the inevitable end of the Fordist model. In fact, little thought seems to have been given to questions of mass unemployment, few available jobs of comparable kinds, and what this would mean. Neo-liberalism in the U.S. and ideas of consumerism of the last twenty years promised another ‘disaster’. A large class of working poor, and downright impoverished persons, is unable to consume given very low disposable income and thus, low purchasing power (Schumpeter, 1994, p. 82-83). The middle classes seem strapped by taxation and high economic uncertainty, and are not dependable consumers either, as much as the system depends on high consumption of goods and services. Current ‘postmodern’ poverty is a definite problem in millions of persons in developed countries that are unable to earn due to lost basic employment. Poverty is a kind of anchor pulled by developed countries so that whole groups are subsidized by the last of the welfare state, and whose situation as an ‘under class’ is more or less permanent.

Were Schumpeter to examine poverty in the Canadian city of Toronto, he might argue that clearly the economy was not organized properly, its capitalist institutions ‘building in’ a large sector or culture of poverty. This should be lowered in its effects by stimulated growth in a number of sectors. He would see how capitalist growth realized in Toronto had no benefit to a large poor sector whose costs were borne by the taxpayer. Schumpeter would spot many things owing to capitalism that even promised the collapse of capitalism from within.

In 2014, more than sixty years after Schumpeter’s death, one find a noisy intellectual class of critics that often refer to poverty but whose members provide few potential solutions. The usual clarion call involves more public sector expenditure, i.e. taxation-derived funds, for the support of a tier that is a non-participant in the greater capitalist society. Without opportunities to earn or to spend beyond basic necessities, the growth of this sector would seem a clear liability to Schumpeter and a sector for which something must be done. He would demand to be taken to a local bank to see lending opportunities, state or charitable incentives to encourage thinking on small entrepreneurial activities, and would remind Canada Revenue Agency policy makers that taxation disturbs the better features of laissez faire economics. He might further ask why a civil servant is entitled to a salary with benefits three or more times the remuneration of similar private sector employees. Theoretically, high incomes are spent locally and improve area economies except there is no small fee for what can be high amounts spent beyond Canada on such unproductive activities as regular holidays in warm climates.

Concluding Reflection

The problem of poverty is a timeless one, and is not solved by mere capitalist success. For Joseph Schumpeter, poverty was a sign of things being amiss in his belief that growth took up labour, ensured basic buying power and could generate new business activity. He might wonder about postmodern ideas of economics and science permitting neo-liberal business models to continue even when a sector of joblessness is built into the economy. There can seem high acceptance of this ‘unavoidable’ sector – involving entire life courses or whole parts of generations. As a scholar not confined to one discipline, Joseph Schumpeter might ask what the psychological and social effects of the situation were, and what should be done, immediately, to correct an obvious imbalance of serious results.

In sum, a modern reader of Joseph Schumpeter will find some ideas quite inspiring, in his attention to poverty as a symptom or marker, and in his realistic ideas of capitalism and its history. Uneven growth, reversals, ‘hard patches’ and change were usual to Schumpeter, as parts of capitalism of which governments and planners must be aware. One finds a capitalist approach that does not forget the problem of poverty, a person not likely to accept mere ‘trickle down’ rationales that have proven faulty. There must be dynamic activity to ensure recoveries and new chapters of capitalism that shall always feature some reversals, slumps, or other low periods.

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References

McCloskey, D. N. (1983). The Rhetoric of Economics. Journal of Economic Literature,

21, 481-517.

Moss, L.S. (2013). Joseph A. Schumpeter – Historian of Economic Perspectives on the

History of Economic Thought. New York: Routledge.

Reinert, E. (1994). Symptoms and causes of poverty – underdevelopment in a

Schumpeterian system. Journal for Development Studies, 1-2, 73-109.

Reisman, D. A. (2004). Schumpeter’s Market – Enterprise & Education. New York: Edward

Edgar Press.

Schumpeter, J. A. (1994). Capitalism, Socialism & Democracy. New York &

London: Routledge.

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