Joseph Schumpeter

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pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

Austerity was, then, in the eyes of liberals, after Keynes sacrificed on the altar of fiscal profligacy. Yet after two decades of failure, austerity’s arch defenders had little to say or show for all its virtue. Chief among those who were quieted was Joseph Schumpeter himself. Schumpeter’s Retreat Twelve years after criticizing the Roosevelt administration’s policies in The Economics of the Recovery Program, which gave Mellon’s liquidationism a theory of growth, stressed the importance of entrepreneurs, and argued for austerity, Joseph Schumpeter cut an intellectually lonely figure. By 1946, the world had gone Keynes’s way, not his. Schumpeter could, like many others, have jumped on the bandwagon, but for a true economic liberal, and a political conservative, that was never an option. He found “the stagnationist theory … as developed by the late Lord Keynes” to be “astounding” only for the fact that it has “not simply [been] laughed out of court.”110 What, then, was his response to these laughable ideas that seemed to explain the depression and what to do about it much better than his own set of austerity-inflected ideas?

After briefly detailing some nineteenth- and early twentieth-century precursors, I examine the two key austerity doctrines formed in this period: “liquidationism”—sometimes called “the Banker’s doctrine” in the United States—and the “Treasury view” in the United Kingdom. These ideas were, I argue, the original neoliberal ideas in that they drew on the classical liberalism of Locke, Hume, and Smith, and applied themselves anew to the policy issues of the day. I then discuss the responses that these ideas engendered, the most relevant of which are John Maynard Keynes’s refutation of austerity policies and Joseph Schumpeter’s strange abrogation of them.11 By 1942, it seems that the die has been cast and austerity had been sent away to the retirement home for bad economic ideas. It turned out, however, to be a premature retirement. Austerity’s Contested Present In chapter 5, we take the story forward. We begin by detailing the two places austerity found a home after Keynes’s anti-austerity arguments seemed to have won the day: Germany—the home of ordoliberalism—and Austria, not the country, but Austria as a distinct school of economics.

Specifically, they charged that once governments were allowed to intervene, they would always use the printing presses to fund their activities. Where British New Liberals began to see recessions as ameliorable through more spending, the Austrians saw in recessions the necessary pain of austerity after the interventionist “party.” In sum, while the New Liberals and their mid-twentieth-century heirs embraced the state and intervention, the Austrians, in particular, Friedrich Hayek, Ludwig von Mises, and Joseph Schumpeter, rejected these notions entirely. John Maynard Keynes once noted that the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.68 Today’s ideas about austerity are no exception to this rule.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

As Karl Marx rightly perceived, industrial capitalism has always been inherently unstable, which is the first and most palpable defect of the system. The cycle of profit, speculation, irrational exuberance, stock market panic and recession has been an endemic feature of capitalism since the industrial revolution began. Creative destruction, the process identified by the Austrian-American economist Joseph Schumpeter as the essential dynamic of capitalism, has long been troublesome for those thrown out of work as a result of increasing competition and technological innovation. It also subverts the sense of community. And today, not only is the business cycle made worse by ill-judged monetary policies and manic bankers – there have been more than 100 major banking crises worldwide in the past three decades – but globalisation and economic interdependence have caused basic manufacturing industries to evacuate wholesale from the developed to the developing world, at a high cost in lost jobs.

That said, the book undoubtedly satisfies the market test, since it remains one of the publishing world’s outstanding bestsellers.25 If there is now a more widespread acceptance that the money motive is not invariably reprehensible, there are caveats. For some, like Keynes, the motive could still be highly distasteful. In forecasting how the world might look to his generation’s grandchildren, he wrote that the love of money would ultimately be recognised as ‘a somewhat disgusting morbidity’. For others, such as Joseph Schumpeter, the economist best known for identifying creative destruction as the motor of capitalism, there remained a question as to how far the profit-maximising business person could be regarded as an admirable role model. He argued that something was lost in the transition from a society governed by aristocrats, whose values were essentially military, to an industrial age; and, unlike Thomas Carlyle, he saw the businessman as woefully unheroic: With the utmost ease and grace the lords and knights metamorphosed themselves into courtiers, administrators, diplomats, politicians and into military officers of a type that had nothing whatever to do with that of the medieval knight.

He rightly says: ‘The buck stops with an owner in a way that it never does with a hired hand. And that is why resilience in an entrepreneur is more important than brilliance – grit trumps almost every other trait.’29 Nowadays there is what I would call grudging assent to the proposition that entrepreneurship has a vital role in generating economic growth, an idea that was first given its proper due by the Austrian school of economists in the twentieth century. Joseph Schumpeter, in particular, lauded the role of entrepreneurs in the capitalist process of creative destruction, whereby inefficient businesses are wiped out in the downturn of the economic cycle, and new, more competitive businesses emerge. The Austrians were bested in argument by Keynes in the 1930s on the question of whether to rely on laissez-faire, or on the monetary and fiscal activism that Keynes preferred, as a remedy for unemployment in the Great Depression.


pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

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Airbnb, airport security, Al Roth, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, Chuck Templeton: OpenTable, clean water, conceptual framework, constrained optimization, continuous double auction, creative destruction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Pareto efficiency, Paul Samuelson, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uranium enrichment, Vickrey auction, Vilfredo Pareto, winner-take-all economy

These early economists aimed to tackle big questions about how the economy worked (and whether it could be made to work better), weighing in on such important matters as market function (and dysfunction), the origin of value, business cycles, and unemployment. It was set in motion by Smith and carried on for one hundred years thereafter by the classical economists—David Ricardo, Thomas Malthus, Karl Marx, Vilfredo Pareto, among others. It was continued for nearly one hundred years more by neoclassical economists like Thorstein Veblen, John Maynard Keynes, and an enduring hero of free-market proponents, Joseph Schumpeter. Pareto, who lived from 1848 until 1923, is emblematic of both the worldliness and precision of these towering figures in the history of economic thought. He was well experienced in matters of business but also well schooled in the language of math that was already deployed to describe economics and commerce. In writing about the significance of Pareto’s work in Econometrica in 1938, Roman economist Luigi Amoroso notes that Pareto had earned a doctorate in engineering from the Polytechnic Institute of Turin in 1869, at the age of twenty-one, and practiced as a manager for twenty years (rising to be president of the Italian Iron Works) before turning to economics.

This approach had many benefits: math created a common language that pushed for weaker assumptions, stronger conclusions, and greater generality. And it allowed economists, as a group, to start creating a concise, logical system that described the world, much the way physicists have done. (Critics of this approach had emerged already at the beginning of the twentieth century. The eminent Austrian American economist Joseph Schumpeter described Pareto’s theories as “arid generalizations” that did little to move the field forward.9) Mathematical models were easily assessed for logical errors. (At least superficially so: there was always the question of what assumptions one chose to make to shrink the market down to a few pages’ worth of algebra.) Errors were apparent right there in the math, not hidden behind wordplay or unspoken assumptions.

In contrast to the steady march that had taken place toward ever-greater generalizability of models, scholars were beginning to take specific phenomena they wished to explore and build up models that, while still abstract, aimed to capture the essence of a real-life market. Akerlof, with characteristic modesty, has observed that this was merely a return to the approach that iconic economists like Joseph Schumpeter and John Maynard Keynes had taken to describe the economy, where there was no pretension of modeling a complete system. Aspects of a market just drop from the sky. For instance, why do humans have the tendencies and instincts in market transactions that Keynes famously described as our “animal spirits”? Where did the entrepreneurs that wrought Schumpeter’s “creative destruction” come from?


pages: 382 words: 92,138

The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato

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Apple II, banking crisis, barriers to entry, Bretton Woods, California gold rush, call centre, carbon footprint, Carmen Reinhart, cleantech, computer age, creative destruction, credit crunch, David Ricardo: comparative advantage, demand response, deskilling, endogenous growth, energy security, energy transition, eurozone crisis, everywhere but in the productivity statistics, Financial Instability Hypothesis, full employment, G4S, Growth in a Time of Debt, Hyman Minsky, incomplete markets, information retrieval, intangible asset, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, natural language processing, new economy, offshore financial centre, Philip Mirowski, popular electronics, profit maximization, Ralph Nader, renewable energy credits, rent-seeking, ride hailing / ride sharing, risk tolerance, shareholder value, Silicon Valley, Silicon Valley ideology, smart grid, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, total factor productivity, trickle-down economics, Washington Consensus, William Shockley: the traitorous eight

And to my father whose battle to survive without her has not diminished his nearly life-long pursuit of perhaps the only really renewable source of energy – nuclear fusion. As a matter of fact, capitalist economy is not and cannot be stationary. Nor is it merely expanding in a steady manner. It is incessantly being revolutionized from within by new enterprise, i.e., by the intrusion of new commodities or new methods of production or new commercial opportunities into the industrial structure as it exists at any moment. Joseph Schumpeter (1942 [2003], 13) The important thing for Government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all. John Maynard Keynes (1926, xxx) It is a popular error that bureaucracy is less flexible than private enterprise. It may be so in detail, but when large scale adaptations have to be made, central control is far more flexible.

A grant from the Ford Foundation’s Reforming Global Finance initiative, led by Leonardo Burlamaqui, was not only helpful but useful due to Leonardo’s own work on understanding ways in which ‘knowledge governance’ can ‘shape’ markets. It was indeed Leonardo’s work with Ford that inspired the first meetings and work that led to another research project, funded by the Institute for New Economic Thinking (INET), in which Randy Wray and I are today banging heads: a project on how to bring together the thinking of Joseph Schumpeter on innovation and Hyman Minsky on finance, to understand the degree to which finance can be turned into a vehicle for creative destruction rather than its current obsession with Ponzi-like destructive creation. Amongst other friends and colleagues who have provided inspiration through interaction and feedback, I want to mention Fred Block, Michael Jacobs, Paul Nightingale and Andy Stirling, the latter two from SPRU, my new academic home.

This economic concept is named after University of Chicago economist Frank Knight (1885–1972), who theorized about risk and uncertainty and their differences in economic terms. 2 Evans and Rauch (1999) show, for instance, that a Weberian-type State bureaucracy that employs meritocratic recruitment and offers predictable, rewarding longterm careers enhances prospects for growth, even when controlling for initial levels of GDP per capita and human capital. 3 Contemporary political economists, such as Chang (2008) and Reinert (2007), who specialize in the history of economic policy do of course talk about the role of the State in promoting a ‘catching-up’ process, or in actively acting countercyclically. Yet these are more in line with a view of the State not as an entrepreneurial risk taker (of first resort) but a more passive entrepreneur of last resort. 4 Joseph Schumpeter (1942 [2003]) referred to ‘creative destruction’ as the process by which innovation changes the status quo, allowing the market shares of firms which introduce new products and processes to grow, and those of the firms that resist change to fall. Chapter 1 FROM CRISIS IDEOLOGY TO THE DIVISION OF INNOVATIVE LABOUR Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

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asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, mass immigration, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

So, the bottom line is this: Not only can China not sell the dollar reserves it now owns; it must continue accumulating more dollar reserves each year in line with its massive trade surplus with the United States. Otherwise, the enormous amount of dollars its exporters earn in the United States each year will push up the yuan when the exporters bring them back home to China and convert them into yuan. That is something the Chinese authorities cannot allow because a much higher yuan would be sure to throw China’s economy into crisis. Notes 1. Joseph Schumpeter, Ten Great Economists, from Marx to Keynes (New York: Oxford University Press, 1951). 2. These estimates were reached using information published by the IMF on disclosed and undisclosed reserves. 3. Fed’s Flow of Funds Account of the United States, second quarter 2011 (see Exhibit 2.7, Rest of the World). CHAPTER 3 Creditopia The only cause of depression is prosperity. —Clement Juglar1 What did a $50 trillion expansion of credit do to the U.S. economy?

The nature of money changed in 1968, and that change transformed the economy. It has become increasingly difficult to distinguish between money and credit. Moreover, the amount of credit has grown so large relative to the amount of what was previously understood to be money that it has made money irrelevant. The new reality is that credit has displaced money as the key economic variable. That change is the subject of Chapter 4. Note 1. Joseph Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 1123. CHAPTER 4 The Quantity Theory of Credit A credit-expansion boom must unavoidably lead to a process which everyday speech calls the depression. —Ludwig von Mises1 So long as gold was money, credit creation was limited by the supply of gold. When the United States severed the link between dollars and gold in 1968, it removed all constraints on how much credit could be created.

Finally, it explains the quantity theory of credit and how it differs from the quantity theory of money. By the end of this chapter, the disturbing implications of this theory will have become clear. The Quantity Theory of Money The quantity theory of money asserts that changes in the quantity of money in an economy cause a proportional change in the price level. The theory is centuries old. In his magisterial work History of Economic Analysis, Joseph Schumpeter credits Jean Bodin, a French political philosopher, for being the first to propound the theory in 1568. David Hume, John Stuart Mill, Ludwig von Mises (with a few qualifications), and Milton Friedman—along with many others—all accepted and wrote about the quantity theory. In 1912, Irving Fisher published the definitive work on the subject, The Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crises.2 In that book, Fisher employed what he called the equation of exchange to demonstrate the relationship between the quantity of money and the price level.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

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3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

In February 2009, as the British Prime Minister Gordon Brown was proposing a massive internationally coordinated Keynesian reflation package at the G20 summit in London, I wrote an article for the online edition of a major UK newspaper about the perils of following a Keynesian policy solution.1 It was clear to me that the cure would not come from a repetition of the old policies of borrowing and reflation. Globalization had fundamentally changed the context. To find a solution to the crisis we needed to explore the “underworld,” as Keynes described it, the world where economists who had gone out of fashion lived. Karl Marx, Joseph Schumpeter, Nikolai Kondratieff, Friedrich Hayek (and even Knut Wicksell, who was still read but not understood) viewed capitalism as a system which was subject to the waves of up and down cycles – as a dynamic disequilibrium system. Modern economics views the market as a stationary equilibrium system – where decisions taken are compatible, so in essence supply equals demand. When he came to office in January 2009, Barack Obama understood that the financial collapse had created a problem for the real economy.

The economics profession and its admirers, as the Nobel Committee must be, have not denounced modern economics as useless or as in some profound crisis. Who is right – the Prize givers and receivers, or the general public which is dubious of economics and economists? Beyond the mainstream there are many pockets of unfashionable economics or heterodoxies, as we may call them. The economic theories of Marx have a bearing on the cycles, as do those of Frederick Hayek. who has his devoted supporters.5 Economists such as Joseph Schumpeter or Nikolai Kondratieff were also much concerned with finding cyclical patterns in economic data over the two previous centuries. It is these economists who have more to say about how and why we are in the state we are in than mainstream or even Keynesian theories. The Role of Globalization As we are going through a crunch in the West, many economies in Asia, Latin America and Africa – the so-called “emerging economies” of China, India, Brazil, Indonesia and Nigeria – are debating “problems” of maintaining their growth at 5 percent or 8 percent or even 10 percent.

Is the economy a system which tends to an equilibrium almost all of the time, or is it a system which tends to disequilibrium and cyclical fluctuations? The tradition of Ricardo and Walras takes the equilibrium route. The equilibrium tradition is the more dominant one, especially in recent years. The tradition of Marx and Wicksell takes the disequilibrium path. And there are insights in the disequilibrium tradition which can be illuminating. It was Joseph Schumpeter who gave economics not only a theory but a vision – weltanschauung – about how capitalism flourished through a series of cycles of booms and busts. Creative Destruction The second half of the nineteenth century witnessed one of the many episodes of globalization. This one was built on the industrial and financial revolutions. The new inventions in transport and communications – railroads, steamships and the introduction of the telegraph – had connected the many parts of the world.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

See Richard Benedick, Ozone Diplomacy: New Directions in Safeguarding the Planet and Paul A. Newman et al, “When Will the Antarctic Ozone Hole Recover?” Geophysical Research Letters 33 (2006). 4 Andrew Mellon quotation from Herbert Hoover’s autobiography, The Memoirs of Herbert Hoover: Vol. 3, The Great Depression, 31-32. 5 In 1934, Joseph Schumpeter wrote, “depressions are not simply evils, which we might attempt to suppress, but . . . forms of something which has to be done.” Joseph Schumpeter, “Depressions,” in Douglass Brown et al., The Economics of the Recovery Program, 16. 6 This statement is itself an instance of the “paradox of the liar,” which is related to the impossibility of devising a logical system that is both internally consistent and complete, demonstrated by Russell and Goedel. This, in turn, relates to the fundamentally fallacious structure of the modern economics of rational expectations and efficient markets discussed in Chapter 14.

Focusing on the evolutionary nature of capitalism draws attention to the inevitability of radical change in political institutions, as well as in economic life. This mutability is the key condition for capitalism’s prosperity and long-term survival. Yet politicians, businesspeople, and economists to the right of the ideological spectrum, the people supposedly most dedicated to capitalism’s historic triumph, are mostly blind to the most important reason for its success. They extol the virtues of Joseph Schumpeter’s process of “creative destruction,”3 whereby dying industries are replaced by previously unimagined new technologies and managerial systems, but they wilfully ignore the same process of creative self-destruction that renews the system as a whole. Why should the politico-economic structure of the capitalist system be considered immutable, while its microfoundations are in constant flux? This mystery has never been properly addressed.

Chapter Two 1 This phrase was coined in 1989 by John Williamson to described the free-market policies imposed on post-communist and developing countries by the U.S. government, along with the IMF, the World Bank, the World Trade Organization, and other international institutions. See John Williamson, “What Washington Means by Policy Reform,” in John Williamson, ed., Latin American Readjustment: How Much Has Happened. 2 See Alain Gresh, “Understanding the Beijing Consensus,” trans. Stephanie Irvine, Le Monde Diplomatique English Edition (November 2008). The Beijing Consensus is described more extensively in Chapter 24. 3 Joseph Schumpeter, Capitalism, Socialism and Democracy. 4 “When they faced a graduated income tax in 1913, businessmen everywhere judged it the most destructive legislation in the nation’s history.” Robert Wiebe, Business Men and Reform: A Study of the Progressive Movement, 196. 5 David Lloyd George, chancellor of the exchequer, described his “People’s Budget” of 1909 as “a war budget. It is for raising money to wage implacable warfare against poverty and squalidness” (April 29, 1909).


pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

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23andMe, agricultural Revolution, air freight, back-to-the-land, banking crisis, barriers to entry, Bernie Madoff, British Empire, call centre, carbon footprint, Cesare Marchetti: Marchetti’s constant, charter city, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, colonial exploitation, colonial rule, Corn Laws, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic dividend, demographic transition, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, everywhere but in the productivity statistics, falling living standards, feminist movement, financial innovation, Flynn Effect, food miles, Gordon Gekko, greed is good, Hans Rosling, happiness index / gross national happiness, haute cuisine, Hernando de Soto, income inequality, income per capita, Indoor air pollution, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of agriculture, invisible hand, James Hargreaves, James Watt: steam engine, Jane Jacobs, John Nash: game theory, joint-stock limited liability company, Joseph Schumpeter, Kevin Kelly, knowledge worker, Kula ring, Mark Zuckerberg, meta analysis, meta-analysis, mutually assured destruction, Naomi Klein, Northern Rock, nuclear winter, oil shale / tar sands, out of africa, packet switching, patent troll, Pax Mongolica, Peter Thiel, phenotype, Plutocrats, plutocrats, Ponzi scheme, Productivity paradox, profit motive, purchasing power parity, race to the bottom, Ray Kurzweil, rent-seeking, rising living standards, Silicon Valley, spice trade, spinning jenny, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, supervolcano, technological singularity, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, ultimatum game, upwardly mobile, urban sprawl, Vernor Vinge, Vilfredo Pareto, wage slave, working poor, working-age population, Y2K, Yogi Berra, zero-sum game

Innovation, whether in the form of new technology or new ways of organising the world, can destroy as well as create. A Wal-Mart store drives small general retailers out of business as surely as the computer drove the typewriter out of business. But against this must be balanced the enormous benefits that (especially the poorest) customers reap in terms of cheaper, more varied and better goods. It was Joseph Schumpeter who pointed out that the competition which keeps a businessman awake at night is not that from his rivals cutting prices, but that of entrepreneurs making his product obsolete. As Kodak and Fuji slugged it out for dominance in the 35mm film industry in the 1990s, digital photography began to extinguish the entire market for analogue film – as analogue records and analogue video cassettes had gone before.

Suddenly the rising income of the average British worker met the falling cost of cotton cloth and suddenly everybody could afford to wear (and wash) cotton underwear. The historian Edward Baines noted in 1835 that the ‘wonderful cheapness of cotton goods’ was now benefiting the ‘bulk of the people’: ‘a country-wake in the nineteenth century may display as much finery as a drawing room in the eighteenth.’ The capitalist achievement, reflected Joseph Schumpeter a century later, ‘does not typically consist of providing more silk stockings for queens but in bringing them within reach of factory girls in return for steadily decreasing amounts of effort.’ But increasing supply was not easy, because even the remotest Pennine valleys and Welsh marches were now thickly settled with the cottages of weavers and spinsters, transport was dear and some of the workers were earning good enough wages to take weekend holidays, occasionally even drinking their pay away till Monday night, preferring consumption to extra income.

The knowledge of how to pack pre-washed salad and save everybody time; the knowledge of how to vaccinate children against polio; the knowledge that insecticide-impregnated mosquito nets can prevent malaria; the knowledge that different-sized paper cups in coffee bars can still have the same-sized lids, saving cost in manufacture and confusion in the shop – a billion such pages of knowledge make up the book of human prosperity. It was Paul Romer’s great achievement in the 1990s to rescue the discipline of economics from the century-long cul-de-sac into which it had driven by failing to incorporate innovation. From time to time its practitioners had tried to escape into theorems of increasing returns – Mill in the 1840s, Allyn Young in the 1920s, Joseph Schumpeter in the 1940s, Robert Solow in the 1950s – but not until Romer’s ‘new growth theory’ in the 1990s was economics fully back in the real world: a world where perpetual innovation brings brief bursts of profit through temporary monopoly to whoever can commandeer demand for new products or services, and long bursts of growth to everybody else who eventually gets to share the spilled-over idea. Robert Solow had concluded that innovation accounted for growth that could not be explained by an increase in labour, land or capital, but he saw innovation as an external force, a slice of luck that some economies had more of than others – his was Mill’s theory with calculus.


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As the Future Catches You: How Genomics & Other Forces Are Changing Your Work, Health & Wealth by Juan Enriquez

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Albert Einstein, Berlin Wall, bioinformatics, borderless world, British Empire, Buckminster Fuller, creative destruction, double helix, global village, half of the world's population has never made a phone call, Howard Rheingold, Jeff Bezos, Joseph Schumpeter, Kevin Kelly, knowledge economy, more computing power than Apollo, new economy, personalized medicine, purchasing power parity, Ray Kurzweil, Richard Feynman, Richard Feynman, Robert Metcalfe, Search for Extraterrestrial Intelligence, SETI@home, Silicon Valley, spice trade, stem cell, the new new thing

Let’s talk about sex … Gina Bari Kolata, Clone: The Road to Dolly, and the Path Ahead (New York: William Morrow, 1998). Lori B. Andrews, The Clone Age: Adventures in the New World of Reproductive Technology (New York: Henry Holt, 1999). 11. Juan Enriquez, “Green Biotech and European Competitiveness,” Trends in Biotechnology, April 2001. 12. This process of creative destruction was identified over half a century ago by an Austrian economist turned Harvard professor, Joseph Schumpeter. See Joseph Schumpeter, Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process (New York: McGraw-Hill, 1939). 13. Charles J. Whalen, “Today’s Hottest Economist Died Fifty Years Ago,” Business Week, December 11, 2000. Chapter XII: Sleepless … (and Angry) in Seattle 1. Daniel Hecker, “High Technology Employment: A Broader View,” Monthly Labor Review, June 1999. 2.

But much of the world is way behind in understanding … Adopting … Creating … New technology. Western Europe is not immune to massive changes … And could easily lose its way if it keeps trying to stop … Key technologies … And keeps bleeding brains to areas like Silicon Valley. Technology is not kind … It does not wait … It does not say please … It slams into existing systems … And often destroys them … While creating a new system.12 (Today’s chi-chi economist, Joseph Schumpeter … died half a century ago … trained as a lawyer … coined the term “creative destruction”: new products and discoveries relentlessly destroy the old … By age 30, he had three clear goals in mind: to become “Europe’s greatest lover of beautiful women and Europe’s greatest horseman—and perhaps also the world’s greatest economist.” He claims to have achieved two out of three.)13 COUNTRIES CAN EITHER SURF … EVER LARGER … AND MORE POWERFUL … WAVES OF CHANGE … OR THEY CAN TRY TO STOP THEM … AND GET CRUSHED.


pages: 418 words: 128,965

The Master Switch: The Rise and Fall of Information Empires by Tim Wu

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accounting loophole / creative accounting, Alfred Russel Wallace, Apple II, barriers to entry, British Empire, Burning Man, Cass Sunstein, Clayton Christensen, commoditize, corporate raider, creative destruction, don't be evil, Douglas Engelbart, Douglas Engelbart, Howard Rheingold, Hush-A-Phone, informal economy, intermodal, Internet Archive, invention of movable type, invention of the telephone, invisible hand, Jane Jacobs, John Markoff, Joseph Schumpeter, Menlo Park, open economy, packet switching, PageRank, profit motive, road to serfdom, Robert Bork, Robert Metcalfe, Ronald Coase, sexual politics, shareholder value, Silicon Valley, Skype, Steve Jobs, Steve Wozniak, Telecommunications Act of 1996, The Chicago School, The Death and Life of Great American Cities, the market place, The Wisdom of Crowds, too big to fail, Upton Sinclair, urban planning, zero-sum game

Schumpeter’s ideas are central to this book. Two of his works are particularly important for this work: The Theory of Economic Development; and Capitalism, Socialism, and Democracy (New York: Routledge, 2006) (1942). For more about his work see Robert Loring Allen, Opening Doors: The Life and Work of Joseph Schumpeter, Volume One—Europe (New Brunswick, NJ: Transaction Publishers, 1991); on his up-and-down life, see Richard Swedberg’s Schumpeter: A Biography (Princeton, NJ: Princeton University Press, 1991); Thomas K. McCraw, Prophet of Innovation: Joseph Schumpeter and Creative Destruction (Cambridge, MA: Belknap Press, 2007). 17. Albert Bigelow Paine, In One Man’s Life: Being Chapters from the Personal & Business Career of Theodore N. Vail (New York: Harper & Bros., 1921) 114. 18. Schumpeter, Theory of Economic Development, 93; Paine, In One Man’s Life, 27. 19.

White. In fact, without White’s opposition, there is good reason to think that Gray would have both created a working telephone and patented it long before Bell.7 The initial inability of Hubbard, White, and everyone else to recognize the promise of the telephone represents a pattern that recurs with a frequency embarrassing to the human race. “All knowledge and habit once acquired,” wrote Joseph Schumpeter, the great innovation theorist, “becomes as firmly rooted in ourselves as a railway embankment in the earth.” Schumpeter believed that our minds were, essentially, too lazy to seek out new lines of thought when old ones could serve. “The very nature of fixed habits of thinking, their energy-saving function, is founded upon the fact that they have become subconscious, that they yield their results automatically and are proof against criticism and even against contradiction by individual facts.”8 The men dreaming of a better telegraph were, one might say, mentally warped by the tangible demand for a better telegraph.

As if mourning his company, Alexander Bell became a bedridden invalid, in the grip of such a depression that he checked himself in to Massachusetts General Hospital.15 CYCLES OF BIRTH AND DEATH The struggle between Bell and Western Union over the fate of the telephone was, in retrospect, a match to the death. The victor would go on to prosper, while the loser would wilt away and die. This is how the Cycle turns. No thinker of the twentieth century better understood that such winner-take-all contests were the very soul of the capitalist system than did the economist Joseph Schumpeter, the “prophet of innovation.” Schumpeter’s presence in the history of economics seems designed to displease everyone. His prose, his personality, and his ideas were infuriatingly provocative and confounding, and quite deliberately so. He bragged of sexual exploits at faculty meetings, and while living in the United States during World War II, he voiced support for Germany, supposedly out of dislike for Russians.

Crisis and Leviathan: Critical Episodes in the Growth of American Government by Robert Higgs, Arthur A. Ekirch, Jr.

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Alistair Cooke, clean water, collective bargaining, creative destruction, credit crunch, declining real wages, endowment effect, fiat currency, fixed income, full employment, hiring and firing, income per capita, Joseph Schumpeter, laissez-faire capitalism, manufacturing employment, means of production, minimum wage unemployment, Plutocrats, plutocrats, post-industrial society, price discrimination, profit motive, rent control, rent-seeking, Richard Thaler, road to serfdom, Ronald Reagan, Simon Kuznets, strikebreaker, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, transcontinental railway, union organizing, Upton Sinclair, War on Poverty, Works Progress Administration

Congressman Pete McCloskey made the same point in recalling his first congressional victory. A postelection survey, intended to demonstrate the victorious candidate's mandate, revealed, as McCloskey put it, "that 5% of the people voted for me because they agreed with my views; 11 % voted for me even though they disagreed with my views, and 84% didn't have any idea what the hell my views were."30 In sum, one has many good reasons to agree with Joseph Schumpeter's assessment: "The freely voting rational citizen, conscious of his (long-run) interests, and the representative who acts in obedience to them-is this not 15 The Sources of Big Government the perfect example of a nursery tale?"31 Political actions commonly take place in an environment of ignorance, misinformation, posturing, and heated emotions; there are long seasons of lassitude and maneuvering punctuated by brief episodes of frenzied action.

The idea of historical path-dependence has been discussed by several scholars in other contexts. Paul David, for example, has argued for it in his studies of technological change. David criticizes "a mechanistic world view that allots to the past at best a transient role in shaping the future." He stresses historical irreversibility, where "previous economic configurations become irrevocably lost." As early as 1942 Joseph Schumpeter warned against commission of a mechanistic, trend-imposing "statistical crime": "for any historical time series, the very concept of historical sequence implies the occurrence of irreversible changes in the economic structure which must be expected to affect the law of any given economic quantity."5 Only a few economists have adopted this perspective explicitly in studies of the growth of governmental power over the economy, but among political historians the idea is widely accepted. 6 A SCHEMATIC VIEW OF THE PROBLEM As we have seen, several commonly employed indexes of the size of government display a ratchet movement during the twentieth century: government grew suddenly much bigger with the onset of each great crisis; after the crisis it receded but usually not to the precrisis level or even to a level that would have been reached had the precrisis rate of growth persisted instead of being displaced by the events of the crisis.

American governments in the twentieth century, impelled by a more "progressive" ideology, readily accepted-indeed eagerly sought-expanded powers. The crisis of the 1890s, the last major battle in which the forces of classical liberalism won a clear victory, serves as an illuminating backdrop against which the crises of the twentieth century stand out in bold relief. CREATIVE DESTRUCTION IDEOLOGICALLY SUSTAINED, 1865-1893 When Joseph Schumpeter coined the expression "creative destruction" to describe the dynamics of "relatively unfettered capitalism," he might have had in mind the United States in the late nineteenth century. Certainly the nation's economic development had never been so rapid, nor so erratic and disruptive. The American who studies the statistics of his country's social and economic change, wrote the industrialist Andrew Carnegie in the early 1890s, "becomes almost dizzy at discovering the velocity with which she is rushing on."


pages: 494 words: 132,975

Keynes Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott

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airport security, banking crisis, Bretton Woods, British Empire, collective bargaining, complexity theory, creative destruction, cuban missile crisis, Francis Fukuyama: the end of history, full employment, Gordon Gekko, greed is good, Gunnar Myrdal, if you build it, they will come, Isaac Newton, Joseph Schumpeter, liquidationism / Banker’s doctrine / the Treasury view, means of production, Mont Pelerin Society, mortgage debt, New Journalism, Northern Rock, Paul Samuelson, Philip Mirowski, price mechanism, pushing on a string, road to serfdom, Robert Bork, Ronald Reagan, Simon Kuznets, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, trickle-down economics, War on Poverty, Yom Kippur War

Kahn was the Messenger Angel who brought messages and problems from Keynes to the ‘Circus’ and who went back to Heaven with the result of our deliberations.”10 Kahn was an indifferent physicist turned inspired economist thanks to his mastery of mathematics, winning a first-class degree before being elected as a fellow of King’s in 1930. Kahn’s switch of subject led the Austrian School economist Joseph Schumpeter,11 with a typical lack of sensitivity, to inform him that “many a failed race-horse makes quite a good hack.”12 Keynes thought Kahn had “as much natural aptitude for economics as anyone whom I have taught since the war.”13 Kahn was highly intelligent and meticulous in his logic, but he lacked the confidence to press his ideas on others. Soft spoken, impeccably mannered, and known to his peers as “Ferdinand,” his middle name, he was perhaps the most important in a line of young men on whom Keynes bestowed the title “Favorite Pupil.”

“The most we may hope for is that the growing information of the public may make it easier for central banks both to follow a cautious policy during the upward swing of the cycle, and so to mitigate the following depression, and to resist the well-meaning but dangerous proposals to fight depression by ‘a little inflation.’”52 So Hayek came to the end of his quartet of lectures. “In the event the lectures were a sensation,” recalled Robbins, “partly for their revelations of an aspect of classical monetary theory which for many years had been forgotten.”53 There was a sense, according to Joseph Schumpeter, that Hayek was saying something new and startling. Although Hayek’s lectures raised as many questions as they answered, Robbins was particularly pleased, for they had achieved exactly his intended purpose, to introduce British economists to “this great tradition [the Austrian School], [that] will do something to persuade English readers that here is a school of thought which can only be neglected at the cost of losing contact with what may prove to be one of the most fruitful scientific developments of our age.”54 The talks served as an extended job interview for Hayek, who dearly wished to join the LSE faculty.

Galbraith jokingly observed, “Some will wonder if economists are capable of such refined emotion.”50 One young Harvard economics graduate student, Robert Bryce,51 a Canadian, enjoyed the added allure of having just arrived from Cambridge, England, where he had been taught by Keynes himself and had attended Hayek’s seminar at the LSE with the attitude of a Christian minister witnessing a cannibal ceremony. Bryce took full advantage of his links to the master, so much so that Joseph Schumpeter was prompted to remark, “Keynes is Allah and Bryce is his prophet.”52 Just as not all of those in Washington who fell under the spell of Keynes were young, some older economics professors at Harvard also underwent an unlikely epiphany. Alvin H. Hansen, who before long came to be known as the “American Keynes,” was a fifty-year-old classical economist when recruited by Harvard from the University of Minnesota in 1937.


pages: 395 words: 116,675

The Evolution of Everything: How New Ideas Emerge by Matt Ridley

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affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, altcoin, anthropic principle, anti-communist, bank run, banking crisis, barriers to entry, bitcoin, blockchain, British Empire, Broken windows theory, Columbian Exchange, computer age, Corn Laws, cosmological constant, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, cryptocurrency, David Ricardo: comparative advantage, demographic transition, Deng Xiaoping, discovery of DNA, Donald Davies, double helix, Downton Abbey, Edward Glaeser, Edward Lorenz: Chaos theory, Edward Snowden, endogenous growth, epigenetics, ethereum blockchain, facts on the ground, falling living standards, Ferguson, Missouri, financial deregulation, financial innovation, Frederick Winslow Taylor, Geoffrey West, Santa Fe Institute, George Gilder, George Santayana, Gunnar Myrdal, Henri Poincaré, hydraulic fracturing, imperial preference, income per capita, indoor plumbing, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, Jeff Bezos, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Khan Academy, knowledge economy, land reform, Lao Tzu, long peace, Lyft, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, means of production, meta analysis, meta-analysis, mobile money, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, Necker cube, obamacare, out of africa, packet switching, peer-to-peer, phenotype, Pierre-Simon Laplace, price mechanism, profit motive, RAND corporation, random walk, Ray Kurzweil, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, rising living standards, road to serfdom, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, sharing economy, smart contracts, South Sea Bubble, Steve Jobs, Steven Pinker, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, women in the workforce

It is an emergent phenomenon. Diminishing returns? The really big thing that both Smith and Ricardo – and Robert Malthus and John Stuart Mill and all the other British political economists of the time – missed, however, was that they were living through the Industrial Revolution. They had no conception that they stood ‘at the threshold of the most spectacular economic developments ever witnessed’, as Joseph Schumpeter put it a century later: ‘Vast possibilities matured into realities before their very eyes. Nevertheless, they saw nothing but cramped economies struggling with ever-decreasing success for their daily bread.’ This was because their world view was dominated by the idea of diminishing returns. Ricardo, for example, watching local farmers struggle with bad harvests in the 1810s, agreed with his friend Malthus that corn yields must stagnate, because the best land was already in cultivation and every marginal acre brought under the plough would be worse than the one before.

The ‘marginalist’ revolution in economics, led by Carl Menger, Léon Walras and Stanley Jevons and culminating in the synthesis of Alfred Marshall, shifted the focus of price setting to the consumer rather than the producer, but left the question of increasing returns largely unanswered. In place of diminishing returns, they produced the idea of an equilibrium – a steady state of perfect competition towards which the economic system tended to move once information is easily available. Then came Joseph Schumpeter, with his relentless focus on innovation and his insistence that there was no equilibrium, but an unfolding of incessant, dynamic change. In his Theory of Economic Development, written while he was at the University of Czernowitz in 1909, Schumpeter was the first economist to insist that the role of the entrepreneur was crucial. Far from being parasitic exploiters of the workers, most businessmen were innovators looking to outwit their rivals, by doing things better or cheaper, and in doing so they inevitably brought improvements to the living standards of consumers.

In the 1920s the American sociologist Colum Gilfillan traced the pedigree of ships from dugout canoes to steamships, implying that there was a gradualism about the progress of technology that stories of sudden invention disguised, and an inevitability about each step once the previous one had been taken. In 1922 William Ogburn developed a fully-fledged theory of emergent invention, arguing that ‘the more there is to invent with, the greater will be the number of inventions’. The economists Joseph Schumpeter and Friedrich Hayek both saw the economy in explicitly Darwinian ways: as a system where ideas recombine and trends emerge rather than are imposed. In 1988 George Basalla wrote a book called The Evolution of Technology, which stressed the continuity of successive innovations. He pointed out that Eli Whitney’s cotton gin was not conjured out of thin air, but adapted from the Indian charka or roller gins already in use.


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Machine, Platform, Crowd: Harnessing Our Digital Future by Andrew McAfee, Erik Brynjolfsson

3D printing, additive manufacturing, AI winter, Airbnb, airline deregulation, airport security, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, backtesting, barriers to entry, bitcoin, blockchain, book scanning, British Empire, business process, carbon footprint, Cass Sunstein, centralized clearinghouse, Chris Urmson, cloud computing, cognitive bias, commoditize, complexity theory, computer age, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, Dean Kamen, discovery of DNA, disintermediation, distributed ledger, double helix, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, ethereum blockchain, everywhere but in the productivity statistics, family office, fiat currency, financial innovation, George Akerlof, global supply chain, Hernando de Soto, hive mind, information asymmetry, Internet of things, inventory management, iterative process, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, joint-stock company, Joseph Schumpeter, Kickstarter, law of one price, Lyft, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, Marc Andreessen, Mark Zuckerberg, meta analysis, meta-analysis, moral hazard, multi-sided market, Myron Scholes, natural language processing, Network effects, new economy, Norbert Wiener, Oculus Rift, PageRank, pattern recognition, peer-to-peer lending, performance metric, Plutocrats, plutocrats, precision agriculture, prediction markets, pre–internet, price stability, principal–agent problem, Ray Kurzweil, Renaissance Technologies, Richard Stallman, ride hailing / ride sharing, risk tolerance, Ronald Coase, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Pinker, supply-chain management, TaskRabbit, Ted Nelson, The Market for Lemons, The Nature of the Firm, Thomas L Friedman, too big to fail, transaction costs, transportation-network company, traveling salesman, two-sided market, Uber and Lyft, Uber for X, Watson beat the top human players on Jeopardy!, winner-take-all economy, yield management, zero day

§ Fast Company journalist Mark Wilson loved the “Bengali Butternut” barbecue sauce that Watson came up with (Mark Wilson, “I Tasted BBQ Sauce Made by IBM’s Watson, and Loved It,” Fast Company, May 23, 2014, https://www.fastcodesign.com/3027687/i-tasted-bbq-sauce-made-by-ibms-watson-and-loved-it), but called its “Austrian Chocolate Burrito” the worst he’d ever had (Mark Wilson, “IBM’s Watson Designed the Worst Burrito I’ve Ever Had,” Fast Company, April 20, 2015, https://www.fastcodesign.com/3045147/ibms-watson-designed-the-worst-burrito-ive-ever-had). ¶ A mechanical fillet is a smooth transition from one area of a part to another—for example, a rounded corner between two surfaces that meet at a right angle. # Or it might not be a good idea. Only time and research will tell. PART 2 PRODUCT AND PLATFORM CHAPTER 6 THE TOLL OF A NEW MACHINE Economic progress, in capitalist society, means turmoil. — Joseph Schumpeter, 1942 WITHIN ONE GENERATION, SEVERAL LONG-STANDING INDUSTRIES were transformed permanently and deeply by a single computer network. The business world has rarely, if ever, seen disruption at this speed and scale before. The first sentence in the previous paragraph exaggerates—the Internet had some help from other technologies as it remade sector after sector—but we don’t think the second sentence does.

It’s memorabilia, and you care about it and you’re passionate and you’re indicating something about yourself. . . . It’s like a totem; it’s a psychological anchor into something that you care about. Acquiring innovation. It was thought for a long time that large, established companies would be the biggest innovators. They’re the ones, after all, with the resources to afford large labs and R&D staff. The great Austrian economist Joseph Schumpeter challenged this view. He maintained that smaller, younger, more entrepreneurial firms—companies that had no interest in maintaining the status quo—were more likely to come up with truly novel goods and services. As he put it, “In general it is not the owner of stage coaches who builds railways.” And indeed, Clay Christensen’s landmark work on disruptive innovations showed that disruptions rarely came from successful industry incumbents and, in fact, often took them very much by surprise.

Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.” “Indeed,” Keynes wrote, “the world is ruled by little else.” Keynes saw that the ideas of prominent “worldly philosophers”* like Adam Smith, Karl Marx, David Ricardo, Friedrich Hayek, and Joseph Schumpeter reach far outside the discipline of economics. They change how people think about fairness and justice, how companies organize themselves and innovate, how governments approach taxation and trade, and so on. Economists think about exchange, a fundamental and universal human activity, so their biggest ideas on the subject have had a huge impact. Bitcoin: The Pseudonymous Revolution Satoshi Nakamoto’s ideas have also had a huge impact, even though nobody knows who he or she is.† On October 31, 2008, a person or group going by that name posted online a short paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.”


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Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, means of production, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies, Vilfredo Pareto, zero-sum game

Even Thomas Malthus disagreed with his friend, writing, "neither labour nor any other commodity can be an accurate measure of real value in exchange" (Ricardo 1951, 416). Economists over the years have had difficulty understanding Ricardo's "corn model" and his Principles textbook, especially the twisted assumptions he required to prove his theories. Ricardo once remarked that only twenty-five people in the entire country could understand it. A century later, Chicago economist Frank H. Knight remarked, "there is much [here] I cannot follow" (1959, 365). Joseph Schumpeter lambasted Ricardo for making most of the economic players "frozen and given," piling "one simplified assumption upon another," and developing a theory "that can never be refuted and lacks nothing save sense" (Schumpeter 1954, 472-73). Just the kind of theory Marx needed! Perhaps Keynes had Ricardo in mind when he wrote, "It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics" (Keynes 1973a [1936], xxiii).

Brilliant, handsome, and witty, Sweezy left Harvard in 1932 as a classical economist, went to the London School of Economics for graduate work, became an ardent Hayekian, then briefly fell under the spell of Harold Laski and John Maynard Keynes, and finally converted to Marxism! From then on, the debonair Sweezy made every effort to make Marxism respectable on college campuses. Returning to Harvard as an instructor during the golden era of the Keynesian revolution, he befriended John Kenneth Galbraith, tutored Robert Heilbroner, and collaborated with Joseph Schumpeter on his forthcoming Capitalism, Socialism and Democracy. Sweezy wrote his most famous article on the "kinked" demand curve, helped organize the Harvard Teachers' Union, and published The Theory of Capitalist Development (1942), an extremely coherent and compelling exposition of Marxism (although the author overly committed himself to citing Stalin). Like Schumpeter, Sweezy predicted at the end of his book that capitalism would inevitably collapse and socialism would "demonstrate its superiority on a large scale" (1942, 352-63).

In 1936, Sidney and Beatrice Webb came back with glowing reports of a "new civilization" and the "re-making of man," a vibrant nation with full employment, good working conditions, free education, free medical services, child care and maternity benefits, and the widespread availability of museums, theaters, and concert halls. Oskar Lange, a Polish socialist, and Fred M. Taylor, president of the AEA, contended that central planning boards could imitate the market's success. Austrian economist and Harvard professor Joseph Schumpeter chided Mises and Hayek by concluding, "Can socialism work? Of course it can," adding even more damagingly, "The capitalist order tends to destroy itself and centralist socialism is ... a likely heir apparent" (Schumpeter 1950 [1942], 167). Foreign Aid and Development Economics After World War II, European and Latin American countries began experimenting with socialism on a gigantic scale, nationalizing industry after industry, raising taxes, imposing wage-price controls, inflating the money supply, creating national welfare programs, and engaging in all kinds of collectivist mischief.


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Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

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Airbnb, bank run, banks create money, Bernie Madoff, bitcoin, Bretton Woods, Carmen Reinhart, corporate raider, correlation does not imply causation, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Mark Zuckerberg, market bubble, money market fund, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Uber for X, War on Poverty, yield curve

We know this because we’re aware of all the rich venture capitalists who grew that way by virtue of putting money behind eventual tech behemoths, along with employees who have attained wealth that can be measured in the tens of millions thanks to stock options. What this tells us is that to attain credit to grow, tech entrepreneurs must give up not insignificant ownership stakes in their companies for the privilege. Beyond that, the nature of entrepreneurialism must be taken into account. The great Austrian economist Joseph Schumpeter aptly described the entrepreneur as the individual whose work “consists precisely in breaking up old, and creating new, tradition.”3 In a world of consumers who are frequently resistant to change, the entrepreneur intends to offer the consumer or business a product or service they didn’t know they wanted. That is no easy feat. Schumpeter further described entrepreneurialism as the “opening of a new market, that is a market into which the particular branch of manufacturer of the country in question has not previously entered.”4 Entrepreneurs are doing something entirely new, something that has never been tested by the markets before.

Far from being an instance of “easy credit,” the horrid rush into housing signaled a massive credit contraction as consumption prevailed over true investment. Unknown are all the economic advances that would have expanded the credit pie had the dollar been stable in the 2000s such that credit had migrated to real ideas instead of consumption. CHAPTER FIFTEEN Conclusion: Why Washington and Wall Street Are Better Off Living Apart The investment banker is ‘a producer’ of money and credit, “the capitalist par excellence.” —Joseph Schumpeter “Your No. 1 client is the government,” John J. Mack, Morgan Stanley’s chairman and chief executive from 2005 to 2009, told current CEO James Gorman in a recent phone call. Mr. Gorman, who was visiting Washington that day, agreed. —Wall Street Journal, September 10, 2013 ALTHOUGH SILICON VALLEY can still claim top-dog status as the center of technological innovation in the United States, Austin, Texas, is increasingly part of the discussion.

Forbes, http://www.forbes.com/pictures/mfl45ekhem/robert-downey-jr-20/. 14. Paul Scott, “From Washed-Up Drug Addict to $100M Man,” Daily Mail Online, May 23, 2013. 15. Ibid. CHAPTER FOUR 1. Claire Cain, “Wearing Your Failures on Your Sleeve,” New York Times, November 8, 2014. 2. Mike Isaac, “Upstarts Raiding Giants for Staff in Silicon Valley,” New York Times, August 19, 2015. 3. Thomas K. McCraw, Prophet of Innovation: Joseph Schumpeter and Creative Destruction (Cambridge, Mass.: Belknap Press, 2007), 70. 4. Ibid., 73. 5. Julianne Pepitone & Stacy Cawley, “Facebook’s first big investor, Peter Thiel, cashes out,” CNNMoney, August 20, 2012. 6. Peter Thiel, with Blake Masters, Zero to One (New York: Crown Business, 2014), 84. 7. Tim Harford, Adapt: Why Success Always Starts with Failure (New York: Farrar Strauss and Giroux, 2011), 236. 8.


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European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

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3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

In a complex, ever-changing economy, policymakers need to do more than stand back and let markets rip – but the belief that they know best is a delusion. Throw in insights from political economy, namely how policymakers get caught up with the crowd or captured by it, and the dangers of micromanagement become clear. The task for policymakers is particularly tricky because while the inherent instability of capitalism is a source of progress – the “gales of creative destruction” produced by innovators and entrepreneurs, as Joseph Schumpeter put it – it can also be extremely damaging: when the financial system runs away with itself and then crashes. Economies need to try to capture the benefits of entrepreneurs’ efforts – or the animal spirits of investors, as Keynes put it – while limiting the financial sector’s excesses. Governments need to encourage the dynamism of technological and business progress, while stepping in to rekindle its spirits in a slump.

Steve Jobs, co-founder of Apple587 Capitalism… is by nature a form or method of economic change and not only never is but never can be stationary… The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organisation that capitalist enterprise creates… The opening up of new markets, foreign or domestic, and the organisational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation… that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. Joseph Schumpeter, Capitalism, Socialism and Democracy, 1942588 To get a glimpse of Europe’s future, you need to get down and party. Hackers, coders, gamers, developers, designers, DJs, technologists, entrepreneurs – they come together from all over Europe each year at Campus Party for a week of inspiring talks, eye-opening demos, informal networking and creative sparking. Even in a digital age, meeting face to face counts.

(Sometimes, though, the financial system propagates bad ideas like a virus, as previous chapters explained.) Thus economic growth is an ongoing voyage of discovery into an unknowable future, fuelled by ingenuity and energy, trialled by enterprising businesses and stimulated by competition within a framework of supportive institutions. In effect, it is a bit like evolution, which proceeds by mutation, selection and replication. While I do not agree with much of what Joseph Schumpeter wrote, his insight in 1942 that capitalism is an evolutionary process of continuous innovation and creative destruction seems fundamentally correct. Developing economies can grow simply by imitating what works well in more advanced ones – as can the less developed parts of every advanced economy. Advanced ones can also inch forward by making incremental improvements to existing ways of doing things.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

The idea of the free market as a spontaneously generated system for “the utilization of knowledge,” he said to an interviewer later in his life, was “the basis not only of my economic but also much of my political views . . . the amount of information the authorities can use is always very limited, and the market uses an infinitely greater amount of information than the authorities can ever do.” Back in the 1940s, when Hayek formulated his ideas about information, there was no sign of communism collapsing: to most observers, it looked like laissez-faire was the ideology whose time had passed. In 1942, Joseph Schumpeter, another Austrian admirer of free markets, who taught at Harvard, published Capitalism, Socialism, and Democracy, in which he argued that capitalism itself was doomed and bureaucracy was its replacement. Hayek was equally fearful about the future, and he set out to write a popular text defending the values of free market liberalism. As with his intellectual heroes Smith and Mill, Hayek’s support for laissez-faire extended far beyond a belief in its economic utility: he viewed the free market as the only effective guarantor of individual freedom, and he reacted viscerally to what he saw happening around him in Great Britain.

Building on the Tableau Economique (Economic Table) that François Quesnay, the eighteenth-century philosopher, had constructed, Léon Walras and Vilfredo Pareto, who both taught at the University of Lausanne, set out to create a coherent mathematical theory of the entire economy. Walras was born in northern France in 1834 and died in 1910. After trying his hand at fiction, journalism, and mine engineering, he followed the advice of his father, an economist, and devoted himself to economics. During the 1860s, Walras published articles on various topics, but it was his 1874 treatise, Elements of Pure Economics, that established him as a major figure. (Joseph Schumpeter, in his History of Economic Analysis, described Walras as “the greatest of all economists.”) After reviewing previous economic doctrines, Walras began his formal analysis by considering how prices are determined in a barter economy where two people trade two items, such as bread and wine, for each other. Walras assumed that each person is aware of how much pleasure, or “utility,” an item gives him, and that this pleasure gradually diminishes as he consumes more and more of the good.

Unless the financial authorities intervene, lending public money freely to whoever needs it, the ultimate result could well be “a traumatic debt deflation and deep depression.” In what was perhaps a poke at the efficient market hypothesis, Minsky described his thesis that capitalist economies inevitably progress from conservative finance to reckless speculation as the “financial instability hypothesis.” Minsky described it as an interpretation of Keynes’s General Theory, and he also credited the Austrian economist Joseph Schumpeter for influencing his views. “The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable,” he explained in 1992. “The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.”


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War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liberal capitalism, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, Plutocrats, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

It was in this respect that the conquistadors’ efforts were both significant for the history of money and paradoxical, since the Spanish monarchy, despite the wealth it had acquired in the New World, was almost always indebted and often was compelled to declare bankruptcy. It is a premise of this book that government finance, the need to accumulate treasure, whether by conquest, by borrowing or by taxation, provides a powerful impetus behind developments in society. This idea was expressed by the great Austrian economist Joseph Schumpeter in his article ‘The Crisis of the Tax State’, published in 1919.2 More specifically, this book argues that the needs of government spending, in particular relating to war finance, are responsible for the development of what is often thought of as a narrow and specialist field, that of monetary history. Currency arrangements – the gold standard, which tied the value of a currency to a fixed amount of gold, Bretton Woods, the Smithsonian Agreement of 1971 – have been brokered in the aftermath, or have collapsed under the pressure, of war.

This would have meant a rate of US$4.40 or thereabouts. The problem of the resumption was that ‘the value of sterling money abroad has been raised by 10 per cent, whilst its purchasing power over British labour is unchanged’. As a consequence, Britain had ‘to reduce our sterling prices . . . by 10 per cent in order to be on a competitive level, unless prices rise elsewhere’.21 Keynes’s later rival Joseph Schumpeter could also see in 1928 that Britain’s return to the gold standard, ‘“stabilizing” the pound at what was, viewed from the standpoint of existing conditions, an artificial value, naturally meant dislocating business, putting a premium on imports and a tax on exports, intensifying losses and unemployment’. It led to a situation which was ‘eminently unstable’. This had been due to ‘the act of politicians, and not to the working of the system which, on the contrary, would have evolved a value of the pound exactly fitting the circumstances’.22 Britain and other European powers had seen a complete reversal of their position.

Williamson, ‘The Price of Gold, 1257–2011’, MeasuringWorth, 2012, http://www.measuringworth.com/gold Total world gold stock: ‘Thomson Reuters GFMS Historic Gold Stock’, in James Turk, The Aboveground Gold Stock: Its Importance and Its Size, GoldMoney Foundation, http://www.goldmoney.com/documents/goldmoney-gold-stock.xls Notes Introduction 1John Maynard Keynes, ‘Economic Possibilities for our Grandchildren’, in Essays in Persuasion, London, 1972 (1st edn 1931), p. 323. 2Joseph Schumpeter, The Crisis of the Tax State, Vienna, 1919. 3F. W. Maitland, Domesday Book and Beyond, Cambridge, 1907, p. 9. 4Ian Fleming, Goldfinger, London, 1959. 5Philip Coggan, Paper Promises: Money, Debt and the New World Order, London, 2011, p. 3. 6Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly, Princeton, 2009. 7B. R. Mitchell, British Historical Statistics, Cambridge, 1988, pp. 601–3. 8Niall Ferguson, The Cash Nexus, London, 2001, p. 126. 9A.


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The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Albert Einstein, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Clayton Christensen, Colonization of Mars, commoditize, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Elon Musk, Erik Brynjolfsson, fear of failure, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, high net worth, hiring and firing, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, technological singularity, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen: Great Stagnation, University of East Anglia, unpaid internship, Vanguard fund, Yogi Berra

Likewise, Robert Gordon’s stellar work on productivity and American prosperity – in some ways the antithesis to Brynjolfsson and McAfee’s work – has given us an extraordinary number of insights. Throughout the work on this book we have been reminded of the significance of many classical or political economists in the nineteenth and twentieth centuries. There are few roads to understanding business and the economy that do not stop by Karl Marx, Joseph Schumpeter, and Friedrich Hayek. One can dispute their politics, but their insights into the economy are instructive for a contemporary student in that field. Similarly, when we have reread works by scholars like John Kenneth Galbraith, Alexander Gerschenkron, and Susan Strange, to name just three, we have been struck by their insights. Much of the recent literature on corporate governance, business development, and strategy that we have read has felt like a copy of the original thought derived from the works of Peter Drucker, Michael Porter, Henry Minzberg, Philip Kotler, and Igor Ansoff.

Over 95 percent of all start-up investments fail to deliver projected returns, and as many as 30–40 percent burn all invested capital and completely fail, says Harvard Business School’s Shikhar Ghosh.31 What is even more striking is that many of them fail for the same reason, probably leading some to suspect that capitalism conforms to the definition of insanity often attributed to Albert Einstein – doing the same thing over and over again, but expecting different results. Of all the internet start-ups, for example, three-quarters fail because of “premature scaling” alone, according to the Startup Genome Report.32 Yet here we are, with rising venture capital investment in internet start-ups – many of them rushing to scale up their businesses faster than the others. Joseph Schumpeter, the Austrian-born economist, argued along the same lines and, partly inspired by German scholar Werner Sombart, portrayed the capitalist innovation process as “a perennial gale of creative destruction.” For Schumpeter, creation and destruction were part of the same process of economic renewal. In fact, in his “vision of capitalism,” the entry of new technologies and entrepreneurs, and the exit of the old, were the central dynamic of progression.33 Capitalism in this school of thought is not a reflection of the way Karl Marx had treated capital accumulation.

Coase started from a simple, almost banal, observation – surprisingly controversial at the time. Companies, he argued, are not black boxes that cannot be understood by economists. Nor are the successes and failures of firms mysteriously shielded from generalized observations about how economies work. Coase, who came from an institutionalist school of thought, was not all that impressed by Joseph Schumpeter’s almost Nietzsche-like admiration of the strong and individualistic entrepreneur: entrepreneurs, Schumpeter later wrote, act “with confidence beyond the range of familiar beacons,” a trait “present in only a small fraction of the population.”14 Nor was Coase satisfied with the residual treatment of firms in much of the economic thinking at the time – a perception of firms memorably described by Cambridge economist Dennis Robertson as “lumps of butter coagulating in a pail of buttermilk.”15 Like other economists with similar interests, Schumpeter could not give a reasonable explanation for why companies exist, and failure to understand such a basic component of economics clouded their views about the role of firms in the economy.


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How to Fix Copyright by William Patry

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A Declaration of the Independence of Cyberspace, barriers to entry, big-box store, borderless world, business intelligence, citizen journalism, cloud computing, commoditize, creative destruction, crowdsourcing, death of newspapers, en.wikipedia.org, facts on the ground, Frederick Winslow Taylor, George Akerlof, Gordon Gekko, haute cuisine, informal economy, invisible hand, Joseph Schumpeter, Kickstarter, knowledge economy, lone genius, means of production, moral panic, new economy, road to serfdom, Ronald Coase, Ronald Reagan, semantic web, shareholder value, Silicon Valley, The Chicago School, The Wealth of Nations by Adam Smith, trade route, transaction costs, trickle-down economics, web application, winner-take-all economy, zero-sum game

From an innovation perspective, balance is precisely the wrong objective. Indeed, it is a dangerous objective since invocation of the balance metaphor is often done in order to maintain the status quo, as in “why upset the balance?” or as in descriptions of the status quo as containing a “delicate balance.” Balance conflicts with the dynamic disruption that creatively pushes us forward no matter how reluctantly: that’s what is behind Austrian economist Joseph Schumpeter’s theory of creative disruption, which was not named, it should be noted, “creative balance.” The balance metaphor should be abandoned in favor of simply asking, “what is the result we want?” What we want, however, cannot be separated from the political arena in which rights and privileges are granted or changed. In that arena, there are serious impediments to the balancing that lawmakers routinely invoke as descriptive of the political process.

It is not at all coincidental that vested rights holder interests favor closed lists while innovative companies favor fair use or other flexible, functional equivalents. As Dr. Francis Gurry, the Director General of the World Intellectual Property Organization cautioned, “Copyright should be about promoting cultural dynamism, not preserving or promoting vested business interests.”26 Innovation Requires a Dynamic Legal System Innovation is by its nature dynamic. Innovation’s power lies in what economist Joseph Schumpeter termed “creative destruction”: the introduction of innovative products and business models that displace old ones.27 If an innovative product or service does not provide competition to existing products or services, it is not innovative. Competition is inextricably linked to innovation. Laws are not. The Internet and information technologies are key drivers of the twenty-first-century economy and cultural development, but such development is possible only if copyright laws do not inhibit their growth.

See http://en.wikipedia.org/wiki/A_Declaration_of_the_Independence_of_Cyberspace. Cf. Jack Goldsmith and Tim Wu, Who Controls the Internet?: Illusions of a Borderless World (2008, Oxford University Press. See also Johnny Ryan, A History of the Interent and the Digital Future (2010, Reaktion Books). 26. Francis Gurry,The Future of Copyright, address delivered in Sydney, Australia, February 25, 2011. 27. Joseph Schumpeter, Capitalism, Socialism and Democracy 83 (Harper & Brothers 3d ed. 1950, 2006 paperback) (1942). 28. Sam Ricketson, WIPO Study on Limitations and Exceptions of Copyright Related Rights in the Digital Environment at page 4, Standing Committee on Copyright and Related Rights, 9th Session, Geneva, June 23 to 27, 2003, SCCR/9/7 (April 5, 2003). Chapter 11 1. Moral Panics and the Copyright Wars (2009, Oxford University Press).


pages: 384 words: 89,250

Made to Break: Technology and Obsolescence in America by Giles Slade

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Albert Einstein, Alexey Pajitnov wrote Tetris, Apple's 1984 Super Bowl advert, Buckminster Fuller, Cass Sunstein, creative destruction, Douglas Engelbart, Douglas Engelbart, global village, housing crisis, indoor plumbing, invention of radio, Joseph Schumpeter, Marshall McLuhan, Mikhail Gorbachev, more computing power than Apollo, mutually assured destruction, Ralph Nader, rent control, Ronald Reagan, Silicon Valley, Steve Jobs, the market place, the medium is the message, Thorstein Veblen, unemployed young men, upwardly mobile, Vladimir Vetrov: Farewell Dossier, white picket fence, women in the workforce

Schairer’s lawyer advised him that Armstrong’s attempt to license the FM system was an “unlawful use of the patent to suppress competition.”15 By the late 1930s, the contest between Armstrong and Sarnoff seemed to be shaping up as a classic confrontation between a huge corporate entity and an upstart entrepreneur. If Armstrong had conceived of his situation in these terms, he might have acted differently. Advanced capitalism had regularly stifle or swallowed up the individual entrepreneur during these years when the political will to enforce legislation against monopolistic practices was the exception rather than the rule. In 1942 the Harvard economist Joseph Schumpeter would devote a portion of his influ ntial book Capitalism, Socialism and Democracy to documenting the causes for what he called “the obsolescence of the entrepreneurial function” in advanced capitalism.16 But whatever Armstrong’s motives were, his decision to exclude RCA proved to be a critical miscalculation, since it left Sarnoff with a strong disincentive to end his campaign against FM.

Perhaps because of this cooptation, the counterculture lasted well beyond the sixties and permitted Madison Avenue to engage in cycle after cycle of rebellion and transgression, marketing new goods, new fads, new symbolic gestures of defian e.The twist that DDB put on psychological obsolescence through their VW ads at the very beginning of the 1960s has been with us ever since. THEODORE LEVITT AND MARSHALL MCLUHAN Bernbach was not the only 1960s marketing genius who was obsessed with obsolescence. Fascinated by the economic theories of Joseph Schumpeter and Peter F. Drucker, Theodore Levitt, an oil industry executive born in Germany decided on a career change in the 1940s. After leaving his position at Standard Oil, Levitt completed a Ph.D. in economics at Ohio State University in 1951. By 1959 he had come under the influ nce of John Kenneth Galbraith and had joined the faculty of Harvard’s Graduate School of Business Administration. An internationally respected economist, Galbraith brought the planned obsolescence controversy into academia by observing that a society which sets for itself the goal of increasing its supply of goods will tend, inevitably, to identify all innovation with additions to, changes in, or increases in its stock of goods.

George Frederick, “Is Progressive Obsolescence the Path toward Increased Consumption?” Advertising and Selling, 11, no. 10 (September 5, 1928): 19,20,44, 46. 3. Ibid., p. 44. 4. Ibid., p. 49. 5. Joseph A. Schumpeter, The Theory of Economic Development: An Enquiry into Profits Capital, Credits, Interest and the Business Cycle,trans. R. Opie (Cambridge: Harvard University Press, 1934). 6. Eduard März, Joseph Schumpeter: Scholar, Teacher, Politician (New Haven: Yale University Press, 1991), p. 5. 7. Schumpeter, Capitalism, Socialism and Democracy, pp. 82–83. 8. Paul M. Mazur, American Prosperity: Its Causes and Consequences (London: Jonathan Cape, 1928), p. 98. 9. Ibid., p. 99. 10. Frederick, “Is Progressive Obsolescence the Path toward Increased Consumption?” p. 44. 11. W. E.Freeland, “Style and Its Relation to Budgeting,”General Management Series,91,pp. 3–19; I.


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The Internet Is Not the Answer by Andrew Keen

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3D printing, A Declaration of the Independence of Cyberspace, Airbnb, AltaVista, Andrew Keen, augmented reality, Bay Area Rapid Transit, Berlin Wall, bitcoin, Black Swan, Bob Geldof, Burning Man, Cass Sunstein, citizen journalism, Clayton Christensen, clean water, cloud computing, collective bargaining, Colonization of Mars, computer age, connected car, creative destruction, cuban missile crisis, David Brooks, disintermediation, Donald Davies, Downton Abbey, Edward Snowden, Elon Musk, Erik Brynjolfsson, Fall of the Berlin Wall, Filter Bubble, Francis Fukuyama: the end of history, Frank Gehry, Frederick Winslow Taylor, frictionless, full employment, future of work, gig economy, global village, Google bus, Google Glasses, Hacker Ethic, happiness index / gross national happiness, income inequality, index card, informal economy, information trail, Innovator's Dilemma, Internet of things, Isaac Newton, Jaron Lanier, Jeff Bezos, job automation, Joseph Schumpeter, Julian Assange, Kevin Kelly, Kickstarter, Kodak vs Instagram, Lean Startup, libertarian paternalism, lifelogging, Lyft, Marc Andreessen, Mark Zuckerberg, Marshall McLuhan, Martin Wolf, Metcalfe’s law, move fast and break things, move fast and break things, Nate Silver, Network effects, new economy, Nicholas Carr, nonsequential writing, Norbert Wiener, Norman Mailer, Occupy movement, packet switching, PageRank, Paul Graham, peer-to-peer, peer-to-peer rental, Peter Thiel, Plutocrats, plutocrats, Potemkin village, precariat, pre–internet, RAND corporation, Ray Kurzweil, ride hailing / ride sharing, Robert Metcalfe, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Skype, smart cities, Snapchat, social web, South of Market, San Francisco, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, TaskRabbit, Ted Nelson, telemarketer, The Future of Employment, the medium is the message, the new new thing, Thomas L Friedman, Tyler Cowen: Great Stagnation, Uber for X, urban planning, Vannevar Bush, Whole Earth Catalog, WikiLeaks, winner-take-all economy, working poor, Y Combinator

“We are asked to perform for our friends, to create things they like, to work on a personal brand—and brands teach us that authenticity is the result of consistency. We must honor our true self and represent the same self to all of our friends or risk being discredited.”105 Berners-Lee’s definition of capitalism, however, is too pedestrian. Rather than just a static market economy that enables trading, capitalism is what the Austrian economist Joseph Schumpeter called an “evolutionary” process of economic change that “never can be stationary.” In his 1942 magnum opus Capitalism, Socialism and Democracy, Schumpeter used the term “Creative Destruction” to describe the constant cycles of disruptive invention and reinvention that drive capitalism. “This process of Creative Destruction is the essential fact about capitalism,” Schumpeter insisted. “It is what capitalism consists in and what every capitalist concern has got to live with.”106 Internet economics, therefore, needs to be understood as a historical narrative rather than as just a static set of market relationships.

Nunes, who’ve replaced the “Innovator’s Dilemma” with the much bleaker “Innovator’s Disaster.” “Nearly everything you think you know about strategy and innovation is wrong,” Downes and Nunes warn about today’s radically disruptive economy.59 In their 2014 book, Big Bang Disruption,60 they describe an economy in which disruption is devastating rather than creative. It’s a world, they say, in which Joseph Schumpeter’s “perennial gales of creative destruction” have become Category 5 hurricanes. Upheavals from big-bang disruptors like Google, Uber, Facebook, and Instagram “don’t create dilemmas for innovators,” Downes and Nunes warn, “they trigger disasters.”61 And Kodak is the textbook example of this kind of disaster—a $31 billion company employing 145,000 people that, as they note, was bankrupted “gradually and then suddenly”62 by the hurricane from Silicon Valley.

Real Books,” New York Times, July 9, 2014. 55 Andrew Wallenstein, “Cable Operator Pitching TV Industry on Plan to Convert Illegal Downloads to Legal Transaction Opportunities,” Variety, August 5, 2013, variety.com/2013/digital/news/comcast-developing-anti-piracy-alternative-to-six-strikes-exclusive-1200572790. 56 “Recording Industry Welcomes Support by Payment Providers to Tackle Illegal Online Sale of Unlicensed Music,” International Federation of the Phonographic Industry, March 2, 2011, ifpi.org/content/section_news/20110302.html. 57 Bill Rosenblatt, “Ad Networks Adopt Notice-and-Takedown for Ads on Pirate Sites,” Copyright and Technology Blog, July 21, 2013, copyrightandtechnology.com/category/economics. 58 Victoria Espinel, “Coming Together to Combat Online Piracy and Counterfeiting,” Whitehouse.gov, July 15, 2013. 59 Kyle Alspach, “Steve Case: Silicon Valley Has Wrong Mindset for Next Internet Revolution,” Techflash, October 10, 2013. 60 Mariana Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths (London: Anthem, 2013), p. 105. 61 Joseph Schumpeter, “The Entrepreneurial State,” Economist, August 31, 2013. 62 Michael Ignatieff, “We Need a New Bismarck to Tame the Machines,” Financial Times, February 11, 2014. 63 Catherine Bigelow, “An Honor for Danielle Steel and a Downton for All,” SFGate, January 9, 2014. 64 Chrystia Freeland, Plutocrats: The Rise of the New Global Super Rich and the Fall of Everyone Else (New York: Penguin, 2012). 65 Chrystia Freeland, “Sympathy for the Toffs,” New York Times, January 24, 2014. 66 Ibid. 67 William Powers, Hamlet’s BlackBerry: A Practical Philosophy for Building a Good Life in the Digital Age (HarperCollins, 2010). 68 Jeff Jarvis, “What Society Are We Building Here?


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The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson, Andrew McAfee

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, access to a mobile phone, additive manufacturing, Airbnb, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, American Society of Civil Engineers: Report Card, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, barriers to entry, basic income, Baxter: Rethink Robotics, British Empire, business intelligence, business process, call centre, Chuck Templeton: OpenTable, clean water, combinatorial explosion, computer age, computer vision, congestion charging, corporate governance, creative destruction, crowdsourcing, David Ricardo: comparative advantage, digital map, employer provided health coverage, en.wikipedia.org, Erik Brynjolfsson, factory automation, falling living standards, Filter Bubble, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, Freestyle chess, full employment, game design, global village, happiness index / gross national happiness, illegal immigration, immigration reform, income inequality, income per capita, indoor plumbing, industrial robot, informal economy, intangible asset, inventory management, James Watt: steam engine, Jeff Bezos, jimmy wales, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, Khan Academy, knowledge worker, Kodak vs Instagram, law of one price, low skilled workers, Lyft, Mahatma Gandhi, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Mars Rover, mass immigration, means of production, Narrative Science, Nate Silver, natural language processing, Network effects, new economy, New Urbanism, Nicholas Carr, Occupy movement, oil shale / tar sands, oil shock, pattern recognition, Paul Samuelson, payday loans, price stability, Productivity paradox, profit maximization, Ralph Nader, Ray Kurzweil, recommendation engine, Report Card for America’s Infrastructure, Robert Gordon, Rodney Brooks, Ronald Reagan, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Simon Kuznets, six sigma, Skype, software patent, sovereign wealth fund, speech recognition, statistical model, Steve Jobs, Steven Pinker, Stuxnet, supply-chain management, TaskRabbit, technological singularity, telepresence, The Bell Curve by Richard Herrnstein and Charles Murray, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, Tyler Cowen: Great Stagnation, Vernor Vinge, Watson beat the top human players on Jeopardy!, winner-take-all economy, Y2K

.* So the only viable way for societies to become wealthier—to improve the standard of living available to its people—is for their companies and workers to keep getting more output from the same number of inputs, in other words more goods and services from the same number of people. Innovation is how this productivity growth happens. Economists love to argue with one another, but there’s great consensus among them about the fundamental importance of innovation for growth and prosperity. Most in the profession would agree with Joseph Schumpeter, the topic’s great scholar, who wrote that, “Innovation is the outstanding fact in the economic history of capitalist society . . . and also it is largely responsible for most of what we would at first sight attribute to other factors.”3 It is here that the consensus ends. How much of this “outstanding fact” is taking place right now, and whether it’s on an upward or downward trend, is a matter of great dispute.

As we discussed at the beginning of the chapter, the earnings of bricklayers will vary a lot less than the winner-take-all earnings of app developers, but that’s not the only difference. Instead of stable market shares, where revenues and income correspond proportionally to differences in talent and effort, competition in winner-take-all markets will be much more unstable and asymmetrical. The great economist Joseph Schumpeter wrote of “creative destruction,” where each innovation not only created value for consumers but also wiped out the previous incumbent. The winners scaled up and dominated their markets, but were in turn vulnerable to the next generation of innovators. Schumpeter’s observation describes markets in software, media, and the Internet much better than traditional markets in manufacturing and services.

Ambitious entrepreneurs are best at this, not well-meaning government leaders or visionary academics. Thomas Edison, Henry Ford, Bill Gates, and many others created new industries that more than replaced the work that was eliminated as farming jobs vanished over the decades. The current transformation of the economy creates an equally large opportunity. Entrepreneurship has been an important part of the Econ 101 playbook at least since economist Joseph Schumpeter’s landmark work, written in the middle of the twentieth century, on the nature of capitalism and innovation. Schumpeter put forward our favorite definition of innovation—“the market introduction of a technical or organisational novelty, not just its invention”—and, like us, believed that it was an essentially recombinant process, “the carrying out of new combinations.”11 He also argued that innovation was less likely to take place in incumbent companies than in the upstarts that were trying to displace them.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

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3D printing, balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

So to understand how they work, and to explain how policy can help them work better, we need a much richer approach. Fortunately, there are plenty of resources within economics with which to do this. For these characteristics of capitalist economies are hardly revelatory. They have been analysed in theory and documented in practice for more than a hundred years of economic scholarship. They underlie the work of some of the greatest economists of the past century—such as Karl Polanyi, Joseph Schumpeter and John Maynard Keynes—and of the more recent schools of evolutionary, institutional and post-Keynesian economics. As the separate chapters in this book show, analysis based on these foundations can generate searching critiques of current policy, and powerful alternative perspectives. Three key insights underpin a rethinking of capitalism in these ways. First, we need a richer characterisation of markets and the businesses within them.

The problem is that adherence to the theory of the market economy prevents the economist from understanding the microeconomic sources of productivity growth in the economy. It is organisations—including household families, business enterprises and government agencies—and not markets that invest in the productive capabilities embodied in physical and human capital that generate productivity. Markets can give organisations access to labour, land, finance and intermediate products, but, as recognised explicitly in the views of both Karl Marx and Joseph Schumpeter, market exchange per se does not enhance the productivity of these inputs.3 Organisations enhance productivity by first developing and then utilising the productive resources that they have under their control. In any economy characterised by significant productivity growth, the investment strategies and organisational structures of business enterprises drive productivity growth. I call these business organisations ‘innovative enterprises’.

Beyond that logical statement, however, the elaboration of the theory of innovative enterprise requires systematic comparative–historical research on the organisational and institutional determinants of the processes that transform technological and market conditions to generate goods and services that are higher quality and lower cost than those that previously existed. Writing at the end of his career, Joseph Schumpeter advised: ‘Nobody can hope to understand the economic phenomena of any, including the present, epoch who has not an adequate command of the historical facts and an adequate amount of historical sense or of what may be described as historical experience.’38 By ‘historical experience’ Schumpeter, who more than any other economist argued for the centrality of innovation for understanding a capitalist economy, meant the ability of the economist to integrate theory and history.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

These institutions long ago marginalised the monetary theories of, for example, the great Scottish economist John Law (1671–1729) who explained the nature of money succinctly back in 1705. He was followed by Henry Thornton (1760–1815) and Henry Dunning MacLeod (1821–1902). John Maynard Keynes (1883–1946) built on these theories and developed practical policies for officials and politicians to implement. However, even then mainstream orthodox economists found his monetary theories and policies challenging, as Joseph Schumpeter explained in his History of Economic Analysis over sixty years ago: it proved extraordinarily difficult for economists to recognise that bank loans and bank investments do create deposits … And even in 1930, when the large majority had been converted and accepted the doctrine as a matter of course, Keynes rightly felt it necessary to re-expound and to defend the doctrine at some length … and some of the most important aspects cannot be said to be fully understood even now.2 A small group of distinguished economists all understood that money as part of a developed monetary system is not, and never has taken the form of a commodity.

verbatim report in the Washington Times, 24 October 2008, washingtontimes.com, accessed 6 June 2016. 8Gillian Tett, ‘Silos and Silences – Why So Few People Spotted the Problems in Complex Credit and What This Implies for the Future’, Financial Stability Review, No. 14, Paris: Banque de France, July 2010, banque-france.fr, accessed 3 October 2013. 9Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time, Boston: Beacon Press, 1957, p. 217. 2. The Creation of Money 1Polanyi, The Great Transformation, p. 132. 2Joseph Schumpeter, A History of Economic Analysis, Oxford: Oxford University Press, 1954, pp. 114–15. 3John Law, Money and Trade Considered with a Proposal for Supplying the Nation with Money, 1705, avalon.law.yale.edu, accessed 6 June 2016. 4Andrea Terzi, ‘The Eurozone Crisis: A Debt Shortage as the Final Cause’, INET Annual Conference, New Economic Thinking: Liberté, Égalité, Fragilité, Paris, 8–11 April 2015.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

The markets and the largest investment-banking operations increasingly came to believe that the authorities would step in to prevent any reckoning for financial bets gone wrong. In this sense, the Great Moderation was at least as much a product of governments as it was of markets, something that pains the heart of free-market fundamentalists. The problem is that in a free market, everyone is free to fail. Indeed, something that Joseph Schumpeter called “creative destruction” is essential to economic progress.The Great Moderation was largely a one-way bet for market participants. Financial crises of one sort or another, which affected companies ranging from Japanese and Swedish banks to Long Term Capital, an American hedge fund, continued to occur. In fact, they became more frequent. However, the US Federal Reserve and Treasury were always quick to flood the market with money and slash interest rates in order to limit the damage to the financial 17 18 Chapter 1 |  The Rise and Fall of the Finance-Driven Economy economy.

Price signals, while imperfect, communicate information relevant to investors and entrepreneurs, who essentially make bets on the future. Profits arise when change occurs in the market and someone seizes the opportunity before others. It is all a big experiment, but millions of autonomous decisions by buyers, sellers, and entrepreneurs sort out what works and what doesn’t, and the economy advances. Another great Austrian, Joseph Schumpeter, called this process “creative destruction,” in which enterprises are constantly dying and being born. The tidy minds of educated elites have always rebelled at this wasteful process. Surely science and analysis, supported by ever-better models and data, can do better than the random judgment of the financial markets. The progressive mind also suspects, not without justification, that the financial markets and the practice of business are corrupt and rigged by a selfish few.


pages: 296 words: 82,501

Stuffocation by James Wallman

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3D printing, Airbnb, back-to-the-land, Berlin Wall, big-box store, Black Swan, BRICs, carbon footprint, Cass Sunstein, clean water, collaborative consumption, commoditize, creative destruction, crowdsourcing, David Brooks, Fall of the Berlin Wall, happiness index / gross national happiness, high net worth, income inequality, Intergovernmental Panel on Climate Change (IPCC), James Hargreaves, Joseph Schumpeter, Kitchen Debate, Martin Wolf, mass immigration, McMansion, means of production, Nate Silver, Occupy movement, Paul Samuelson, post-industrial society, Post-materialism, post-materialism, Richard Florida, Richard Thaler, sharing economy, Silicon Valley, Simon Kuznets, Skype, spinning jenny, The Signal and the Noise by Nate Silver, Thorstein Veblen, Tyler Cowen: Great Stagnation, World Values Survey, Zipcar

Once you had noticed this happening with the process of producing yarn, you would also see that it was a natural part of the progress of other industries. Once someone discovered that making railroads with steel was better than iron, for instance, the iron tracks were obsolete. Actually, while you were about it, this theory did not just sound like a number of industries, it sounded a lot like capitalism. The Austrian American economist Joseph Schumpeter noticed this. “The same process of industrial mutation – if I may use that biological term,” Schumpeter wrote, “incessantly revolutionises the economic structure from within, incessantly destroys the old, incessantly creating a new one. This process of Creative Destruction is the essential fact about Capitalism.” Seen this way, it is little wonder that obsolescence and the waste that came with the throwaway culture resonated so strongly with the captains of consciousness.

Source: Giles Slade, Made to Break (Cambridge: Harvard University Press, 2006). “The same process of industrial mutation – if I may use that biological term,” Schumpeter wrote, “incessantly revolutionises the economic structure from within, incessantly destroys the old, incessantly creating a new one. This process of Creative Destruction is the essential fact about Capitalism.” From Joseph Schumpeter, Capitalism, Socialism and Democracy (New York: Harper, 1942). Christine Frederick For more on Christine Frederick, read Christine McGaffey Frederick, Selling Mrs. Consumer (New York: Business Borse, 1929); also Janice Rutherford, Selling Mrs. Consumer: Christine Frederick and the Rise of Household Efficiency (Athens, Georgia: University of Georgia Press, 2003). Bernard London Find Bernard London, Ending the Depression Through Planned Obsolescence (1932) on Wikimedia.org.


pages: 209 words: 80,086

The Global Auction: The Broken Promises of Education, Jobs, and Incomes by Phillip Brown, Hugh Lauder, David Ashton

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active measures, affirmative action, barriers to entry, Branko Milanovic, BRICs, business process, business process outsourcing, call centre, collective bargaining, corporate governance, creative destruction, credit crunch, David Ricardo: comparative advantage, deindustrialization, deskilling, Frederick Winslow Taylor, full employment, future of work, glass ceiling, global supply chain, immigration reform, income inequality, industrial cluster, industrial robot, intangible asset, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, labour market flexibility, low skilled workers, manufacturing employment, market bubble, market design, neoliberal agenda, new economy, Paul Samuelson, pensions crisis, post-industrial society, profit maximization, purchasing power parity, QWERTY keyboard, race to the bottom, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, sovereign wealth fund, stem cell, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, transaction costs, trickle-down economics, winner-take-all economy, working poor, zero-sum game

—Global Head of HR, European Telecoms Company T he global auction for jobs is not based on a division between head and body nations despite the rhetoric of American technological superiority. Trump cards held by workers in the competition for high-value work have been reshuffled as they have been throughout the history of capitalism. Governments have a political duty to privilege their citizens, but capitalism has no such loyalty. Where it is given room to breathe, it tirelessly accumulates capital in whatever ways it can with scant regard for existing arrangements. Joseph Schumpeter highlighted a relentless capitalism, which “is by nature a form or method of economic change.”1 If alive today, even Schumpeter may have been surprised by the scale of “perpetual commotion” in the economy in recent decades. He would also have been reminded of Karl Marx and Friedrich Engels’s words that under capitalism “all that is solid melts into air, all that is holy is profane, and man is at last compelled to face with sober senses, his real conditions of life, and his relations with his kind.”2 The real condition confronting many well-qualified Americans is an economy of knowledge caught in two minds.

So we will continue in the hope that Americans, along with other developed and emerging nations, will ultimately rise to the national as well as global challenges that will shape the quality of life for the next generation. 164 The Global Auction Notes Chapter One 1. Alexis de Tocqueville, Democracy in America, vol. 2 (New York: Harper and Row, 1966 [1835]). 2. See Richard Rosecrance, The Rise of the Virtual State: Wealth and Power in the Coming Century (New York; Basic Books, 1999), xi. 3. Joseph Schumpeter, Capitalism, Socialism and Democracy (New York: Harper, 1947), chap. 7. 4. Ed Michaels, Helen Handfield-Jones, and Beth Axelrod, The War for Talent (Boston, Mass.: Harvard Business School Press, 2001). 5. Here “low wages” is a relative concept relating to the expectations of the rewards and career prospects associated with professional and managerial occupations. This relative idea of low wages is discussed in chap. 8. 6.


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Double Entry: How the Merchants of Venice Shaped the Modern World - and How Their Invention Could Make or Break the Planet by Jane Gleeson-White

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Affordable Care Act / Obamacare, Bernie Madoff, Black Swan, British Empire, carbon footprint, corporate governance, credit crunch, double entry bookkeeping, full employment, Gordon Gekko, income inequality, invention of movable type, invention of writing, Islamic Golden Age, Johann Wolfgang von Goethe, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, means of production, Naomi Klein, Ponzi scheme, shareholder value, Silicon Valley, Simon Kuznets, source of truth, spice trade, spinning jenny, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, traveling salesman, upwardly mobile

Like Sombart, Weber argues that double entry is significant because it makes possible an abstract measure of income and expenses—and therefore enables the calculation of profit, the key component of capitalistic business practice. Weber also believed that the formal rationality of double entry made the world a cold and disenchanted place—and, ominously, predicted that double entry would continue its rule ‘perhaps until the last ton of fossilized coal is burnt’. The economist Joseph Schumpeter (1883–1950) also traces the development of capitalism back to double-entry bookkeeping. In Capitalism, Socialism and Democracy, published in 1942, Schumpeter says that capitalism adds a new edge to rationality by ‘exalting the monetary unit—not itself a creation of capitalism—into a unit of account. That is to say, capitalist practice turns the unit of money into a tool of rational cost-profit calculations, of which the towering monument is double-entry bookkeeping.’

p. 168 Although he does not go . . . Edwards and Walker, op. cit., p. 345. p. 169 ‘The most general presupposition . . .’ Weber in Carruthers and Espeland, op. cit., p. 32. p. 169 ‘a rational capitalistic establishment . . .’ Weber in Michael J. Fischer, ‘Luca Pacioli on business profits’, Journal of Business Ethics, vol. 25, no. 4, June 2000, pp. 299–312. p. 169 ‘exalting the monetary unit . . .’ Joseph Schumpeter, Capitalism, Socialism and Democracy, Taylor & Francis e-Library, 1942, p. 123. p. 170 ‘generates a formal spirit of critique . . .’ D. Stephen Long, Divine Economy, Routledge, London, 2000, p. 18. p. 171 ‘Perhaps it is sufficient to . . .’ Yamey, Art and Accounting, op. cit., p. 82. p. 172 ‘If [the merchant] be fortunate . . .’ Carruthers and Espeland, op. cit., p. 55. p. 173 In a 2000 essay on biomedical ethics . . .


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How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present by Thomas J. Dilorenzo

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banking crisis, British Empire, collective bargaining, corporate governance, corporate social responsibility, financial deregulation, Fractional reserve banking, Hernando de Soto, income inequality, invisible hand, Joseph Schumpeter, laissez-faire capitalism, means of production, medical malpractice, Menlo Park, minimum wage unemployment, Norman Mailer, Plutocrats, plutocrats, price stability, profit maximization, profit motive, Ralph Nader, rent control, rent-seeking, Robert Bork, Ronald Coase, Ronald Reagan, Silicon Valley, statistical model, The Wealth of Nations by Adam Smith, transcontinental railway, union organizing, Upton Sinclair, wealth creators, working poor, Works Progress Administration, zero-sum game

Luxury consumption provides industry with the stimulus to discover and introduce new things.”2 Indeed, the most successful capitalists have brought to the masses products and services that were once considered luxuries available only to the rich. The result is that the average American working person today lives better in many ways than kings did several hundred years ago, with his automobiles, central heating and air conditioning, swimming pools and hot tubs, inexpensive food, and all the other “necessities” of modern life that those kings would have considered miracles. All of this is the product of capitalism. The economist Joseph Schumpeter summed up how capitalism benefits the masses: The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses. . . . It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings.

Neela Banerjee and David Firestone, “New Kind of Electricity Market Strains Old Wires Beyond Limits,” New York Times, August 24, 2003, 1. CHAPTER ONE: WHAT IS CAPITALISM? 1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Random House, 1937), 422. 2. Ludwig von Mises, Liberalism: In the Classical Tradition (San Francisco: Cobden Press, 1985), 32. 3. Joseph Schumpeter, Capitalism, Socialism, and Democracy, 3rd ed. (New York: Harper and Row, 1962), 62. 4. Ludwig von Mises, Human Action: A Treatise on Economics (Auburn, AL: Ludwig von Mises Institute, 1998), 270. 5. Ibid., 272. 6. For the classic refutation of socialism as an economic system see Ludwig von Mises, Socialism (Indianapolis: LibertyClassics, 1981), first published in 1922. The mass murder and economic destruction that were the inevitable consequences of socialism—and that were predicted by Mises and others in the 1920s—are documented in Stephane Courtois et al., eds., The Black Book of Communism (Cambridge: Harvard University Press, 1999). 7.

The Haves and the Have-Nots by Branko Milanovic

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Berlin Wall, Branko Milanovic, colonial rule, crony capitalism, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, endogenous growth, Fall of the Berlin Wall, financial deregulation, full employment, Gini coefficient, high net worth, illegal immigration, income inequality, income per capita, Joseph Schumpeter, means of production, open borders, Pareto efficiency, Plutocrats, plutocrats, purchasing power parity, Simon Kuznets, very high income, Vilfredo Pareto, Washington Consensus, zero-sum game

After stating boldly, “I am simply investigating the uniformity of the phenomena” and “not seeking to convince anyone,” he, perhaps uniquely in the history of social sciences, warded off potential readers by warning them that “those who have another objective will have no trouble finding an infinity of works which will give them complete satisfaction; they need not read this one.”6 The malaise, Aron explained, stems from Pareto’s attitude, which in essence says that everything professors teach is false. But the professors, Pareto argued, must persevere in this falsehood because that’s the only thing the populace would ever understand, since to teach the truth would be fatal to any social order. In Pareto’s jargon: social equilibrium requires belief in nonlogical sentiments.7 This is how Joseph Schumpeter in his monumental History of Economic Analysis described Pareto:He was a man of strong passions, passions of the kind that effectively preclude a man from seeing more than one side of a political issue, or for that matter, of a civilization. This disposition was reinforced rather than mitigated by his classic education that made the ancient world as familiar to him as were his own Italy and France—the rest of the world just [barely] existed for him.8 Pareto wrote two influential (text)books of economics and is today, in the economics profession, remembered essentially for two contributions: Pareto improvement (or Pareto optimum) and Pareto’s “law” of income distribution.

I am grateful to Andrea Brandolini for the information on Pareto. 5 Raymond Aron, Main Currents in Sociological Thought (New York: Pelican, 1967), 2:176. 6 Vilfredo Pareto, Manual of Political Economy, translated by Ann S. Schwirr (New York: Augustus M. Kelley, 1971), 2. 7 “This is why Pareto will always remain apart among professors and sociologists. It is almost intolerable to the mind, at least to a teacher, to admit that truth in itself can be harmful” (Aron, Main Currents, 2:177). 8 Joseph Schumpeter, A History of Economic Analysis (1952; reprint, New York: Oxford University Press, 1980), 860. 9 The formula is a bit more complicated. Say that the “guillotine” is 1.45. If n people have incomes higher than y, then increasing the threshold to 1.1y would reduce the number of people with such high incomes to n/(1.1)1.45 = n/1.148. 10 Pareto, Manual of Political Economy, 312. 11 Pareto died in 1923, a year after Mussolini came to power in Italy.


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The Great Reset: How the Post-Crash Economy Will Change the Way We Live and Work by Richard Florida

banking crisis, big-box store, blue-collar work, car-free, carbon footprint, collapse of Lehman Brothers, congestion charging, creative destruction, deskilling, edge city, Edward Glaeser, falling living standards, financial innovation, Ford paid five dollars a day, high net worth, Home mortgage interest deduction, housing crisis, if you build it, they will come, income inequality, indoor plumbing, interchangeable parts, invention of the telephone, Jane Jacobs, Joseph Schumpeter, knowledge economy, labour mobility, low skilled workers, manufacturing employment, McMansion, Menlo Park, Nate Silver, New Economic Geography, new economy, New Urbanism, oil shock, Own Your Own Home, pattern recognition, peak oil, Ponzi scheme, post-industrial society, postindustrial economy, reserve currency, Richard Florida, Robert Shiller, Robert Shiller, secular stagnation, Silicon Valley, Silicon Valley startup, sovereign wealth fund, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, total factor productivity, urban decay, urban planning, urban renewal, white flight, young professional, Zipcar

Capitalism, the most innovative, revolutionary economic system of all time, was also prone to financial panics and economic crises. Despite the massive deprivation and human suffering they caused, these crises played a fundamental role in propelling the economy forward. They were critical moments when existing economic and social arrangements were remade, enabling new periods of economic growth. Born in the same year that Marx died, the great theorist of innovation and entrepreneurship, Joseph Schumpeter, used the phrase “creative destruction” to describe how economic crises sweep away old firms and outmoded economic systems and practices, clearing the way for entrepreneurs to introduce new technologies and even entirely new industries and setting into motion a new era of growth. John Maynard Keynes saw in these crises the need for government spending to essentially protect capitalism from itself.

It would never grow rapidly again, he believed, because all the ingredients for growth, including technological innovation and population growth, had been exhausted, and deficit spending by the government was the only way out. The Great Depression set the stage for the Second Great Reset. Just as Hansen and others were advancing this theory and capturing the attention of policy makers and the public, his Harvard colleague Joseph Schumpeter was developing his own, more accurate assessment of the role of innovation in overcoming economic crises. Schumpeter, notes Field, had a much “better fix on what was going on. He developed his homage to the power of creative destruction against the backdrop of what has turned out to be the most technologically dynamic epoch of the twentieth century.”4 Field’s contention about the innovativeness of the Second Reset is based on detailed and meticulous research.


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Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy by Erik Brynjolfsson

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Amazon Mechanical Turk, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, business process, call centre, combinatorial explosion, corporate governance, creative destruction, crowdsourcing, David Ricardo: comparative advantage, easy for humans, difficult for computers, Erik Brynjolfsson, factory automation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, hiring and firing, income inequality, intangible asset, job automation, John Markoff, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Khan Academy, Kickstarter, knowledge worker, labour mobility, Loebner Prize, low skilled workers, minimum wage unemployment, patent troll, pattern recognition, Paul Samuelson, Ray Kurzweil, rising living standards, Robert Gordon, self-driving car, shareholder value, Skype, too big to fail, Turing test, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, wealth creators, winner-take-all economy, zero-sum game

Making progress in these two areas will be the best way to allow human workers and institutions to race with machines, not against them. Fostering Organizational Innovation How can we implement a “race with machines” strategy? The solution is organizational innovation: co-inventing new organizational structures, processes, and business models that leverage ever-advancing technology and human skills. Joseph Schumpeter, the economist, described this as a process of “creative destruction” and gave entrepreneurs the central role in the development and propagation of the necessary innovations. Entrepreneurs reap rich rewards because what they do, when they do it well, is both incredibly valuable and far too rare. To put it another way, the stagnation of median wages and polarization of job growth is an opportunity for creative entrepreneurs.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

Evolutionary economics is in fact a well-established sub-discipline, which has had its own dedicated journal for the past sixteen years.21 Thorstein Veblen first posed the question ‘Why is Economics Not an Evolutionary Science?’ (implying that it really should be) as long ago as 1898.22 In a famous passage in his Capitalism, Socialism and Democracy, which could equally well apply to finance, Joseph Schumpeter characterized industrial capitalism as ‘an evolutionary process’: This evolutionary character . . . is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action; this fact is important and these changes (wars, revolutions and so on) often condition industrial change, but they are not its prime movers.

Left to itself, natural selection should work fast to eliminate the weakest institutions in the market, which typically are gobbled up by the successful. But most crises also usher in new rules and regulations, as legislators and regulators rush to stabilize the financial system and to protect the consumer/voter. The critical point is that the possibility of extinction cannot and should not be removed by excessively precautionary rules. As Joseph Schumpeter wrote more than seventy years ago, ‘This economic system cannot do without the ultima ratio of the complete destruction of those existences which are irretrievably associated with the hopelessly unadapted.’ This meant, in his view, nothing less than the disappearance of ‘those firms which are unfit to live’.30 In writing this book, I have frequently been asked if I gave it the wrong title.

Raff and P. Temin (eds.), Learning by Doing in Markets, Firms and Countries (Cambridge, MA, 1999), pp. 253-94. 27 The allusion is of course to Richard Dawkins, The Selfish Gene (2nd edn., Oxford, 1989). 28 Rudolf Hilferding, Finance Capital: A Study of the Latest Phase of Capitalist Development (London, 2006 [1919]). 29 ‘Fear and Loathing, and a Hint of Hope’, The Economist, 16 February 2008. 30 Joseph Schumpeter, The Theory of Economic Development (Cambridge, MA, 1934), p. 253. 31 Bertrand Benoit and James Wilson, ‘German President Complains of Financial Markets “Monster” ’, Financial Times, 15 May 2008. List of Illustrations Photographic acknowledgements are given in parentheses. Every effort has been made to contact all copyright holders. The publishers will be happy to make good in future editions any errors or omissions brought to their attention.


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Bourgeois Dignity: Why Economics Can't Explain the Modern World by Deirdre N. McCloskey

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Admiral Zheng, agricultural Revolution, Albert Einstein, BRICs, British Empire, butterfly effect, Carmen Reinhart, clockwork universe, computer age, Corn Laws, creative destruction, dark matter, David Ricardo: comparative advantage, Donald Trump, Edward Lorenz: Chaos theory, endogenous growth, European colonialism, experimental economics, financial innovation, Fractional reserve banking, full employment, George Akerlof, germ theory of disease, Gini coefficient, greed is good, Howard Zinn, income per capita, interchangeable parts, invention of agriculture, invention of air conditioning, invention of writing, invisible hand, Isaac Newton, James Watt: steam engine, John Maynard Keynes: technological unemployment, John Snow's cholera map, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, long peace, means of production, Naomi Klein, New Economic Geography, New Urbanism, Paul Samuelson, purchasing power parity, rent-seeking, road to serfdom, Robert Gordon, Ronald Coase, Ronald Reagan, sceptred isle, Scientific racism, Scramble for Africa, Shenzhen was a fishing village, Simon Kuznets, Slavoj Žižek, spinning jenny, Steven Pinker, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, tulip mania, union organizing, Upton Sinclair, urban renewal, V2 rocket, very high income, working poor, World Values Survey, Yogi Berra

It is happening now even in Egypt. Some of the enrichment was win-win, a “creative accumulation,” as the economic historian Nick von Tunzelmann puts it. Think of the hula hoop or the skate board, new products with no close substitutes to be damaged by the novelty. Yet most changes do damage some people — from “creative destruction,” in the phrase of Werner Sombart’s (18631941) made famous by Joseph Schumpeter (1883-1950). Win-lose is usual. Think of the new fold-up-and-carry canvas lawn chairs, which once sold for $40 and now for $6, which have bankrupted companies making the older aluminum chairs. They in turn had bankrupted the old wooden folding deck chairs, which in turn had bankrupted the still older Adirondack non-folding wooden chairs. Chicago prospers mightily, and windily proclaims its might, and so St.

The theories of the economists took useful account of little changes—a 5 percent rise of income when cotton factories grew or a 10 percent fall when Napoleon ruled the Continent. But they did not notice that the change to be explained, 1780-1860, was not 5 or 10 percent but 100 percent, and was on its way to that unprecedented 1,500 percent relative to what is was in the eighteenth century. Only recently, beginning in the 1950s, has the inquiry into the nature and causes of the wealth of nations begun to recognize the oversight. In the 1940s Joseph Schumpeter was already scornful of the classical economists for their failure to see what was happening. T. R. Malthus (1766-1834) and David Ricardo (1772-1823) “lived at the threshold of the most spectacular economic development ever witnessed. . . . [yet] saw nothing but cramped economies, struggling with ever-decreasing success for their daily bread.”1 Their student John Stuart Mill (1806-1873) even in 1871 “had no idea of what the capitalist engine was going to achieve.”

A world without a United States might have permanently turned after 1945 against the Industrial Revolution, just as a world without Britain and Holland would not have developed bourgeois dignity and liberty in the first place.57 A deeper reply is that the turn to the left, and many of the turns to the right, did in fact stop the Industrial Revolution, at any rate in the places where anti-innovation was well and truly tried. To be sure, in 1945 it looked like market societies were exhausted, and that giving socialism and the welfare state a serious trial even in the United States was in the cards. The best economists, such as Joseph Schumpeter, Alvin Hansen, John Maynard Keynes, Oskar Lange, Paul Samuelson, and Abba Lerner, thought at the time — with greater or lesser pleasure at the thought — that the world was moving from capitalism to socialism, whether or not the embattled democracies survived. Many people were impressed by the Soviet successes of the 1930s, whatever their human costs, and were very impressed by Stalin’s victory over Hitler.


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Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

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algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, Plutocrats, plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

Basically, these economists concentrate on economic booms and what distorts them. Every boom, they say, comes from extraordinary credit expansion out of proportion to real economic growth. One Austrian School acolyte, Kurt Richebächer, had predicted just that unhappy fate for the U.S. housing bubble several years before his death during the summer of 2007. Hyman Minsky (1919-96), part Keynesian, part disciple of Joseph Schumpeter, became so well known for preaching the financial system’s vulnerability to speculation and risk that admirers labeled the August panic a “Minsky Moment.” Certainly the Austrian-Minsky fusion, so specific in its finger pointing, will rise or fall on the economic outcome of the next several years. Parallel inflections have been suggested for energy: the insistence that fossil-fuel history has also had dramatic break points that prompted government, commerce, and society to redirect how energy was used and to recast the global structure of its production and consumption.

With booming currency markets, soaring derivative volume, and the enabling effects of large-scale computerization, the basic backdrop for the sectoral triumph of finance was in place. FIGURE 2.3 The Evolution of Critical Derivatives, 1972-2005 Source: Chase Manhattan; 1993-2005 discussions from various sources. Back in 1977, Time had titled a lengthy essay on credit card issuers “Merchants of Debt” but had examined none of the bolder new financial products. Perhaps unknowingly, the magazine had adopted a phrase used in the 1930s by Joseph Schumpeter, an economist of the Austrian School, and then in the 1970s by Hyman Minsky. Both men argued that downturns evolved from financial and credit excesses. “Merchants of debt” was their epithet for banks and other financial entities that strove to market debt in as many (innovative) forms and to as many buyers as possible. The longer good times persisted—a description most of the last quarter century would fit—the more likely the financial sector was to be marketing unwise or risky products.6 The omissions and fallibilities of U.S. census and economic data are not a principal concern of this book.

Indeed, foreigners sold U.S. securities heavily in August. Clearly, elements of marketplace globalization are in some retreat, not least in the United States. Over the last fifteen years, I have used the term “financial mercantilism” to describe a collaboration in which Washington and the U.S. financial sector seek to minimize certain unwanted marketplace forces. The purpose is to suppress what economist Joseph Schumpeter called “creative destruction”—for the United States, circa 2008, that would include the failure of a major financial institution or the deflation-cum-downward-revaluation of financial assets. My book Arrogant Capital (1994), following several notable bailouts, used this phraseology: “Financial mercantilism—government-business collaboration calculated to suspend or stymie market forces—has at least partly replaced yesteryear’s vibrant capitalism.”


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Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

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Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buy low sell high, capital asset pricing model, corporate raider, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, Kenneth Arrow, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, money market fund, Myron Scholes, new economy, New Journalism, Paul Samuelson, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, stochastic process, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond, zero-sum game

The Commission was home to Nobel laureate Harry Markowitz in the 1950s and is still home to many other famous scholars. Plans were also made to establish the new journal, to be called Econometrica. That journal is now nearly sixty years old and commands wide respect among economists, statisticians, and mathematicians. The first issue of Econometrica, which appeared in January 1933, contained an introductory article by the famous Harvard economist and the first president of the Econometric Society, Joseph Schumpeter, as well as a timely paper by Irving Fisher titled “The Debt-Deflation Theory of Great Depressions.” The first fruit of Cowles’s own research into market forecasting, an article titled “Can Stock Market Forecasters Forecast?,” appeared in the July 1933 issue. A three-word abstract of the article concluded: “It is doubtful.” Cowles analyzed the track records of four sets of forecasters: sixteen leading financial services that furnished their subscribers with selected lists of common stocks; the purchases and sales of stocks made by twenty leading fire insurance companies; a test of the Dow Theory gleaned from Hamilton’s editorials in The Wall Street Journal; and the twenty-four publications that had set Cowles off on his quest, including sixteen professional financial services, four financial weeklies, one bank letter, and one investment-house letter.

Hence, a few years later, I took time off to earn a Ph.D. in economics.”1 At the age of thirty, in 1932, Williams enrolled in the Graduate School of Arts and Sciences at Harvard. He set out to find an economist who could explain to his satisfaction what had caused the recent debacle in the nation’s economy, as Diogenes had set out with his lamp in search of one honest man. Williams got to know the greats of the Harvard economics faculty at the time—the quintessential Viennese Joseph Schumpeter, the plain midwestern American Alvin Hansen, and the irrepressible Wassily Leontief, newly arrived from the University of Kiel in Germany, to which he had fled after the Russian revolution. Much as Williams admired these figures, he confesses in his memoir that, like Diogenes, he never found the man he was seeking. When it came time to write his doctoral dissertation, he conferred with Schumpeter about an appropriate topic.

Modigliani describes Burbank as “a famous anti-foreigner and anti-semite.”4 Samuelson is even harsher: “Burbank stood for everything in scholarly life for which I had utter contempt and abhorrence.”5 The interview did not go well. Burbank reviewed the list of all the famous people on the Harvard faculty, expressed his doubts that Modigliani could match their skills, and suggested that the young man go home.a Though he had decided that Harvard was clearly not for him, Modigliani did have lunch with Joseph Schumpeter and Gottfried Haberler while he was in Cambridge. Haberler was another senior and foreign-born member of the Harvard department. “They gave me hell,” Modigliani recalls, when he told them he had decided to return to the New School.6 They insisted that Burbank had overstepped his authority and had no business rejecting the choice of the economics faculty. Unpersuaded, Modigliani took the train back to New York City that afternoon.


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Multitude: War and Democracy in the Age of Empire by Michael Hardt, Antonio Negri

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affirmative action, Berlin Wall, Bretton Woods, British Empire, conceptual framework, continuation of politics by other means, David Graeber, Defenestration of Prague, deskilling, Fall of the Berlin Wall, feminist movement, Francis Fukuyama: the end of history, friendly fire, global village, Howard Rheingold, Howard Zinn, illegal immigration, Joseph Schumpeter, labour mobility, land reform, land tenure, late capitalism, liberation theology, means of production, Naomi Klein, new economy, Paul Samuelson, private military company, race to the bottom, RAND corporation, reserve currency, Richard Stallman, Slavoj Žižek, The Chicago School, The Structural Transformation of the Public Sphere, Thomas Malthus, Thorstein Veblen, Tobin tax, transaction costs, union organizing, War on Poverty, Washington Consensus

Power may at times be more widely distributed or at others divided between two or several rulers, but the only thing that can never exist is a total absence of power, a void. In effect, when scholars use the term anarchy to characterize such periods they usually refer not to an absence of power but merely to institutional chaos, excesses or defects of the production of norms, or conflicts among powers—and all of this was certainly present in England’s seventeenth-century interregnum as it is in today’s era of globalization. As Joseph Schumpeter says, just when it seems that the field is clear and empty, there are really already the seeds of “a tropical growth of new legal structures.”76 Our contemporary interregnum, in which the modern national paradigm of political bodies is passing toward a new global form, is also populated by an abundance of new structures of power. The only thing that remains constantly present and never leaves the scene is power itself.

For the “republican” line, see the various publications that refer to “global civil society,” such as Mary Kaldor, Global Civil Society: An Answer to War (Cambridge: Polity, 2003); and the annual journal Global Civil Society, which began publication in 2001. 75 On the limitations of the “domestic analogy,” which attempts to link political forms on the global scene with those in the national framework, see Empire, 3-21. 76 Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper and Brothers, 1942), 141. 77 See Saskia Sassen, “The State and Globalization,” in Rodney Hall and Thomas Biersteker, eds., The Emergence of Private Authority in Global Governance (Cambridge: Cambridge University Press, 2002), 91-112. See also our Empire. 78 For a good summary of the theories of uneven development and unequal exchange, see B.

To the extent that Leo Strauss is an intellectual point of reference for these neoconservatives, one might have suspected such a development after having read Strauss’s book on Spinoza, in which he gives a nihilistic interpretation of the ontology, a skeptical reading of ethics, and a cold reception of prophetic Judaism. It is an interpretation remarkably close to Schmitt’s reading of Hobbes. 118 See Joseph Schumpeter, Business Cycles (New York: McGraw-Hill, 1939). For Schumpeter’s theory of crisis, see also “The Analysis of Economic Change,” Review of Economic Statistics 17, (May 1935): 2-10; and “Theoretical Problems of Economic Growth,” Journal of Economic History 7 (November 1947): 1-9. 119 See Antonio Damasio, Looking for Spinoza: Joy, Sorrow, and the Feeling Brain (New York: Harcourt, 2003). 120 Eric Raymond, The Cathedral and the Bazaar (Sebastopol, CA: O’Reilly, 1999).


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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

In 1930 he had published The Theory of Interest, a polishing and rethinking of his earlier writings on financial economics that today is seen as his most important contribution to the field.23 And the mathematical approach he favored had finally begun to gain traction, especially in Europe. The wealth of 1920s America lured European scholars across the Atlantic. One of them, Norwegian future Nobelist Ragnar Frisch, persuaded Fisher to join him in launching an association of mathematically minded economists. Harvard’s Joseph Schumpeter, an Austrian-educated scholar who didn’t do much math himself but admired those who did, signed on as a cofounder. They dubbed their new group the Econometric Society, and began to hold occasional small meetings where papers were presented. They didn’t have the money to do much more. A letter arrived in Fisher’s mailbox from Cowles. Fisher, who had known Cowles’s father and uncle at Yale, enlisted the newspaper heir as the society’s patron.

The book is a brilliant guide to bargain hunting, but isn’t much help to someone looking for a general theory of investing. Williams’s Theory was more congenial in its approach. Williams had been a junior investment banker in Boston when the great crash came. He stayed on at his firm until 1932, and then enrolled in Harvard’s economics Ph.D. program in hopes that he would learn to “understand the workings of the economy as a whole.” His faculty adviser Joseph Schumpeter was worried that Williams’s conservative political beliefs might rub others on the dissertation committee the wrong way and urged him to focus on a subject that no one would dare challenge him on.14 The result was The Theory of Investment Value. “Rational men, when they buy stocks and bonds, would never pay more than the present worth of the expected future dividends,” Williams wrote, “…nor could they pay less, assuming perfect competition, with all traders equally well informed.”15 The book was thus a guide to valuing stocks on the basis of projected future dividends, much as Irving Fisher had outlined back in 1906.

Putnam’s Sons, 1971), 27. 23. The full text of Theory of Interest is available online at the Library of Economics and Liberty, www.econlib.org. 24. According to various Cowles Commission reports, attendees at the summer conferences, which ran from 1935 through 1940, included economists Ragnar Frisch, Trygve Haavelmo, Nicholas Kaldor, Oskar Lange, Wassily Leontief, Abba Lerner, Paul Samuelson, and Joseph Schumpeter; statistician-geneticist R. A. Fischer; statistical quality control pioneer Walter Shewhart; statisticians Corrado Gini (of “Gini coefficient” fame), Harold Hotelling, and Jacob Wolfowitz (who fathered a famous son named Paul); and mathematicians Karl Menger and Abraham Wald. 25. Alfred Cowles III, “Can Stock Market Forecasters Forecast?” Econometrica (July 1933): 324. 26. New York Times, Jan. 1, 1933, 7. 27.


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The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

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activist fund / activist shareholder / activist investor, Albert Einstein, Asian financial crisis, banks create money, Bretton Woods, British Empire, capital controls, currency manipulation / currency intervention, currency peg, deindustrialization, European colonialism, facts on the ground, fiat currency, financial independence, floating exchange rates, full employment, global reserve currency, imperial preference, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, margin call, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, New Journalism, open economy, Paul Samuelson, Potemkin village, price mechanism, price stability, psychological pricing, reserve currency, road to serfdom, seigniorage, South China Sea, special drawing rights, The Great Moderation, the market place, trade liberalization, Works Progress Administration

Maynard would later reflect proudly on his chosen profession that the economist “must be mathematician, historian, statesman, philosopher.”5 He would never display a rare gift as any one of these alone, but he amalgamated them with a genius that no economist has ever matched. It is a long-standing matter of contention among Keynes’s chroniclers the degree to which his personal life should be held to inform his development as a public intellectual, scholar, and statesman. Famed economist Joseph Schumpeter, for example, cuttingly pronounced Keynes’s famous aphorism “in the long run we are all dead” to be a natural perspective for a childless thinker. Keynes and his future wife, it should be noted, had tried to have a child in the late 1920s; but more to the point, to dismiss important elements of Keynes’s thinking on the grounds that they were artifacts of alleged hidden impulses is to fail to give his reasoning its due.

“Had Keynes begun … with the simple statement that he found it realistic to assume that modern capitalistic societies had money wage rates that were sticky and resistant to downward movements,” the great economist Paul Samuelson argued in 1964, “most of his insights would have remained just as valid.”96 This is the logical basis on which much Keynesian analysis today is undertaken—not on Keynes’s theorizing about the unique menace of money (to which Keynes clung tenaciously). “Most people who admire Keynes,” Joseph Schumpeter wryly observed, “take from him what is congenial to them and leave the rest.”97 For his part, Rueff argued that Keynes’s monetary and fiscal policy prescriptions had no sound basis. On the contrary, their inevitable result down the road would be inflation and a private productive apparatus less able to supply the goods and services people actually want.98 Hubert Henderson and others had shared this view, but it did not become widespread until the stagflation of the 1970s and the consequent anti-Keynesian blowback.

As for Britain, he observed that “even such advantage as used to exist in depreciating the exchange has been greatly diminished by the growing practice of linking money wage rates to the cost of living. If money wages in this country always go up when the cost of imported food stuffs rises, the power of exchange depreciation to help us begins to evaporate.”40 Keynes was more an internationalist Englishman than an English internationalist. Therefore it was not surprising that “Keynes’s advice,” in the words of his great contemporary Joseph Schumpeter, “was in the first instance always English advice, born of English problems.”41 These problems were mutating rapidly with global economic and political forces during the 1920s and ’30s. In the ’20s, memories were still fresh of Great Britain, the nineteenth century’s imperial creditor nation, in Keynes’s words “conduct[ing] the international orchestra,” whereas by the ’30s a grim acceptance had set in that Britain had a chronic payments deficit problem that could not be cured within the strictures of any idealist, “automatic” global system—particularly one whose terms would now be set by the United States.


pages: 327 words: 103,336

Everything Is Obvious: *Once You Know the Answer by Duncan J. Watts

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active measures, affirmative action, Albert Einstein, Amazon Mechanical Turk, Black Swan, butterfly effect, Carmen Reinhart, Cass Sunstein, clockwork universe, cognitive dissonance, collapse of Lehman Brothers, complexity theory, correlation does not imply causation, crowdsourcing, death of newspapers, discovery of DNA, East Village, easy for humans, difficult for computers, edge city, en.wikipedia.org, Erik Brynjolfsson, framing effect, Geoffrey West, Santa Fe Institute, George Santayana, happiness index / gross national happiness, high batting average, hindsight bias, illegal immigration, industrial cluster, interest rate swap, invention of the printing press, invention of the telescope, invisible hand, Isaac Newton, Jane Jacobs, Jeff Bezos, Joseph Schumpeter, Kenneth Rogoff, lake wobegon effect, Long Term Capital Management, loss aversion, medical malpractice, meta analysis, meta-analysis, Milgram experiment, natural language processing, Netflix Prize, Network effects, oil shock, packet switching, pattern recognition, performance metric, phenotype, Pierre-Simon Laplace, planetary scale, prediction markets, pre–internet, RAND corporation, random walk, RFID, school choice, Silicon Valley, statistical model, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, The Death and Life of Great American Cities, the scientific method, The Wisdom of Crowds, too big to fail, Toyota Production System, ultimatum game, urban planning, Vincenzo Peruggia: Mona Lisa, Watson beat the top human players on Jeopardy!, X Prize

It assumes, in effect, that as long as economists have a good model of how individuals behave, they effectively have a good model for how the economy behaves as well. In eliminating the complexity, however, the representative-agent approach effectively ignores the crux of the micro-macro problem—the very core of what makes macroeconomic phenomena “macro” in the first place. It was for precisely this reason, in fact, that the economist Joseph Schumpeter, who is often regarded as the founding father of methodological individualism, attacked the representative-agent approach as flawed and misleading.10 In practice, however, methodological individualists have lost the battle, and not just in economics. Pick up any work of history, sociology, or political science that deals with “macro” phenomena, like class, race, business, war, wealth, innovation, politics, law, or government, and you will find a world populated with representative agents.

Bruce Mayhew (1980) and Frank Dobbin (1994) have both made a similar argument about circular reasoning. 6. This argument was made long ago by the physicist Philip Anderson in a famous paper titled “More Is Different” (Anderson 1972). 7. For Thatcher’s original quote, see Keay (1987). 8. The definition of “methodological individualism” is typically traced to the early twentieth century in the writings of the Austrian economist Joseph Schumpeter (1909, p. 231); however, the idea goes back much earlier, at least to the writings of Hobbes, and was popular among the thinkers of the Enlightenment, for whom an individualistic view of action fit perfectly with their emerging theories of rational action. See Lukes (1968) and Hodgson (2007) for a discussion of the intellectual origins of methodological individualism, as well as a scathing critique of its logical foundations. 9.


pages: 387 words: 110,820

Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell

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barriers to entry, Berlin Wall, big-box store, cognitive dissonance, computer age, creative destruction, Daniel Kahneman / Amos Tversky, delayed gratification, deskilling, Donald Trump, Edward Glaeser, fear of failure, Ford paid five dollars a day, Frederick Winslow Taylor, George Akerlof, global supply chain, global village, greed is good, Howard Zinn, income inequality, interchangeable parts, inventory management, invisible hand, James Watt: steam engine, Joseph Schumpeter, Just-in-time delivery, knowledge economy, loss aversion, market design, means of production, mental accounting, Pearl River Delta, Ponzi scheme, price anchoring, price discrimination, race to the bottom, Richard Thaler, Ronald Reagan, side project, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, traveling salesman, ultimatum game, Victor Gruen, washing machines reduced drudgery, working poor, yield management, zero-sum game

IKEA touts its “green side” by lighting its stores with low-wattage bulbs and charging extra for plastic bags while its clientele burns through gallon after gallon of fuel to buy disposable tables and lamps. Asked his assessment of company practices, MIT-trained urban development expert Wig Zamore said: “IKEA is the least sustainable retailer on the planet.” IN 1939, Harvard economist Joseph Schumpeter singled out key retail organizations as causing the “big disturbance.” He wrote that they “disrupt the existing system and enforce a distinct process of adaptation.” Typically, these outfits were founded by what he called “new men,” with “new capital.” Discounters from Woolworth to Walton to Kamprad are typical of these new men. None was born into the business he would one day dominate, and perhaps as a consequence none felt bound by traditional business practices.

,” Washington Post, July 9, 2008, A15. 137 Vietnam and other low-wage nations: See Anna Eriksson and Margareta Przedpel ska, “The Impact of Swedish Investment and Trade in Labour Conditions in Vietnam,” a master’s thesis online at www.ep.liu.se/exjobb/eki/2001.nek/018. 138 seven times the area of a football field: A football field is a bit less than 58,000 square feet in area. 138 500-kilometer radius: Karin Lundstrom, “Will IKEA Make the Arctic Bloom?” This Europe, November 29, 2007; see http://www.thiseurope.com/node/191. 138 charging extra for plastic bags: Avis Thomas-Lester, “IKEA Puts a Price on Throw-away Plastic,” Washington Post, March 16, 2007, B01. 139 “enforce a distinct process of adaptation”: Joseph Schumpeter, Business Cycles (New York: McGraw-Hill, 1939), 101. 140 “that could be moved around at will”: Richard Sennett, The Craftsman (New Haven, Conn.: Yale University Press, 2008). 143 consumer electronics shop members: Carol Stocker, “The Fix Is in Decline,” Boston Globe, February 10, 2005, H1. 143 young viewers were unlikely to encounter one: The Fix-It Shop was converted to a Mail-It Shop with a fax machine and shipping service.


pages: 279 words: 87,910

How Much Is Enough?: Money and the Good Life by Robert Skidelsky, Edward Skidelsky

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banking crisis, basic income, Bertrand Russell: In Praise of Idleness, Bonfire of the Vanities, call centre, creative destruction, David Ricardo: comparative advantage, death of newspapers, financial innovation, Francis Fukuyama: the end of history, full employment, happiness index / gross national happiness, income inequality, income per capita, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, lump of labour, market clearing, market fundamentalism, Paul Samuelson, profit motive, purchasing power parity, Ralph Waldo Emerson, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, union organizing, University of East Anglia, Veblen good, wage slave, wealth creators, World Values Survey, zero-sum game

Francis could all agree on this point, whatever else their differences. Writers from as far afield as India and China could also agree on it, as we shall see. Aristotle is the classic source of pre-modern economic thought, for two reasons. First, unlike his more radical predecessor Plato, he did not try to conjure a social ideal out of pure reason. His goal was simply to organize the opinions of his educated contemporaries, to forge them into a system. Joseph Schumpeter’s description of his economic writings as “decorous, pedestrian, slightly mediocre, and more than slightly pompous common sense” is a caricature, but not a complete distortion.1 Second, and related to this, Aristotle was the dominant influence on all economic theorizing from the twelfth to the seventeenth century. He created a framework of ideas that was to survive, with various modifications, until its replacement by the equally imposing edifice of Adam Smith.

Quoted in Alain Martineau, Herbert Marcuse’s Utopia (Montreal: Harvest House, 1984), p. 7. 50. Quoted ibid., p. 20. 51. Herbert Marcuse, One-Dimensional Man: Studies in the Ideology of Advanced Industrial Society, ed. Douglas Kellner (Boston: Beacon Press, 1991), pp. xlii, xxx. 52. Ibid., p. 246. 53. Herbert Marcuse, Eros and Civilization (New York: Random House, 1961), p. 48. 54. Ibid., p. 260. CHAPTER 3. THE USES OF WEALTH 1. Joseph Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 57. 2. Aristotle, Nicomachean Ethics, tr. Christopher Rowe and Sarah Broadie (Oxford: Oxford University Press, 2002), p. 251. In Aristotle’s other major ethical work, the Eudemian Ethics, he is more even-handed between the active and the philosophical life. 3. Aristotle, Politics in The Complete Works of Aristotle, ed.


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Stealth of Nations by Robert Neuwirth

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accounting loophole / creative accounting, big-box store, British Empire, call centre, collective bargaining, corporate governance, full employment, Hernando de Soto, illegal immigration, income inequality, informal economy, invisible hand, Jane Jacobs, jitney, joint-stock company, Joseph Schumpeter, megacity, microcredit, New Urbanism, pirate software, profit motive, Shenzhen was a fishing village, Simon Kuznets, special economic zone, The Wealth of Nations by Adam Smith, thinkpad, upwardly mobile, Vilfredo Pareto, yellow journalism

Polanyi believed in the importance of markets but, in his most famous work, The Great Transformation, critiqued the impact of conceiving “the free market” as the natural way of the world. If society is devoted to the principle of profit as the root of life, he wrote, “the idea of freedom thus degenerates into a mere advocacy of free enterprise—which is today reduced to a fiction by the hard reality of giant trusts and princely monopolies.” (Polanyi’s contemporary, the economist Joseph Schumpeter, compressed this thought into a more striking image: “The stock exchange is a poor substitute for the Holy Grail.”) Polanyi saw the free market as a political construct and argued that the pursuit of profit alone would not liberate people from slavery or guarantee that we could not poison the planet. He called for moral and ethical principles to ride herd over financial success, and argued that our economic actions needed to be embedded within a larger sense of shared social values.

In fact, most wars are good for business. As Mother Courage tells her entourage in Bertolt Brecht’s play about a street peddler in medieval Europe’s Hundred Years’ War, “I won’t let you spoil my war for me. Destroys the weak, does it? Well, what does peace do for ’em, huh? War feeds its people better.” While Brecht’s words may sound shocking today, they’re not much different from what some respected economists have said. As Joseph Schumpeter, one of the great economic phrasemakers, put it, “No bourgeoisie ever disliked war profits.” Indeed, wartime profiteering extends to the modern era and to some conflicts that are considered far too noble and high-minded to have involved smuggling and profiteering. For instance, in order to channel the nation’s resources for World War II, the United States instituted stringent price controls.


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A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, corporate raider, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

South Korea may rely more on market solutions than Britain does in the provision of health care, but the case is the reverse in water or railways. If the ‘slippery slope’ existed, we wouldn’t have these kinds of diversity. The (Neo-)Schumpeterian School One-sentence summary: Capitalism is a powerful vehicle of economic progress, but it will atrophy, as firms become larger and more bureaucratic. Joseph Schumpeter (1883–1950) is not one of the biggest names in the history of economics. But his thoughts were original enough to have a whole school named after him – the Schumpeterian, or neo-Schumpeterian, school.* (Not even Adam Smith has a school named after him.) Like the Austrians, Schumpeter worked under the shadow of the Marxist school – so much so that the first four chapters of his magnum opus, Capitalism, Socialism, and Democracy (henceforth CSD), published in 1942, are devoted to Marx.17 Joan Robinson, the famous Keynesian economist, once famously quipped that Schumpeter was just ‘Marx with the adjectives changed’.

He is often thought of as an Austrian economist (no, not by his nationality – he was an American), but he had a lot of Institutionalist influences, and some of his ideas overlap with the Keynesian and the Behaviouralist ones. 2. Physicists have tried, and failed, to construct what they call the ‘theory of everything’. 3. ‘… and in their darkness bind them all’, goes the rest of the sentence. 4. Joseph Schumpeter emphasized that all analysis in economics is preceded by a pre-analytical cognitive act, called vision, in which the analyst ‘visualise[s] a distinct set of coherent phenomena as a worth-while object of [his] analytic efforts’. He pointed out that ‘this vision is ideological almost by definition’, as ‘the way in which we see things can hardly be distinguished from the way in which we wish to see them’.


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Creative Intelligence: Harnessing the Power to Create, Connect, and Inspire by Bruce Nussbaum

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3D printing, Airbnb, Albert Einstein, Berlin Wall, Black Swan, Chuck Templeton: OpenTable, clean water, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Danny Hillis, declining real wages, demographic dividend, Elon Musk, en.wikipedia.org, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, follow your passion, game design, housing crisis, Hyman Minsky, industrial robot, invisible hand, James Dyson, Jane Jacobs, Jeff Bezos, jimmy wales, John Gruber, John Markoff, Joseph Schumpeter, Kickstarter, lone genius, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, new economy, Paul Graham, Peter Thiel, QR code, race to the bottom, reshoring, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, six sigma, Skype, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, Tesla Model S, The Chicago School, The Design of Experiments, the High Line, The Myth of the Rational Market, thinkpad, Tim Cook: Apple, too big to fail, tulip mania, We are the 99%, Y Combinator, young professional, Zipcar

Funding Circle, for example, has lent $37 million to six hundred local businesses and Crowdcube has raised about $4 million in equity capital for more than a dozen companies. If Americans shifted just half of their combined $30 trillion of investments in multinational conglomerates to local businesses, argues Cortese, “we’d be living in a far different world.” CREATIVE DESTRUCTION AND CREATIVE EDUCATION In Capitalism, Socialism and Democracy, Joseph Schumpeter wrote, “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” Schumpeter, the father of “creative destruction,” saw a version of capitalism in which entrepreneurs were the central, disruptive energy sustaining economic growth.

Volume 11, “Laissez-faire: Pro and Con” (Chicago: University of Chicago Press, 1999). 244 Fortunately, there are “incubators”: Nicole Davis, “Putting Your Money Where Your Mom and Pops Live,” Brooklyn Based, March 3, 2012, accessed September 15, 2012, http://brooklynbased.net/email/2012/ 03/putting-your-money-where-your-mom-and-pops-live/. 244 As Amy Cortese, a crowdfunding: http://www.amycortese.com/Amy_Cortese_homepage.html, accessed September 15, 2012; Davis, “Putting Your Money Where Your Mom and Pops Live.” 244 ”people need to be able: Amy Cortese, correspondence with author, August 7, 2012. 244 Cortese believes that: Ibid. 244 Smallknot, for example: Davis, “Putting Your Money Where Your Mom and Pops Live.” 244 Egg restaurant in Brooklyn: Ibid. 244 The forty-five investors: Smallknot profile of Egg restaurant campaign, http://smallknot.com/egg, accessed September 15, 2012. 244 Smallknot was founded by two: Andrew Cominelli, “Smallknot Redefines Small Business Finance,” Greenpoint Gazette, March 14, 2012, accessed September 15, 2012, http://www.greenpointnews.com/news/4316/ smallknot-redefines-small-business-finance. 245 “We were working all hours”: Ibid. 245 “Local crowdfunding can mitigate”: Amy Cortese, correspondence with author, August 7, 2012. 245 In Britain, crowdfunding: http://locavesting.blogspot.com, accessed October 18, 2012. 245 Funding Circle, for example: http://www.fundingcircle.com/, accessed September 15, 2012. 245 If Americans shifted just half: Danielle Sacks, interview with Amy Cortese, “ ’Locavesting’: Investing in Main Street Instead of Wall Street,” Fast Company, accessed October 18, 2012, http://www.fastcoexist.com/1678356/ locavesting-investing-in-main-street-instead-of-wall-street. 245 In Capitalism, Socialism and Democracy: Joseph Schumpeter, Capitalism, Socialism and Democracy (New York: Harper, 1975; orig. pub. 1942), 82–85. CHAPTER 9 251 Sixteen of us had spent: Future of Design Summit, Stanford, March 19 to 20, 2010. Among the others at the summit were Nick Leon, now director of Design London; Bill Burnett, Executive Director of the Stanford Design Program; Ronald Jones, who leads the Experience Design Group at Konstfack University College of Arts, Crafts and Design in Stockholm; Nathan Shedroff, who was then launching a design strategy MBA at California College of the Arts in San Francisco; and Jacob Mathew, cofounder of IDIOM, a top innovation consultancy in India. 253 Roger Martin at the Rotman: I talk with Roger Martin often and have done many interviews and panels with him over the last fifteen years, but he shared this important bit of advice about assessing creativity during an online discussion.


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The Paypal Wars: Battles With Ebay, the Media, the Mafia, and the Rest of Planet Earth by Eric M. Jackson

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bank run, business process, call centre, creative destruction, disintermediation, Elon Musk, index fund, Internet Archive, iterative process, Joseph Schumpeter, market design, Menlo Park, Metcalfe’s law, money market fund, moral hazard, Network effects, new economy, offshore financial centre, Peter Thiel, Robert Metcalfe, Sand Hill Road, shareholder value, Silicon Valley, Silicon Valley startup, telemarketer, The Chicago School, the new new thing, Turing test

After several years of erratic ups and downs, the venture reached profitability, registered 40 million users, became the first Internet company to stage an IPO following the 9/11 terrorist attacks, and eventually sold out to a much bigger firm. While this is an impressive track record by most standards, it’s far short of what our group initially hoped to accomplish. I may not have fully appreciated it when I accepted the CEO’s invitation to join what was then a tiny startup, but it stands to reason that the creation of most technology ventures is by necessity a tumultuous process. Joseph Schumpeter, a Harvard economist, dubbed the process of entrepreneurs unleashing new innovations into the marketplace as “creative destruction” because it invariably shakes up the existing economic order.1 Looking back, this term is certainly appropriate to describe what PayPal set out to do, and it also hints at the turbulence that accompanied our efforts. Vigorous competition provided one source of that tumult.

Every successful company needs some form of a big-picture vision to guide its decision-making processes. Management teams also need to motivate their employees by making them feel that their company is somehow special. Both cases certainly applied to Confinity. But those observations alone don’t diminish the magnitude of Peter’s vision. Even though he never used the exact words, he was pledging to turn Confinity into nothing less than an initiator of the “creative destruction” that Joseph Schumpeter described sixty years earlier. He genuinely seemed to believe that this little startup had the ability to upend the world’s financial systems by giving consumers unparalleled power over their own finances. Say what you will about this vision’s credibility, but in the days that followed his speech I became convinced that Peter wasn’t the only person in the office who believed it. The company’s Web site designer created a T-shirt that showed God and Adam from Michelangelo’s Sistine Chapel ceiling exchanging cash with a pair of Palm Pilots.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

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Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

One theory that emerged in the early 1930s was that the engineers had overreached. Several Austrian-born economists led by Friedrich Hayek argued that economic booms bred overinvestment in dubious or unprofitable projects, and reasoned that the economy required a slump to clear away this overhang of unneeded assets. “Depressions are not simply evils, which we might attempt to suppress,” wrote another of the Austrians, Joseph Schumpeter, “but forms of something which has to be done, namely, adjustment to change.” Anything that remedied the Depression would interfere with this necessary adjustment. This ecological view was shared by Andrew Mellon, Herbert Hoover’s Treasury secretary. He welcomed the cleansing effect of the Great Depression. Hoover recalls being told by Mellon to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… it will purge the rottenness out of the system.

Louis: The Federal Reserve Bank of St. Louis). 11 Wilson was quite taken: Woodrow Wilson, Papers of Woodrow Wilson, February 24, 1898, 440. 12 “What we are proceeding”: Ibid., December 23, 1913, 65. 13 “The whole country”: Quoted in “About… Robert Latham Owen,” accessed at http://www.kansascityfed.org/publicat/TEN/pdf/Fall2007/Fall07About.RobertOwen.pdf. 14 “forms of something which has to be done”: Joseph Schumpeter, “Depressions,” in Economics of the Recovery Program (New York: McGraw-Hill, 1934). 15 “liquidate labor, liquidate stocks”: Whether Mellon actually said this is unknown. It was attributed to him by Herbert Hoover in The Memoirs of Herbert Hoover, The Great Depression 1929–1941 (New York: Macmillan, 1952), 30. 16 had to restore prices and end deflation: Fisher’s views are well captured in Robert Loring’s Irving Fisher: A Biography (Hoboken, N.J.: Wiley, 1993), 240. 17 It was the engineer’s duty: Hoover wrote this in 1954 in Engineer’s Week.

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

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active measures, Affordable Care Act / Obamacare, barriers to entry, business process, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial innovation, fixed income, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Robert Shiller, shareholder value, Steve Jobs, The Great Moderation, value at risk

See Feng Gu and Baruch Lev, “Overpriced Shares, Ill-Advised Acquisitions, and Goodwill Impairment,” The Accounting Review 86 (2011): 1995–2022. 3. This brings to mind the great economist (“creative destruction”) Joseph Schumpeter: “Success in conducting a business enterprise depends under present conditions much more on the ability to deal with labor leaders, politicians and public officials than it does on business ability . . . Hence, except in the biggest concerns [companies] that can afford to employ specialists of all kinds, leading positions tend to be filled by “fixers” and “trouble shooters” rather than by “production men.” In Joseph Schumpeter, Capitalism, Socialism, and Democracy, 3rd ed. (New York: HarperPerennial, 1950), 386. 4. Interestingly, the 1902 report informs about an employee’s subscription plan to purchase the preferred stock of the company to participate in the future profits of US Steel.


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Milton Friedman: A Biography by Lanny Ebenstein

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affirmative action, banking crisis, Berlin Wall, Bretton Woods, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Arrow, labour market flexibility, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Ponzi scheme, price stability, rent control, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thorstein Veblen, zero-sum game

Hansen also thought that the “great contribution of Keynes’ General Theory was the clear and specific formulation of the consumption function. This is an epochmaking contribution to the tools of economic analysis, analogous to, but even more important than, Marshall’s discovery of the demand function.”6 Developed economies are, Hansen and other Keynesians believe, subject to long-term stagnation as a result of attempted excess savings. According to Joseph Schumpeter, who was often considered with Keynes to have been one of the two leading contemporary economists in the first half of the twentieth century, Keynes’s was a “doctrine that... can easily be made to say both that ‘who tries to save destroys real capital’ and that, via saving, ‘the unequal distribution of income is the ultimate cause of unemployment.’ This is what the Keynesian Revolution amounts to.”7 A declining average propensity to consume as economies mature provides much of the basis for core elements in the Keynesian public policy program: government deficit spending, high estate and progressive income taxation, and a major role for national government macromanagement of the economy.

Johnson: I suspect Friedman had a lot to do with it.11 Many agree that the phrase “Chicago school of economics” was not used until after World War II. According to Henry Spiegel, a wellread and judicious historian of economic thought: “At the time when Viner taught at Chicago, the designation ‘Chicago School’ was not yet a commonly used term.”12 No reference to the “Chicago school” has been found in histories of economic thought written before the mid-1950s, including Joseph Schumpeter’s massive History of Economic Analysis, Joseph Dorfman’s multivolume The Economic Mind in American Civilization, and Paul Homan’s Contemporary Economic Thought. Similarly, there is apparently no reference to a “Chicago school” in the American Economic Review or Journal of Political Economy before the 1950s. Friedman himself provides evidence that the name “Chicago school of economics” was not used before the postwar era.


pages: 403 words: 111,119

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth

3D printing, Asian financial crisis, bank run, basic income, battle of ideas, Berlin Wall, bitcoin, blockchain, Branko Milanovic, Bretton Woods, Buckminster Fuller, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, choice architecture, clean water, cognitive bias, collapse of Lehman Brothers, complexity theory, creative destruction, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, dematerialisation, Douglas Engelbart, Douglas Engelbart, en.wikipedia.org, energy transition, Erik Brynjolfsson, ethereum blockchain, Eugene Fama: efficient market hypothesis, experimental economics, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, Financial Instability Hypothesis, full employment, global supply chain, global village, Henri Poincaré, hiring and firing, Howard Zinn, Hyman Minsky, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, land value tax, Landlord’s Game, loss aversion, low skilled workers, M-Pesa, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, megacity, mobile money, Mont Pelerin Society, Myron Scholes, neoliberal agenda, Network effects, Occupy movement, off grid, offshore financial centre, oil shale / tar sands, out of africa, Paul Samuelson, peer-to-peer, planetary scale, price mechanism, quantitative easing, randomized controlled trial, Richard Thaler, Ronald Reagan, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, smart cities, smart meter, South Sea Bubble, statistical model, Steve Ballmer, The Chicago School, The Great Moderation, the map is not the territory, the market place, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, Torches of Freedom, trickle-down economics, ultimatum game, universal basic income, Upton Sinclair, Vilfredo Pareto, wikimedia commons

‘I don’t care who writes a nation’s laws – or crafts its advanced treatises – so long as I can write its economics textbooks,’ he declared in later years, ‘The first lick is the privileged one, impinging on the beginner’s tabula rasa at its most impressionable state.’34 Samuelson’s 1948 Circular Flow diagram, which depicted income flowing round the economy as if it were water flowing round plumbed pipes. A long struggle of escape Paul Samuelson was not alone in appreciating the extraordinary influence wielded by those who determine how we begin. His teacher and mentor, Joseph Schumpeter, also realised that the ideas handed down to us can be very hard to shake off, but he was determined to do so, to make way for his own insights. As Schumpeter wrote in his 1954 History of Economic Analysis, In practice we all start our own research from the work of our predecessors, that is, we hardly ever start from scratch. But suppose we did start from scratch, what are the steps we should have to take?

Jevons himself had a hunch that economic analysis should be dynamic but, lacking the mathematics to do it, he settled for comparative statics, which compares snapshots of two points in time: it was an unfortunate compromise because it led him away from, rather than towards, the insight he ultimately sought.13 In the 1860s, Karl Marx described how the relative income shares of workers and capitalists would continually rise and fall, due to self-perpetuating cycles of output and employment.14 By the end of the nineteenth century, Thorstein Veblen was criticising economics for being ‘helplessly behind the times in not being evolutionary’ and therefore unable to explain change or development,15 while Alfred Marshall argued against mechanical metaphors and, instead, for seeing economics as ‘a branch of biology, broadly interpreted’.16 Twentieth-century attempts to recognise the economy’s inherent dynamism were likewise made by deeply opposing schools of thought but even they couldn’t dislodge equilibrium thinking. In the 1920s John Maynard Keynes critiqued the use of comparative statics, pointing out that it is precisely what happens in between those snapshots of economic events that is of greatest interest. ‘Economists set themselves too easy, too useless a task,’ he wrote, ‘if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.’17 In the 1940s, Joseph Schumpeter drew on Marx’s insights into dynamism to describe how capitalism’s inherent process of ‘creative destruction’, through continual waves of innovation and decline, gave rise to business cycles.18 In the 1950s, Bill Phillips created his MONIAC precisely with the aim of replacing comparative statics with system dynamics, complete with the time lags and fluctuations that can be observed as water flows into and out of tanks.


pages: 351 words: 93,982

Leading From the Emerging Future: From Ego-System to Eco-System Economies by Otto Scharmer, Katrin Kaufer

Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, Asian financial crisis, Basel III, Berlin Wall, Branko Milanovic, cloud computing, collaborative consumption, collapse of Lehman Brothers, colonial rule, Community Supported Agriculture, creative destruction, crowdsourcing, dematerialisation, Deng Xiaoping, en.wikipedia.org, European colonialism, Fractional reserve banking, global supply chain, happiness index / gross national happiness, high net worth, housing crisis, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Johann Wolfgang von Goethe, Joseph Schumpeter, market bubble, mass immigration, Mikhail Gorbachev, Mohammed Bouazizi, mutually assured destruction, Naomi Klein, new economy, offshore financial centre, peak oil, ride hailing / ride sharing, Ronald Reagan, Silicon Valley, smart grid, Steve Jobs, technology bubble, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, Washington Consensus, working poor, Zipcar

The guideline “what’s good for the financial sector is good for the whole country and economy” or, in the case of the United States, “what’s good for Wall Street is good for America,” does not apply, as became painfully visible when the financial meltdowns destroyed roughly US$50 trillion of capital36 and worldwide about 30 million jobs between 2007 and the end of 2009.37 Rather than improving the efficiency of a financial services industry that extracts profits by generating one bubble after another, what we need is a more effective financial market that serves the needs of the real economy. 2. Money is not capital. Capital is an entrepreneurial capacity that propels the economy and drives the transformative process of value creation. Financial capital allows entrepreneurs to take an idea and move it toward action: to hire people, build a product that they envision, and create the infrastructure required to sustain a business. As described by the economist Joseph Schumpeter, this process is “creative destruction.”38 What drives it? In Schumpeter’s view, it is the entrepreneur. Schumpeter thought that capitalism would eventually destroy itself by crowding out entrepreneurs from increasingly bigger and more bureaucratic companies.39 While his view on entrepreneurs rings true to many, there is an even deeper force at work that drives entrepreneurial activity and value creation across all sectors of society.

., 20 Business Alliance for Local Living Economies (BALLE), 89–90, 218–219 Capital, 75, 77, 241 collectively creating, 100–102 myths about, 102 natural, human, industrial, and financial, 91–92 origin, history, and meanings of the term, 91 reclaiming our ownership of, 102–103 relinking financial with real, 90–103 Capitalism, 90 current crisis of, 137 evolution of, as evolution of consciousness, 51, 52f, 53–57 Joseph Schumpeter on, 96 Max Weber on, 79 shared ownership and, 135 stakeholder, 54 (see also Society 3.0) Capitalism 2.0, 92, 187 Capitalism 3.0, 92, 187 Cardoso, Fernando Henrique, 63 Cardoso, Marcelo, 222–223 Catholic Church, 32 Challenge-response model of economic evolution, 51, 52f, 55–56 Cheney, Dick, 20 Chernobyl disaster, 34–36 China, 60–61, 141 Chinese government, leading learning communities in the, 215–217 Cicero, 130 Citigroup, 10 Civil society movements, problems with the first wave of, 41 Civil society organizations (CSOs), 227 Climate and Development Knowledge Network (CDKN), 181 Action Lab Event, 181–182 Climate change, 37, 174 shifting the conversation on, 180–182 Clinton, Bill, 58 Closed heart, 32, 33 Closed-loop designs, 81–82 Closed mind, 32, 33 Closed will, 32, 33 “Closing-in” points, 240.


pages: 151 words: 38,153

With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don't Pay Enough by Peter Barnes

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Alfred Russel Wallace, banks create money, basic income, Buckminster Fuller, collective bargaining, computerized trading, creative destruction, David Ricardo: comparative advantage, declining real wages, deindustrialization, diversified portfolio, en.wikipedia.org, Fractional reserve banking, full employment, hydraulic fracturing, income inequality, Jaron Lanier, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, land reform, Mark Zuckerberg, Network effects, oil shale / tar sands, Paul Samuelson, profit maximization, quantitative easing, rent-seeking, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, the map is not the territory, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, Upton Sinclair, Vilfredo Pareto, wealth creators, winner-take-all economy

If one country’s carbon price is lower than another’s, import fees can make up the difference. 17. California Public Utilities Commission, “Decision Adopting Cap-and-Trade Greenhouse Gas Allowance Revenue Allocation Methodology for the Investor-Owned Electric Utilities, San Francisco,” 2012, 58, http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M031/K744/31744787.pdf. Chapter 9: From Here to the Adjacent Possible 1. Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Row, 1942). 2. Niles Eldredge and Stephen Jay Gould, “Punctuated equilibria: An alternative to phyletic gradualism,” in T. J. M. Schopf, ed., Models in Paleobiology (San Francisco: Freeman Cooper, 1972, 82—115, http://www.blackwellpublishing.com/ridley/clas-sictexts/eldredge.pdf. 3. Stuart Kauffman, Investigations (New York: Oxford University Press, 2003). 4.

Social Capital and Civil Society by Francis Fukuyama

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Berlin Wall, blue-collar work, Fall of the Berlin Wall, feminist movement, Francis Fukuyama: the end of history, George Akerlof, German hyperinflation, Jane Jacobs, Joseph Schumpeter, Kevin Kelly, labor-force participation, low skilled workers, p-value, Pareto efficiency, postindustrial economy, principal–agent problem, RAND corporation, Silicon Valley, The Death and Life of Great American Cities, transaction costs, World Values Survey

Many social scientists will accept the importance of exogenously generated norms in the capitalist economy, and many further believe that the latter plays a role over time in depleting social capital that has been built up through noneconomic means. There is a significant and interesting literature on the “cultural contradictions of capitalism,” which argues that capitalist development ultimately undermines itself by producing insufficient norms, or else by producing norms at odds with those necessary for the operation of markets and innovation. Perhaps the most famous exponent of this view was Joseph Schumpeter, who argued in Capitalism, Socialism, and Democracy that capitalism tended to produce a class of elites over time that was hostile to the very forces that had made their lives possible and that they would eventually seek to replace market economies with socialist ones.1 Daniel Bell and others have written about the problems of affluence in undermining the work ethic and other kinds of norms necessary to the capitalist order.2 It is a staple of the contemporary literature about corporate layoffs and downsizing that the global economy has become an enemy of community by disrupting families, localities, and the loyalties that at one time pervaded the workplace.3 1 Joseph A.


pages: 113 words: 37,885

Why Wall Street Matters by William D. Cohan

Apple II, asset-backed security, bank run, Bernie Sanders, bonus culture, break the buck, buttonwood tree, corporate governance, corporate raider, creative destruction, Credit Default Swap, Donald Trump, Exxon Valdez, financial innovation, financial repression, Fractional reserve banking, Gordon Gekko, greed is good, income inequality, Joseph Schumpeter, London Interbank Offered Rate, margin call, money market fund, moral hazard, Potemkin village, quantitative easing, secular stagnation, Snapchat, South Sea Bubble, Steve Jobs, Steve Wozniak, too big to fail, WikiLeaks

It’s impossible, of course, to try to surmise what would have happened if the Federal Reserve and the Treasury had not bailed out Wall Street in 2008, because the Fed and the Treasury did bail out Wall Street in 2008. And by the way, though people may forget, that is exactly why the Federal Reserve was set up in the first place a century earlier: to bail out Wall Street if needed and to save capitalism from itself, the seeds of its own destruction having been sown from the start, as the economist Joseph Schumpeter famously argued. Still, we fume. At the infamous April 2009 meeting in the Roosevelt Room at the White House between President Obama, then three months into the job, and the CEOs of the nation’s biggest and most powerful banks, the mood was tense, to say the least. The stock market had hit its relative lows during the previous month. There was lots of noise about how Wall Street’s just-bailed-out bankers had still managed to pay themselves multimillion-dollar bonuses.


pages: 540 words: 168,921

The Relentless Revolution: A History of Capitalism by Joyce Appleby

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1919 Motor Transport Corps convoy, agricultural Revolution, anti-communist, Asian financial crisis, asset-backed security, Bartolomé de las Casas, Bernie Madoff, Bretton Woods, BRICs, British Empire, call centre, collateralized debt obligation, collective bargaining, Columbian Exchange, commoditize, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, Doha Development Round, double entry bookkeeping, epigenetics, equal pay for equal work, European colonialism, facts on the ground, failed state, Firefox, fixed income, Ford paid five dollars a day, Francisco Pizarro, Frederick Winslow Taylor, full employment, Gordon Gekko, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, hiring and firing, illegal immigration, informal economy, interchangeable parts, interest rate swap, invention of movable type, invention of the printing press, invention of the steam engine, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, Jeff Bezos, joint-stock company, Joseph Schumpeter, knowledge economy, land reform, Livingstone, I presume, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, moral hazard, Parag Khanna, Ponzi scheme, profit maximization, profit motive, race to the bottom, Ralph Nader, refrigerator car, Ronald Reagan, Scramble for Africa, Silicon Valley, Silicon Valley startup, South China Sea, South Sea Bubble, special economic zone, spice trade, spinning jenny, strikebreaker, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thorstein Veblen, total factor productivity, trade route, transatlantic slave trade, transatlantic slave trade, transcontinental railway, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration, Yogi Berra, Yom Kippur War

By the last three decades of the nineteenth century the United States and Germany had nurtured the innovations that picked up the beat of economic development. Constant innovations didn’t come without cost, because every improved device rendered obsolete its predecessor. Prodded by the lure of stronger sales and higher profits, backers of incessant inventiveness hurt established industries and firms. The early-twentieth-century Austrian economist Joseph Schumpeter captured the essence of capitalism, with his “creative destruction” of the old by the new.28 Rarely has anyone so precisely hit the nail on the head, implying the consequences associated with both “creative” and “destruction.” Less catchy is the economists’ take on this, “early obsolescence,” a phrase meant to indicate that commercial objects don’t grow old; they just become obsolete when they are replaced by something better.

Forced to dissolve his trust, Rockefeller created a cluster of smaller Standard Oils. And therein lies a capitalist morality play. When in 1909 a federal court ordered the dissolution of Standard Oil, managers who had chafed under the centralization of authority in the company’s New York City headquarters had the chance to try new techniques. There’s almost a law hidden here, a corollary to Joseph Schumpeter’s famous remark that capitalism involved creative destruction. Capitalism benefits from periodic liberation from established authorities, freeing those who yearn to experiment, innovate, and learn from fresh ideas.50 Corporate power in the United States waxed strong as the nineteenth century came to an end. The imperialist forays of Western governments into Africa and Asia made them more accommodating of their domestic capitalists.

This is because in the United States, the first two years of college are dedicated to what is called general education, unlike other national systems, which have students specializing in secondary schools. So along with all the newly minted scientists who found good jobs in higher education there were thousands in literature, philosophy, history, political science, and sociology who did so as well. With tenured positions within the academy, much of the country’s intelligentsia lost the acerbic tone of skeptical outsiders, common in Europe. The economist Joseph Schumpeter feared that capitalism would fail because of its cultural opponents. The American public has resoundingly supported capitalism and its demands on society in part because they have not been exposed to the withering commentary of critics. State legislatures and private philanthropists got behind the monumental effort to build university systems by opening up their purses. For that, they expected gratitude from the students.


pages: 651 words: 180,162

Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb

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Air France Flight 447, Andrei Shleifer, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, Chuck Templeton: OpenTable, commoditize, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discrete time, double entry bookkeeping, Emanuel Derman, epigenetics, financial independence, Flash crash, Gary Taubes, George Santayana, Gini coefficient, Henri Poincaré, high net worth, hygiene hypothesis, Ignaz Semmelweis: hand washing, informal economy, invention of the wheel, invisible hand, Isaac Newton, James Hargreaves, Jane Jacobs, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, Marc Andreessen, meta analysis, meta-analysis, microbiome, money market fund, moral hazard, mouse model, Myron Scholes, Norbert Wiener, pattern recognition, Paul Samuelson, placebo effect, Ponzi scheme, principal–agent problem, purchasing power parity, quantitative trading / quantitative finance, Ralph Nader, random walk, Ray Kurzweil, rent control, Republic of Letters, Ronald Reagan, Rory Sutherland, selection bias, Silicon Valley, six sigma, spinning jenny, statistical model, Steve Jobs, Steven Pinker, Stewart Brand, stochastic process, stochastic volatility, The Great Moderation, the new new thing, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Malthus, too big to fail, transaction costs, urban planning, Vilfredo Pareto, Yogi Berra, Zipf's Law

This optionality-driven method of search is not foolishly random. Thanks to optionality, it becomes tamed and harvested randomness. Creative and Uncreative Destructions Someone who got a (minor) version of the point that generalized trial and error has, well, errors, but without much grasp of asymmetry (or what, since Chapter 12, we have been calling optionality), is the economist Joseph Schumpeter. He realized that some things need to break for the system to improve—what is labeled creative destruction—a notion developed, among so many other ones, by the philosopher Karl Marx and a concept discovered, we will show in Chapter 17, by Nietzsche. But a reading of Schumpeter shows that he did not think in terms of uncertainty and opacity; he was completely smoked by interventionism, under the illusion that governments could innovate by fiat, something that we will contradict in a few pages.

Ancient Greek culture represented a balance of the two, until the influence of Socrates on Euripides gave a larger share to the Apollonian and disrupted the Dionysian, causing this excessive rise of rationalism. It is equivalent to disrupting the natural chemistry of your body by the injection of hormones. The Apollonian without the Dionysian is, as the Chinese would say, yang without yin. Nietzsche’s potency as a thinker continues to surprise me: he figured out antifragility. While many attribute (mistakenly) the notion of “creative destruction” to the economist Joseph Schumpeter (not wondering how something insightful and deep can come out of an economist),2 while, as we saw, the more erudite source it to Karl Marx, it is indeed Nietzsche who was first to coin the term with reference to Dionysus, whom he called “creatively destructive” and “destructively creative.” Nietzsche indeed figured out—in his own way—antifragility. I read Nietzsche’s The Birth of Tragedy twice, first as a child when I was very green.

Castel, 2008, “Seeing Is Believing: The Effect of Brain Images on Judgments of Scientific Reasoning.” Cognition 107: 343–352. McCloskey, D., and S. Ziliak, 1996, “The Standard Error of Regressions.” Journal of Economic Literature 34(1): 97–114. McConaugby, D., C. Matthews, and A. Fialko, 2001, “Founding Family Controlled Firms: Performance, Risk and Value.” Journal of Small Business Management 39: 31–49. McCraw, Thomas 2007, Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: The Belknap Press of Harvard University. McGill, S., 2007, Low Back Disorders: Evidence-Based Prevention and Rehabilitation. Human Kinetics Publishers. McGrath, R. G., 1999, “Falling Forward: Real Options Reasoning and Entrepreneurial Failure.” Academy of Management Review: 13–30. McKnight, Scot, 2009, Fasting. Thomas Nelson. McMahon, Darrin M., 2001, Enemies of the Enlightenment: The French Counter-Enlightenment and the Making of Modernity.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Although the gap has closed since then, with the 2011 figures at around $15 trillion and $14 trillion, respectively, there are still substantial institutional “cash pools” outside the banking system (Pozsar, Adrian, et al. 2012). Whereas the traditional image of a bank is as a crucial intermediary between lenders and borrowers, banks today operate not simply as issuers of debt but also as repositories of risk. To grasp the significance of this difference for money, I want to turn to the arguments of Hyman Minsky and Susan Strange. MINSKY’S HALF-CENTURY Hyman Minsky was a doctoral student of Joseph Schumpeter and Wassily Leontief at Harvard during the 1940s. Whereas Schumpeter had drawn attention to banks’ importance in the business cycle, Minsky’s main focus was on the effect of financial markets on the wider economy (Minsky 1993a, 1993b). During the 1970s, Minsky developed the financial instability hypothesis, in which he argued that speculative bubbles and spells of financial market instability are part of the normal life cycle of the economy (Minsky 1992).

For the latter, what is involved is rather—if we must speak of “meaning” at all—that meaning which lies in the function of money in the economic process. For this meaning the other (“cultural significance”) is relevant only insofar as it influences the actual behaviour of people with respect to money; and here it is again a question of performance (to be answered in the individual case) whether one succeeds in grasping these elements of a given cultural environment which are essential for the explanation of monetary history. JOSEPH SCHUMPETER, “MONEY AND CURRENCY”1 Schumpeter’s insistence that culture is “not what concerns monetary science” typifies a way of approaching money in classical social and economic thought that has never really gone away—even though it has been persuasively challenged by scholars in sociology and anthropology. Revealingly perhaps, though many of the discussions so far in this book have touched upon the question of money’s relationship with culture, none has focused on it explicitly and directly.

L’Enfer des Choses René Girard et la Logique de l’Economie, Paris, Seuil. Durkheim, E. (1899). “De la définition des phénomènes religieux.” Année sociologique 2: 1–28. Durkheim, E. (1997). The Division of Labor in Society, New York, Free Press. Durkheim, E. (2001). The Elementary Forms of Religious Life, Oxford, U.K., Oxford University Press. Eagleton, T. (2012). Why Marx Was Right, New Haven, CT/London, Yale University Press. Earley, J. S. (1994). “Joseph Schumpeter: A Frustrated ‘Creditist.’ ” New Perspectives in Monetary Macroeconomics, G. Dymski and R. Pollin Eds. Ann Arbor, University of Michigan Press: 337–51. Economou, M., M. Madianos, et al. (2011). “Increased Suicidality amid Economic Crisis in Greece.” Lancet 378: 1459. Eggertsson, G. B. and P. Krugman (2012). “Debt, Deleveraging and the Liquidity Trap: A Fisher-Minsky-Koo Approach.” The Quarterly Journal of Economics 127 (3): 1469–513.

The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

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air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business process, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, labour market flexibility, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K, zero-sum game

or "What is the likelihood of the markup changing between broad-woven fabrics on the one hand and the market for men's suits on the other?" I would define what was going on in general terms and then translate that into the implications for individual businesses. That was my value-added, and we prospered. Working with heavy industry gave me a profound appreciation of the central dynamic of capitalism. "Creative destruction" is an idea that was articulated by the Harvard economist Joseph Schumpeter in 1942. Like many powerful ideas, his is simple: A market economy will incessantly revitalize itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive ones. I read Schumpeter in my twenties and always thought he was right, and I've watched the process at work through my entire career. The telegraph was a perfect illustration. By the time my friend Herbie and I had set out as kids to learn Morse code in the late 1930s, the telegraph industry was at its peak.

A d a m Smith's Enlightenment ideas of individual initiative and the power of markets came back from near eclipse in the 1930s to their current dominance of the global economy. Smith (above left) remains among my deepest intellectual influences. I was also influenced by the thinking of John Locke (above right), the great British moral philosopher who articulated fundamental notions of life, liberty, and property, and Joseph Schumpeter, the twentieth-century economist whose concept of creative destruction gets to the heart of the role of technological change in a modern capitalist society. TOP LEFT: Hulton Archive/Getty Images; TOP RIGHT: Bettman/Corbis; BOTTOM RIGHT: Getty Images More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright.

T H E AGE OF T U R B U L E N C E We did not find it necessary to raise rates for another six months—and then only to 5.5 percent, and for a different reason. GDP continued to grow at a solid pace, unemployment shrank, and inflation stayed in check, for another four years. By not being too quick to raise rates, we helped clear the way for the postwar period's longest economic boom. This was a classic example of why you can't just decide monetary policy based on an econometric model. As Joseph Schumpeter might have pointed out, models are subject to creative destruction too. E ven rising productivity could not explain the looniness of stock prices. On October 14, 1996, the Dow Jones Industrial Average vaulted past 6,000—a milestone achieved, declared a front-page story in USA Today, "on the opening day of the seventh year of the most consistent bull market in history." Papers all across the country put the news on the front page too.


pages: 687 words: 189,243

A Culture of Growth: The Origins of the Modern Economy by Joel Mokyr

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Andrei Shleifer, barriers to entry, Berlin Wall, clockwork universe, cognitive dissonance, Copley Medal, creative destruction, David Ricardo: comparative advantage, delayed gratification, deliberate practice, Deng Xiaoping, Edmond Halley, epigenetics, Fellow of the Royal Society, financial independence, framing effect, germ theory of disease, Haber-Bosch Process, hindsight bias, income inequality, invention of movable type, invention of the printing press, invisible hand, Isaac Newton, Jacquard loom, Jacquard loom, Jacques de Vaucanson, James Watt: steam engine, John Harrison: Longitude, Joseph Schumpeter, knowledge economy, labor-force participation, land tenure, law of one price, Menlo Park, moveable type in China, new economy, phenotype, price stability, principal–agent problem, rent-seeking, Republic of Letters, Ronald Reagan, South Sea Bubble, statistical model, survivorship bias, the market place, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, transaction costs, ultimatum game, World Values Survey, Wunderkammern

—David Hume, 1742 Contents Acknowledgments ix Preface xiii Part I: Evolution, Culture, and Economic History Chapter 1: Culture and Economics 3 Chapter 2: Nature and Technology 16 Chapter 3: Cultural Evolution and Economics 22 Chapter 4: Choice-based Cultural Evolution 34 Chapter 5: Biases in Cultural Evolution 43 Part II: Cultural Entrepreneurs and Economic Change, 1500–1700 Chapter 6: Cultural Entrepreneurs and Choice-based Cultural Evolution 59 Chapter 7: Francis Bacon, Cultural Entrepreneur 70 Chapter 8: Isaac Newton, Cultural Entrepreneur 99 Part III: Innovation, Competition, and Pluralism in Europe, 1500–1700 Chapter 9: Cultural Choice in Action: Human Capital and Religion 119 Chapter 10: Cultural Change and the Growth of Useful Knowledge, 1500–1700 142 Chapter 11: Fragmentation, Competition, and Cultural Change 165 Chapter 12: Competition and the Republic of Letters 179 Part IV: Prelude to the Enlightenment Chapter 13: Puritanism and British Exceptionalism 227 Chapter 14: A Culture of Progress 247 Chapter 15: The Enlightenment and Economic Change 267 Part V: Cultural Change in the East and West Chapter 16: China and Europe 287 Chapter 17: China and the Enlightenment 321 Epilogue: Useful Knowledge and Economic Growth 339 References 343 Index 381 Acknowledgments This book had its origins in the Joseph Schumpeter lectures I delivered in Graz in November 2010 and I am deeply grateful to my hosts at the Schumpeter Society for their hospitality and penetrating comments at an early stage. Books based on endowed lectures tend to be relatively short. This book, however, took on a life of its own, and chapters kept being added. Having argued in previous works that the emergence of a cultural phenomenon we think of as the Enlightenment was central to the economic and technological miracles that mark European history since the Industrial Revolution, it became clear that we should ask hard questions about the origins of the emergence of intellectual innovation and a creative elite of scholars and engineers who pushed the envelope.

Thus there were many forms of socialist thought before Marx, and his great achievement was to unify and coordinate these belief into a cohesive doctrine. Psychiatry was a messy body of knowledge until Freud came along. Scholarship on the great cultural entrepreneurs in history is vast. Multitudinous bookshelves are devoted to the works of Adam Smith and Sigmund Freud, and even more minor cultural entrepreneurs such as Ayn Rand, Joseph Schumpeter, Michel Foucault, and Herbert Marcuse. Some may find a great deal of interest in parsing and exegesizing the exact words of cultural entrepreneurs to find out what the Master “really meant.” However, because my purpose is to uncover how cultural change affected actual events and outcomes, what is of concern to us is what people actually extracted and learned from the cultural entrepreneurs and how they changed their economic behavior as a result.

A Human Capital Theory of Protestant Economic History.” Quarterly Journal of Economics, Vol. 124, No. 2, pp. 531–96. Belfanti, Carlo Marco. 2004. “Guilds, Patents, and the Circulation of Technical Knowledge.” Technology and Culture Vol. 45, No. 3, pp. 569–89. Bell, A.E. 1947. Christian Huygens and the Development of Science in the Seventeenth Century. London: Edward Arnold. Benabou, Roland. 2008. “Ideology (Joseph Schumpeter Lecture).” Journal of the European Economic Association Vol. 6, Nos. 2-3, pp. 321–52. Benabou, Roland, Davide Ticchi, and Andrea Vindign,. 2014. “Forbidden Fruits: The Political Economy of Science, Religion and Growth.” Unpublished working paper, Princeton University. Benhabib, Jess and Spiegel, Mark M. 2005. “Human Capital and Technology Diffusion.” In Philippe Aghion and Steven N. Durlauf, eds., Handbook of Economic Growth.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business process, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, labour market flexibility, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, Plutocrats, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

He wrote in 1776 during the East India Company era, when exploitative mercantilism and laissez-faire prevailed. That era provided the evidence that Smith utilized in arguing that the business community readily colludes against consumers, employees, and the public interest, resulting in higher prices, less innovation, and a reduced variety of goods. That sentiment also informed the works of political scientist Joseph Schumpeter. He fathered the concept of “creative destruction,” which describes the capitalist process: new, innovative competitors—Apple or Google, for example—arise to challenge established giants such as Microsoft or IBM. The level of such enterprise destruction runs about 10 percent annually in the United States; between 1989 and 1997 an average of 611,000 US firms disappeared each year, out of about 5.7 million.62 Antitrust policy is designed explicitly to promote and nurture this creative destruction process by limiting the ability of aging dinosaur firms to metamorphose into conglomerates that restrict competition; without it, capitalism stagnates as dinosaurs stagger on, dominating weaker innovators.

In fact, academic researchers have determined that the American business community in toto has been debt free since 2004, when the corporate debt ratio fell below zero.13 Some undercapitalized banks, small businesses, and struggling manufacturing enterprises are hard pressed and indebted, but they’re the exception in an American business community flush with profits and cash three decades into the Reagan era. Economists talk about two types of extraordinary profits, named to honor economists David Ricardo and Joseph Schumpeter. Ricardian rents accrue to owners of fixed (nonreproduceable) resources, such as quite fertile land, oil, or gold deposits, while Schumpeterian rents flow to individuals or firms because of entrepreneurial insights in a risky or complicated environment—think of the early days of Bill Gates or Steve Jobs. But the Reagan era created a third category I term Reagan rents, which accrue to enterprise leaders who command neither scarce resources nor unusual skill; they have the good fortune simply to hold senior corporate positions during the Reagan era of regulatory capture and shareholder capitalism, commanding only their supine boards of directors.

He provided both the muscle and the vision during the New Deal era that gave lift to Adam Smith’s centuries-old hope for capitalism to improve the lot of all mankind: “Mass production must be accompanied by mass consumption, and this in turn implies a distribution of wealth—not of existing wealth, but wealth produced during the same period—as it provides men purchasing power equivalent to the quantity of goods and services offered by the country’s productive apparatus.”7 The Smith/Eccles/Roosevelt recipe of family capitalism is straightforward: the moral sentiments of society should be harnessed in support of widely broadcasting the gains from productivity growth. Attaining that goal hinges on two elements from Henry Ford adopted by these countries: prioritizing productivity growth in order to maximize economic growth, and linking wages to labor productivity growth. Prioritizing productivity reaches back to the British economist Alfred Marshall and the Austrian Joseph Schumpeter who first preached the seminal importance of raising productivity as the precursor to prosperity.8 This lesson was emphasized anew in the postwar era by a number of nations, including the family capitalism countries and Japan. Indeed, the first great challenge to America’s postwar economic preeminence was Japanese firms such as Toyota in the 1970s and 1980s. Initially mocked, the quality, consumer appeal, and pace of productivity improvements embodied in postwar Japanese products in the space of a decade or two revolutionized global manufacturing.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Adjustable rate notes protect bondholders against imprudent or capital-risking actions by management, like taking on gobs of new debt. Looser regulations on issuance like shelf registration, which allows corporations to file general prospectuses to be kept on file, rather than prepare custom prospectuses for a specific stock or bond issue, allow firms to hawk their paper when the market looks friendly. Joseph Schumpeter (1939, vol. 2, p. 613), writing during a decade when financial innovation was deeply out of fashion, observed that "it is one of the most characteristic features of the financial side of capitalist evolution so to 'mobilize' all, even the longest, maturities as to make any commitment to a promise of future balances amenable to being in turn financed by any sort of funds and especially by funds available for short time, even overnight, only.

Higher future prices hold the promise of higher future profits, which makes new investments more attractive. While this may provoke a "reaction" sometime in the future — higher investment demand will drive up the price of investment goods, thereby offsetting the possibility of higher profits — the short-term effect is undeniably stimulative iCWV, p. 189-190). Changes in the natural rate may also come from the "real" side of an economy. Keynes followed Joseph Schumpeter in arguing that technical and organizational innovations adopted by a handful of especially spirited entrepreneurs, which competition forces the less pioneering to adopt, are at the heart of capitalist progress. But these innovators would be nothing more than frustrated dreamers if the banking system — or, more broadly, financiers — didn't accommodate them by allowing them to rent RENEGADES Other people's money (CWYl, pp. 85-86).


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The Right to Earn a Living: Economic Freedom and the Law by Timothy Sandefur

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barriers to entry, big-box store, Cass Sunstein, clean water, collective bargaining, corporate governance, corporate social responsibility, creative destruction, Edward Glaeser, housing crisis, joint-stock company, Joseph Schumpeter, labour mobility, minimum wage unemployment, positional goods, price stability, profit motive, race to the bottom, Ralph Nader, RAND corporation, rent control, Robert Bork, Silicon Valley, The Wealth of Nations by Adam Smith, trade route, transaction costs, Upton Sinclair, urban renewal, wealth creators

It also encourages economic efficiency by removing from the marketplace those producers who are unable or unwilling to compete against more efficient firms. They can choose to go into another business instead or to find a niche market wherein they can specialize. This is admittedly disruptive to the entrepreneurs and workers who work for the less efficient firms and who, when those firms fail, find themselves temporarily unemployed and must obtain new jobs or new skills. This is the process that economist Joseph Schumpeter famously called “creative destruction.” Although these economic readjustments may be difficult for workers, the result will be greater economic efficiency and more wealth for everyone, including those who were formerly unemployed.10 In the 1930s, the creative nature of this dynamism was not widely respected, and intellectuals professing a doctrine of “rational” economic planning by government assailed the basic concepts of supply and demand, claiming that government control over the economy would eliminate the alleged inefficiencies of capitalism, equalize income among citizens, and organize economic activity with precision.11 This planning was generally characterized as “reform” and as a way to protect small-scale producers and family farmers from unfair competition by powerful industries, but the reality was quite different: the new economic planning systems stifled entrepreneurship and innovation and worsened the Great Depression.

See also Timothy Sandefur, “Mine and Thine Distinct: What Kelo Says about Our Path,” Chapman Law Review 10 (2006): 19–26. 5. Truax v. Corrigan, 257 U.S. 312, 376 (1921) (Brandeis, J., dissenting) (emphasis added). 6. Dorsey Richardson, Constitutional Doctrines of Justice Oliver Wendell Holmes (Baltimore: Johns Hopkins Press, 1924), p. 41. 7. Nebbia v. New York, 291 U.S. 502 (1934). 321 Notes for Pages 125–128 8. Ibid. at 537. 9. United States v. Carolene Products, 304 U.S. 144, 152 n. 3 (1938). 10. Joseph Schumpeter, Capitalism, Socialism and Democracy (New York: Harper, 1975), pp. 82–85. 11. Amity Schlaes, The Forgotten Man: A New History of the Great Depression (New York: HarperCollins, 2007); and Arthur A. Ekirch Jr., Ideologies and Utopias: The Impact of the New Deal on American Thought (Chicago: Quadrangle Books, 1969). 12. Arthur A. Ekirch Jr., The Decline of American Liberalism (New York: Atheneum, 1976), p. 276.


pages: 420 words: 124,202

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention by William Rosen

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Albert Einstein, All science is either physics or stamp collecting, barriers to entry, collective bargaining, computer age, Copley Medal, creative destruction, David Ricardo: comparative advantage, decarbonisation, delayed gratification, Fellow of the Royal Society, Flynn Effect, fudge factor, full employment, invisible hand, Isaac Newton, Islamic Golden Age, iterative process, Jacquard loom, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, Joseph Schumpeter, Joseph-Marie Jacquard, knowledge economy, moral hazard, Network effects, Paul Samuelson, Peace of Westphalia, Peter Singer: altruism, QWERTY keyboard, Ralph Waldo Emerson, rent-seeking, Ronald Coase, Simon Kuznets, spinning jenny, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, transcontinental railway, zero-sum game, éminence grise

Their optimism is by any measure far greater than that found in the general population, with the result that their decision making is, to be charitable, flawed, whether as a result of the classic confirmation bias—the tendency to overvalue data that confirm one’s original ideas—or the “sunk-cost” bias, which is another name for throwing good money after bad. Even after reliable colleagues urge them to quit, a third of inventors will continue to invest money, and more than half will continue to invest their time.8 A favorite explanation for the seeming contradiction is the work of the Czech émigré economist Joseph Schumpeter,* who drew a famous, though not perfectly clear, boundary between invention and innovation, with the former an economically irrelevant version of the latter. The heroes of Schumpeter’s economic analysis were, in consequence, entrepreneurs, who “may9 be inventors just as they may be capitalists … they are inventors not by nature of their function, but by coincidence….” To Schumpeter, invention preceded innovation—he characterized the process as embracing three stages: invention, commercialization, and imitation—but was otherwise insignificant.

Jung-Beeman, “Neural Activity When People Solve Verbal Problems with Insight,” PLoS Biology 2, no. 4, April 2004. 5 “The relaxation phase is crucial” Jonah Lehrer, “The Eureka Hunt,” The New Yorker, July 28, 2008. 6 Some of the results were predictable Joseph Rossman, The Psychology of the Inventor: A Study of the Patentee (Washington, D.C.: Inventors Publishing, 1931). 7 “lack of capital” Ibid. 8 more than half will continue to invest their time Thomas Astebro, “Inventor Perseverance After Being Told to Quit: The Role of Cognitive Biases,” Journal of Behavioral Decision Making 20, January 2007. 9 “may be inventors” Scherer, “Invention and Innovation in the Watt-Boulton Steam Engine Venture,” citing Joseph Schumpeter’s Theory of Economic Development. 10 Another study, this one conducted in 1962 Donald W. MacKinnon, “Intellect and Motive in Scientific Inventors: Implications for Supply,” in Simon Kuznets, ed., The Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton: Princeton University Press, 1962). 11 the eighteenth-century Swiss mathematician Daniel Bernoulli Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: John Wiley & Sons, 1996). 12 “The more inventive an independent inventor is” MacKinnon, “Intellect and Motive in Scientific Inventors: Implications for Supply,” in Kuznets, ed., Rate and Direction of Inventive Activity. 13 “first scientific man to study the Newcomen engine” “Henry Beighton” in Oxford Dictionary of National Biography. 14 Leonhard Euler applied Usher, History of Mechanical Inventions. 15 His published table of results Jennifer Karns Alexander, The Mantra of Efficiency: From Waterwheel to Social Control (Baltimore: Johns Hopkins University Press, 2008). 16 The resulting experiment Pacey, Maze of Ingenuity. 17 His example showed a generation of other engineers Mokyr, “The Great Synergy,” quoting Cardwell, 1994. 18 “In comparing different experiments” Pacey, Maze of Ingenuity. 19 As far back as the 1960s Dean Keith Simonton, “Creativity as Blind Variation and Selective Retention: Is the Creative Process Darwinian?”


pages: 481 words: 120,693

Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland

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activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, assortative mating, banking crisis, barriers to entry, Basel III, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, call centre, carried interest, Cass Sunstein, Clayton Christensen, collapse of Lehman Brothers, commoditize, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Deng Xiaoping, don't be evil, double helix, energy security, estate planning, experimental subject, financial deregulation, financial innovation, Flash crash, Frank Gehry, Gini coefficient, global village, Goldman Sachs: Vampire Squid, Gordon Gekko, Guggenheim Bilbao, haute couture, high net worth, income inequality, invention of the steam engine, job automation, John Markoff, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, liberation theology, light touch regulation, linear programming, London Whale, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, NetJets, new economy, Occupy movement, open economy, Peter Thiel, place-making, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, postindustrial economy, Potemkin village, profit motive, purchasing power parity, race to the bottom, rent-seeking, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, self-driving car, short selling, Silicon Valley, Silicon Valley startup, Simon Kuznets, Solar eclipse in 1919, sovereign wealth fund, stem cell, Steve Jobs, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tony Hsieh, too big to fail, trade route, trickle-down economics, Tyler Cowen: Great Stagnation, wage slave, Washington Consensus, winner-take-all economy, zero-sum game

And Betsey Stevenson and Justin Wolfers have found that the paradox of unhappy growth is particularly true in the first stages of growth in “miracle” economies, such as South Korea or Ireland—the moment when the tigers take their first leap is also the time when their people are unhappiest. No one has come up with a definitive explanation of the unhappy growth paradox, but the economists who study it speculate that the uncertainty and inequality of these periods of rapid economic change may be to blame. Even if our country’s economy overall is growing strongly and we are doing well ourselves, we know that we are living through a period of what Joseph Schumpeter called “creative destruction.” That volatility, and the painful consequences it has for the losers, makes even the winners anxious. The tension in emerging markets isn’t only psychological. As in the West, a big part of the story of the developing world’s first gilded age is the “friction . . . between capital and labor, between rich and poor” that Carnegie identified more than a century earlier.

That means you can probably blame Drucker for far too many soul-destroying PowerPoint presentations, peppy but hollow business books, and inspirational corporate “coaches” with lots of energy but no message. But Drucker also, more than half a century ago, predicted the shift to what he dubbed a “knowledge economy” and, with it, the rise of the “knowledge worker.” Drucker made his name in America, but he was a product of the Viennese intellectual tradition—Joseph Schumpeter was a family friend and frequent guest during his boyhood—of looking for the big, underlying social and economic forces and trying to spot the moments when they changed. Accordingly, he saw the emerging knowledge worker as both the product and beneficiary of a profound shift in how capitalism operated. “In the knowledge society the employees—that is, knowledge workers—own the tools of production,” Drucker wrote in a 1994 essay in the Atlantic.


pages: 482 words: 117,962

Exceptional People: How Migration Shaped Our World and Will Define Our Future by Ian Goldin, Geoffrey Cameron, Meera Balarajan

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Admiral Zheng, agricultural Revolution, barriers to entry, Berlin Wall, Branko Milanovic, British Empire, conceptual framework, creative destruction, demographic transition, Deng Xiaoping, endogenous growth, failed state, Fall of the Berlin Wall, Gini coefficient, global supply chain, guest worker program, illegal immigration, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), job automation, Joseph Schumpeter, knowledge economy, labor-force participation, labour mobility, Lao Tzu, life extension, low skilled workers, low-wage service sector, Malacca Straits, mass immigration, microcredit, Network effects, new economy, New Urbanism, old age dependency ratio, open borders, out of africa, price mechanism, purchasing power parity, Richard Florida, selection bias, Silicon Valley, Silicon Valley startup, Skype, spice trade, trade route, transaction costs, transatlantic slave trade, transatlantic slave trade, women in the workforce, working-age population

The creation of new industries and markets displaces people from their old jobs and generates opportunities elsewhere. As has been mentioned already, in low-and middle-income countries, economic development typically promotes migration.76 The process of economic transformation into an industrial economy displaces traditional livelihoods in favor of large-scale production through the process Joseph Schumpeter called “creative destruction”: The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.77 The incorporation of developing countries into the global economy, rather than halting migration, can stimulate movement through the disruptive process of social and economic reorganization.

“Population Growth and International Migration,” in Douglas S. Massey and J. Edward Taylor (eds.), International Migration: Prospects and Policies in a Global Market. Oxford, UK: Oxford University Press, pp. 15–34, p. 33. 71. Quoted in Castles and Miller, 2009: 224. 72. Pritchett, 2006: 30. 73. Massey et al., 2002: 13. 74. Ibid., 2002: 15. 75. Pritchett, 2006: 43–62. 76. de Haas, 2008. 77. Joseph Schumpeter. 1942 [1975]. Capitalism, Socialism and Democracy. New York: Harper, pp. 82–85. 78. Saskia Sassen. 1988. The Mobility of Labour and Capital: A Study of International Investment and Labor Flow. Cambridge, UK: Cambridge University Press, p. 18. 79. Ibid.: 19. 80. Massey and Taylor, 2004: 385. 81. Susan Gabbard, Rick Mines, and Beatriz Boccalandro. 1994. “Migrant Farmworkers: Pursuing Security in an Unstable Labor Market,” Research Report No. 5, U.S.


pages: 464 words: 116,945

Seventeen Contradictions and the End of Capitalism by David Harvey

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accounting loophole / creative accounting, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business climate, California gold rush, call centre, central bank independence, clean water, cloud computing, collapse of Lehman Brothers, colonial rule, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, deskilling, drone strike, end world poverty, falling living standards, fiat currency, first square of the chessboard, first square of the chessboard / second half of the chessboard, Food sovereignty, Frank Gehry, future of work, global reserve currency, Guggenheim Bilbao, Gunnar Myrdal, income inequality, informal economy, invention of the steam engine, invisible hand, Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Just-in-time delivery, knowledge worker, low skilled workers, Mahatma Gandhi, market clearing, Martin Wolf, means of production, microcredit, new economy, New Urbanism, Occupy movement, peak oil, phenotype, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, short selling, Silicon Valley, special economic zone, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, wages for housework, Wall-E, women in the workforce, working poor, working-age population

It sets up a train of technological accommodations and of new problems, and in so doing it creates new opportunity niches that call forth fresh combinations which in turn introduce further technologies – and further problems … The economy therefore exists always in a perpetual openness of change – in perpetual novelty. It exists perpetually in a process of self-creation. It is always unsatisfied … The economy is perpetually constructing itself.6 New technological configurations displace the old and in so doing initiate phases of what the economist Joseph Schumpeter famously dubbed ‘gales of creative destruction’.7 Whole ways of life and modes of being and thinking have to drastically alter to embrace the new at the expense of the old. The recent history of deindustrialisation and its association with dramatic technological reconfigurations is an obvious case in point. Technological change is neither costless nor painless and the cost and the pain are not evenly shared.

Brian Arthur, The Nature of Technology: What It Is and How It Evolves, New York, Free Press, 2009, pp. 22 et seq. 2. Jane Jacobs, The Economy of Cities, New York, Vintage, 1969. 3. Arthur, The Nature of Technology, p. 211. 4. Alfred NorthWhitehead, Process and Reality, New York, Free Press, 1969, p. 33. 5. Arthur, The Nature of Technology, p. 213; Karl Marx, Grundrisse, Harmondsworth, Penguin, 1973. 6. Arthur, The Nature of Technology, p 191. 7. Joseph Schumpeter, Capitalism, Socialism and Democracy, London, Routledge, 1942, pp. 82–3. 8. Arthur, The Nature of Technology, p. 186. 9. André Gorz, Critique of Economic Reason, London, Verso, 1989, p. 200. 10. Martin Ford, The Lights in the Tunnel: Automation, Acclerating Technology and the Economy of the Future, USA, AcculantTM Publishing, 2009, p. 62. 11. Ibid., pp. 96–7. 12. Gorz, Critique of Economic Reason, p. 92. 13.


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Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

Fisheries managed with transferable quotas were half as likely to collapse as fisheries that use traditional methods.14 Two other points regarding incentives are worth noting. First, a market economy inspires hard work and progress not just because it rewards winners, but because it crushes losers. The 1990s were a great time to be involved in the Internet. They were bad years to be in the electric typewriter business. Implicit in Adam Smith’s invisible hand is the idea of “creative destruction,” a term coined by the Austrian economist Joseph Schumpeter. Markets do not suffer fools gladly. Take Wal-Mart, a remarkably efficient retailer that often leaves carnage in its wake. Americans flock to Wal-Mart because the store offers an amazing range of products cheaper than they can be purchased anywhere else. This is a good thing. Being able to buy goods cheaper is essentially the same thing as having more income. At the same time, Wal-Mart is the ultimate nightmare for Al’s Glass and Hardware in Pekin, Illinois—and for mom-and-pop shops everywhere else.

It would be more accurate to describe them as skeptical. The broader the scope of government, the more room there is for special interests to carve out deals for themselves that have nothing to do with the legitimate functions of government described in Chapter 3. Tyranny of the status quo. If small groups can get what they want out of the legislative process, they can also stop what they don’t want, or at least try. Joseph Schumpeter, who coined the term “creative destruction,” described capitalism as a process of incessantly destroying the old structure and creating a new one. That may be good for the world; it is bad for the firms and industries that make up the “old structure.” The individuals standing in capitalism’s path of progress—or destruction, from their standpoint—will use every tool they have to avoid it, including politics.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

In the late 1960s and early 1970s, for example, I came to the view that a bigger role for markets and a macroeconomic policy dedicated to monetary stability were essential, in both high-income and developing countries. I participated, therefore, in the move towards more market-oriented economic perspectives that took place at that time. I was particularly impressed with the Austrian view of the market economy as a system for encouraging the search for profitable opportunities, in contrast to the neoclassical fixation with equilibrium: the writings of Joseph Schumpeter and Hayek were (and remain) powerful influences. The present crisis has underlined my scepticism about equilibrium, but has also restored a strong and admiring interest in the work of Keynes, which had begun when I was at Oxford. After a passage of eighty years, Keynes’s concerns of the 1930s have again become ours. Those who fail to learn from history are, we have been reminded, condemned to repeat it.

This was partly because of those huge current-account surpluses, foreign-currency interventions and consequent demands for safe assets. Many investors – particularly those concerned with providing incomes in retirement, such as pension funds – needed higher returns than government bonds provided, while stocks looked less attractive after the collapse of the market in 2000. The market’s response was to mass-produce higher-yielding, pseudo-high-grade assets. In an inversion of Joseph Schumpeter’s idea of ‘creative destruction’, Jagdish Bhagwati of Columbia University called this ‘destructive creation’.41 It was the new structured finance that provided investors with what they thought they wanted. As Lloyd Blankfein, chairman of Goldman Sachs, pointed out in 2009: ‘In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments … rated triple A.’42 In short, what the market demanded the innovative financial sector duly supplied.


pages: 607 words: 133,452

Against Intellectual Monopoly by Michele Boldrin, David K. Levine

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accounting loophole / creative accounting, agricultural Revolution, barriers to entry, cognitive bias, creative destruction, David Ricardo: comparative advantage, Dean Kamen, Donald Trump, double entry bookkeeping, en.wikipedia.org, endogenous growth, Ernest Rutherford, experimental economics, financial innovation, informal economy, interchangeable parts, invention of radio, invention of the printing press, invisible hand, James Watt: steam engine, Jean Tirole, John Harrison: Longitude, Joseph Schumpeter, Kenneth Arrow, linear programming, market bubble, market design, mutually assured destruction, Nash equilibrium, new economy, open economy, peer-to-peer, pirate software, placebo effect, price discrimination, profit maximization, rent-seeking, Richard Stallman, Silicon Valley, Skype, slashdot, software patent, the market place, total factor productivity, trade liberalization, transaction costs, Y2K

P1: KNP head margin: 1/2 gutter margin: 7/8 CUUS245-07 cuus245 978 0 521 87928 6 May 21, 2008 16:55 158 Against Intellectual Monopoly Economic Arguments for Intellectual Monopoly Economists – ourselves included – think that it is important that the creators of ideas be compensated for their effort in adding to our stock of knowledge.8 Although the economics literature generally acknowledges that intellectual property leads to undesirable intellectual monopoly, it also argues that this might be a good thing – because creators of new ideas may not be adequately compensated otherwise, and this is one way to provide additional compensation. As Joseph Schumpeter, in the words of Jean Tirole, puts it, “If one wants to induce firms to undertake R&D one must accept the creation of monopolies as a necessary evil.”9 This view is as commonly held among economists today as it was in the past. In their recent textbook, Robert Barro and Xavier Sala-i-Martin argue: In order to motivate research, successful innovators have to be compensated in some manner. The basic problem is that the creation of a new idea or design . . . is costly. . . .

Consequently, without intellectual monopoly, there will be no innovation. The idea that monopoly is necessary for innovation forms the foundation for a wide variety of economic models, ranging from general equilibrium models of monopolistic competition to micromodels of patents and patent races. The original theoretical argument was sketched by Allyn Young before the Second World War and developed in greater detail by Joseph Schumpeter during the war. The first formal treatment of the idea that competitive markets are intrinsically incapable of handling innovations can be found in writings by Kenneth Arrow and subsequently Karl Shell, published in the early and middle 1960s. In the second half of the 1980s, Robert Lucas, Paul Romer, and many followers used new analytical instruments to apply this P1: KNP head margin: 1/2 gutter margin: 7/8 CUUS245-07 cuus245 978 0 521 87928 6 May 21, 2008 16:55 Defenses of Intellectual Monopoly 159 point of view to the problem of economic development, creating a theory now known as the new growth theory.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

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affirmative action, Albert Einstein, Bernie Madoff, British Empire, capital controls, cleantech, cloud computing, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, George Gilder, Gunnar Myrdal, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, knowledge economy, labor-force participation, margin call, Mark Zuckerberg, means of production, medical malpractice, minimum wage unemployment, money market fund, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, price stability, Ralph Nader, rent control, Robert Gordon, Ronald Reagan, Silicon Valley, Simon Kuznets, skunkworks, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve, zero-sum game

Chapter Nineteen 1 Jane Jacobs, The Economy of Cities (New York: Random House, 1969). Toward the end of this fascinating work, Jacobs writes: “The primary economic conflict, I think, is between people whose interests are with already well-established economic activities, and those whose interests are with the emergence of new economic activities” (p. 249). 2 Quoted in Arnold Heertje, Economics and Technical Change (New York: John Wiley & Sons, 1977), p. 75. 3 Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Row, 1962). 4 William Tucker, “Of Mites and Men,” Harper’s, vol. 257, no. 1539 (August 1978) pp. 43–58. 5 Martin J. Bailey, “Inflationary Distortions and Taxes,” in Henry J. Aaron, ed., Inflation and the Income Tax (Washington, DC: the Brookings Institution, 1976), p. 302. See also note 8, chapter 15. Chapter Twenty 1 Albert O.

budget balancing Buffett, Warren Bulgaria Bundy, McGeorge bureaucracy Burns, Scott Burry, Mike business, big government policy small strategy busing California, welfare in California Business Round Table California PropositionSee Proposition cannibalism Cannibals and Kings (Marvin Harris) Canute capital flight capital gains taxes government revenues from inflation and need for cut in capitalism, chance in critiques of democracy and dynamics of golden rule of moral neutrality of origins of rules of vs. socialism work under Capitalism, Socialism, and Democracy (Joseph Schumpeter) Capitalism and Freedom (Milton Friedman) capitalist freedom cardiological units Carlson, Chester Carnegie, Andrew Carnegie Council on Children Carson, Rachel Carter, Jimmy Carter administration Catholics CAT scanners CBO. See Congressional Budget Office Census Bureau Central Park CETA. See Comprehensive Employment and Training Act Chafee, John Chait, Jonathan chance Chance, Love and Logic (Charles Peirce) charity Chesterton, G.


pages: 483 words: 134,377

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly

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air freight, Andrei Shleifer, battle of ideas, Bretton Woods, British Empire, business process, business process outsourcing, Carmen Reinhart, clean water, colonial rule, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, Deng Xiaoping, desegregation, discovery of the americas, Edward Glaeser, en.wikipedia.org, European colonialism, Francisco Pizarro, fundamental attribution error, germ theory of disease, greed is good, Gunnar Myrdal, income per capita, invisible hand, James Watt: steam engine, Jane Jacobs, John Snow's cholera map, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, M-Pesa, microcredit, Monroe Doctrine, oil shock, place-making, Ponzi scheme, risk/return, road to serfdom, Silicon Valley, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, Thomas L Friedman, urban planning, urban renewal, Washington Consensus, World Values Survey, young professional

He kept going with financing from a factory owner with deep pockets. Watt’s spending twelve years improving an invention and a factory owner’s financing him only happened because Watt had gotten a patent on his steam engine. Conventional wisdom is that patents are the main or only way the West solved the inadequate incentives for invention problem. But there is also an even more bottom-up solution that was first sketched out by Joseph Schumpeter early in the twentieth century in his famous theory of “creative destruction.” Schumpeter postulated that an innovator has a jump on everyone else on commercializing his or her own idea. The innovator can develop new products that use his ideas, keeping the idea itself secret from other would-be users. What this means is that he has a monopoly on a product, the new product that resulted from his idea, and as with all monopolies he can realize high profits.

Available at: http://williameasterly.files.wordpress.com/2010/08/60_easterly_comin_gong_wealthofnations_prp.pdf, accessed August 31, 2013. 18. Charles W. J. Withers, Placing the Enlightenment: Thinking Geographically About the Age of Reason (Chicago, IL: University of Chicago Press, 2007), Kindle edition, locations 92–93; and Mokyr, Enlightened Economy, 34 (on “bumper sticker”). 19. Mokyr, Enlightened Economy, 30. 20. Ibid., 33. 21. Ibid., 42. 22. Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper and Brothers, 1942). 23. Paul M. Romer, “Endogenous Technological Change.” Journal of Political Economy 98, no. 5, pt. 21 (October 1990): S71–S102. 24. Paul M. Romer, “New Goods, Old Theory, and the Welfare Costs of Trade Restrictions,” Journal of Development Economics 43 (1994): 5–38. 25. William Easterly and Ross Levine, “The European Origins of Economic Development,” NBER Working Paper 18162, National Bureau of Economic Research, Cambridge, MA (June 2012), confirm that colonial European settlement is associated with higher incomes today. 26.


pages: 868 words: 147,152

How Asia Works by Joe Studwell

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affirmative action, anti-communist, Asian financial crisis, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collective bargaining, crony capitalism, cross-subsidies, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, failed state, financial deregulation, financial repression, Gini coefficient, glass ceiling, income inequality, income per capita, industrial robot, Joseph Schumpeter, Kenneth Arrow, land reform, land tenure, large denomination, liberal capitalism, market fragmentation, non-tariff barriers, offshore financial centre, oil shock, open economy, passive investing, purchasing power parity, rent control, rent-seeking, Right to Buy, Ronald Coase, South China Sea, The Wealth of Nations by Adam Smith, urban sprawl, Washington Consensus, working-age population

In December 2010, Indonesian banks were able to charge firms 13–14 per cent on short-term loans, despite a central bank base rate of 6.5 per cent. 114. The most famous exposition of this view is perhaps Schumpeter’s. The banker, he wrote, ‘is essentially a phenomenon of development … He makes possible the carrying out of new combinations, authorizes people, in the name of society as it were, to form them. He is the ephor [the senior magistrate in ancient Greece] of the exchange economy.’ Joseph Schumpeter, A Theory of Economic Development, translated by Redvers Opie (Cambridge, MA: Harvard University Press, 1934), p. 74. Part 4 – Where China Fits In 1. Li Xiangqian and Han Gang, ‘Xin faxian Deng Xiaoping yu Hu Yaobang deng sanci tanhua jilu’ (‘Newly Discovered Record of Three of Deng Xiaoping’s Talks with Hu Yaobang and Others’), Bainianchao, n0. 3 (1999): 4–11, reprinted in Xie Chuntao, ed., Deng Xiaoping xiezhen (A Portrait of Deng Xiaoping) (Shanghai: Shanghai cishu chubanshe, 2005), p. 192. 2.

.), Developing Country Debt and Economic Performance, Volume 3: Country Studies – Indonesia, Korea, Philippines, Turkey (Chicago: University of Chicago Press,1989). Richard J. Samuels, Machiavelli’s Children: Leaders and Their Legacies in Italy and Japan (Ithaca, NY: Cornell University Press, 2003). Henry Sanderson and Michael Forsythe, China’s Superbank: Debt, Oil and Influence – How China Development Bank is Rewriting the Rules of Finance (Singapore: John Wiley, 2012). Joseph Schumpeter, Redvers Opie (trans.), A Theory of Economic Development (Cambridge, MA: Harvard University Press, 1934). Adam Schwarz, A Nation in Waiting: Indonesia’s Search for Stability (St Leonards: Allen & Unwin, 1999). Tibor Scitovsky, ‘Economic Development in Taiwan and South Korea’ in L. Lau (ed.), Models of Development: A Comparative Study of Economic Growth in South Korea and Taiwan (San Francisco: Institute for Contemporary Affairs, 1986).


pages: 258 words: 63,367

Making the Future: The Unipolar Imperial Moment by Noam Chomsky

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Albert Einstein, Berlin Wall, Bretton Woods, British Empire, capital controls, collective bargaining, corporate governance, corporate personhood, creative destruction, deindustrialization, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Frank Gehry, full employment, Howard Zinn, Joseph Schumpeter, kremlinology, liberation theology, Long Term Capital Management, market fundamentalism, Mikhail Gorbachev, Occupy movement, oil shale / tar sands, precariat, RAND corporation, Ronald Reagan, structural adjustment programs, The Great Moderation, too big to fail, uranium enrichment, Washington Consensus, WikiLeaks, working poor

In short, President Obama’s programs were “a giveaway to Wall Street executives” and a blow in the solar plexus to their defenseless victims. The outcome should surprise only those who insist on hopeless naïveté about the design and implementation of policy, particularly when economic power is highly concentrated and state capitalism has entered into a new stage of “creative destruction,” to borrow Joseph Schumpeter’s famous phrase, but with a twist: creative in ways to enrich and empower the rich and powerful, while the rest are free to survive as they may, while celebrating Loyalty and Law Day. The Revenge Killing of Osama Bin Laden June 1, 2011 The May 1 [2011] U.S. attack on Osama bin Laden’s compound violated multiple elementary norms of international law, beginning with the invasion of Pakistani territory.


pages: 210 words: 56,667

The Misfit Economy: Lessons in Creativity From Pirates, Hackers, Gangsters and Other Informal Entrepreneurs by Alexa Clay, Kyra Maya Phillips

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3D printing, Airbnb, Alfred Russel Wallace, Berlin Wall, Burning Man, collaborative consumption, conceptual framework, creative destruction, double helix, fear of failure, game design, Hacker Ethic, Howard Rheingold, informal economy, invention of the steam engine, James Watt: steam engine, Joseph Schumpeter, Kickstarter, lone genius, Mark Zuckerberg, mass incarceration, megacity, Occupy movement, peer-to-peer rental, Ronald Reagan, Rosa Parks, sharing economy, Silicon Valley, Steve Jobs, Steven Levy, Stewart Brand, supply-chain management, union organizing, Whole Earth Catalog, Whole Earth Review, Zipcar

The average life span of leading American companies has declined by over fifty years in the last hundred years: from sixty-seven years in the 1920s to only fifteen in 2012.10 Apart from the auto sector, many other blue-chip industries are in decline. The pharmaceutical industry had its heyday in the eighties and nineties, with blockbuster drugs like Lipitor, Plavix, and Zoloft. Some in the industry have faced competition from generics and been forced to slash internal R&D. If we listened to Joseph Schumpeter, the economist and political scientist, we’d allow the forces of “creative destruction”—the process of destroying an old economic order and the emergence of a new one—to have their way. DAVID BERDISH IS A DEVOUT Catholic and a third-generation autoworker at Ford Motor Company. He worked at the company for thirty-one years before recently retiring. His grandfather, a prominent labor organizer and founding member of UAW Local 600, a union that represented the largest Ford plants, was at the infamous Battle of the Overpass, where United Auto Worker union organizers were beaten by Ford henchmen.


pages: 196 words: 57,974

Company: A Short History of a Revolutionary Idea by John Micklethwait, Adrian Wooldridge

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affirmative action, barriers to entry, Bonfire of the Vanities, borderless world, business process, Corn Laws, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, double entry bookkeeping, Etonian, hiring and firing, industrial cluster, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, knowledge worker, laissez-faire capitalism, manufacturing employment, market bubble, mittelstand, new economy, North Sea oil, race to the bottom, railway mania, Ronald Coase, Silicon Valley, six sigma, South Sea Bubble, Steve Jobs, Steve Wozniak, strikebreaker, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, tulip mania, wage slave, William Shockley: the traitorous eight

European and Asian governments tried to run companies of their own—and failed spectacularly. Many on the Left would argue that companies tried to set up governments of their own—and succeeded equally spectacularly. Meanwhile, the ways that companies have subtly influenced our lives have multiplied. It was a company—Lever Brothers—that introduced us to the concept of “BO.” (“It was not enough to produce satisfactory soap,” Joseph Schumpeter once observed. “It was also necessary to induce people to wash.”)5 It is a company—McDonald’s—that is credited with teaching the Chinese how to queue.6 Three themes stand out in our story. First, the company’s past is often more dramatic than its present. Modern business books may have macho titles such as Barbarians at the Gate and Only the Paranoid Survive, but early businessmen took risks with their lives as well as their fortunes.


pages: 172 words: 46,104

Television Is the New Television: The Unexpected Triumph of Old Media in the Digital Age by Michael Wolff

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activist fund / activist shareholder / activist investor, barriers to entry, commoditize, creative destruction, disintermediation, hiring and firing, Joseph Schumpeter, Marc Andreessen, Mark Zuckerberg, Marshall McLuhan, Silicon Valley, Steve Jobs, telemarketer, the medium is the message, zero-sum game

There was, even, a kind of slack-jawed response—perhaps not least of all because Hollywood power is not used to being challenged—to the certainty, impatience, and what rather seemed like the advanced intelligence of the tech side. Very quickly it all seemed something like a math class mixing slow students with advanced ones. Morris began the day gamely recalling his college economics and Joseph Schumpeter and creative destruction and the need to come to terms with how great transformations happen—how to manage destruction. He drew a triangle on a whiteboard, with one point for tech, one point for talent, one point for media companies. We are all in this together, he said confidently. When that did not get an obvious assent, he changed it into a kind of exhortation: “Are we all in this together?”


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

First, math ensures that the elements of a model—the assumptions, behavioral mechanisms, and main results—are stated clearly and are transparent. Once a model is stated in mathematical form, what it says or does is obvious to all who can read it. This clarity is of great value and is not adequately appreciated. We still have endless debates today about what Karl Marx, John Maynard Keynes, or Joseph Schumpeter really meant. Even though all three are giants of the economics profession, they formulated their models largely (but not exclusively) in verbal form. By contrast, no ink has ever been spilled over what Paul Samuelson, Joe Stiglitz, or Ken Arrow had in mind when they developed the theories that won them their Nobel. Mathematical models require that all the t’s be crossed and the i’s be dotted.

Imperial Ambitions: Conversations on the Post-9/11 World by Noam Chomsky, David Barsamian

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British Empire, collective bargaining, cuban missile crisis, declining real wages, failed state, feminist movement, Howard Zinn, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Joseph Schumpeter, liberation theology, Monroe Doctrine, offshore financial centre, Ronald Reagan, The Wealth of Nations by Adam Smith, Thomas L Friedman, Upton Sinclair, uranium enrichment, Westphalian system

Part of the reason that conservative international relations specialists like Samuel Huntington and Robert Jervis were highly critical of U.S. policy was the observation that U.S. policies were creating a situation in which much of the world regarded the United States as a “rogue state,” a threat to their existence, and would form coalitions against U.S. hegemony. And this was in the Clinton years, before the Bush administration’s National Security Strategy. In a 1919 essay called “The Sociology of Imperialisms,” the Austrian economist Joseph Schumpeter wrote: There was no corner of the world where some interest was not alleged to be in danger or under actual attack. If the interests were not Roman, they were of Rome’s allies; and if Rome had no allies, then allies would be invented. When it was utterly impossible to contrive such an interest—why, then it was the national honor that had been insulted. The fight was always invested with an aura of legality.


pages: 187 words: 62,861

The Penguin and the Leviathan: How Cooperation Triumphs Over Self-Interest by Yochai Benkler

business process, California gold rush, citizen journalism, Daniel Kahneman / Amos Tversky, East Village, Everything should be made as simple as possible, experimental economics, experimental subject, framing effect, informal economy, invisible hand, jimmy wales, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge economy, laissez-faire capitalism, loss aversion, Murray Gell-Mann, Nicholas Carr, peer-to-peer, prediction markets, Richard Stallman, Scientific racism, Silicon Valley, Steven Pinker, telemarketer, Toyota Production System, ultimatum game, Washington Consensus, zero-sum game, Zipcar

In Europe, the progression went in the other direction; the rise of command-control systems began with state bureaucracy (pioneered by Bismarck in Prussia) and later diffused to businesses. But whatever the order of events, by the mid-1960s one thing was clear: In the United States and elsewhere, organization of hierarchies had come to dominate modern economic and social life. The father of sociology, Max Weber, saw this earlier in the century; economists like Joseph Schumpeter saw this in the mid-century: The future was to be inherited by ever larger, controlled bureaucracies; by various versions of Leviathan. Paralleling the arc taking place in politics, the intellectual debate (and to some extent the practice) of the next forty years saw a pronounced shift away from centralized systems and toward markets and market-mimicking approaches. In short, the Invisible Hand reemerged onto the landscape not only in the ivory tower and in the halls of Washington, but also in business and social life.


pages: 273 words: 83,186

The botany of desire: a plant's-eye view of the world by Michael Pollan

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back-to-the-land, clean water, David Attenborough, double entry bookkeeping, double helix, Francisco Pizarro, invention of agriculture, Joseph Schumpeter, mandatory minimum, Maui Hawaii, means of production, paper trading, Ralph Waldo Emerson, Steven Pinker

By 1636 the taverns were crowded with such people, and as long as Holland remained home to an expanding population of greater fools—people blinded by their desire for instant wealth—the truly foolish act would have been to abstain from the tulip trade.* Even so, there was more to the windhandel than mere wind. For the tulip craze marked the birth of a real business—the Dutch bulb trade—that would long outlast the mania. (The same could be said of our own Internet bubble: beneath the froth of speculation is a new and important industry.) According to Joseph Schumpeter, it is not at all unusual for the birth of a new business to be attended by a speculative bubble as capital rushes in, dazzled by the young industry’s wildly exaggerated promise. Every bubble sooner or later must burst—the carnival that was permanent would spell the end of the social order. In Holland the crash came in the winter of 1637, for reasons that remain elusive. But with real tulips about to come out of the ground, paper trades and futures contracts would soon have to be settled—real money would soon have to be exchanged for real bulbs—and the market grew jittery.


pages: 298 words: 81,200

Where Good Ideas Come from: The Natural History of Innovation by Steven Johnson

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Ada Lovelace, Albert Einstein, Alfred Russel Wallace, carbon-based life, Cass Sunstein, cleantech, complexity theory, conceptual framework, cosmic microwave background, creative destruction, crowdsourcing, data acquisition, digital Maoism, digital map, discovery of DNA, Dmitri Mendeleev, double entry bookkeeping, double helix, Douglas Engelbart, Douglas Engelbart, Drosophila, Edmond Halley, Edward Lloyd's coffeehouse, Ernest Rutherford, Geoffrey West, Santa Fe Institute, greed is good, Hans Lippershey, Henri Poincaré, hive mind, Howard Rheingold, hypertext link, invention of air conditioning, invention of movable type, invention of the printing press, invention of the telephone, Isaac Newton, Islamic Golden Age, Jacquard loom, James Hargreaves, James Watt: steam engine, Jane Jacobs, Jaron Lanier, John Snow's cholera map, Joseph Schumpeter, Joseph-Marie Jacquard, Kevin Kelly, lone genius, Louis Daguerre, Louis Pasteur, Mason jar, mass immigration, Mercator projection, On the Revolutions of the Heavenly Spheres, online collectivism, packet switching, PageRank, patent troll, pattern recognition, price mechanism, profit motive, Ray Oldenburg, Richard Florida, Richard Thaler, Ronald Reagan, side project, Silicon Valley, silicon-based life, six sigma, Solar eclipse in 1919, spinning jenny, Steve Jobs, Steve Wozniak, Stewart Brand, The Death and Life of Great American Cities, The Great Good Place, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, transaction costs, urban planning

Economists and social historians have documented multiple factors that drove the march of the market: capitalist economies had a better track record of long-term increases in GDP; economic actors had more liberty to make individual choices; economic self-interest is an undeniable motivating force for human beings. But few defenses of capitalism’s economic virtues failed to mention its protean force. Even its critics acknowledged the market’s drive for novelty and innovation, as in Joseph Schumpeter’s famous theory of “creative destruction.” 7 This framework is adapted from Yochai Benkler’s book The Wealth of Networks. Benkler’s point is that we have extensive experience with three of the four possible combinations. Private corporations are centralized and market-based. The marketplace itself is decentralized and, obviously, market-based. Planned economies are centralized and non-market-based.


pages: 275 words: 77,955

Capitalism and Freedom by Milton Friedman

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affirmative action, Berlin Wall, central bank independence, Corn Laws, Deng Xiaoping, floating exchange rates, Fractional reserve banking, full employment, invisible hand, Joseph Schumpeter, liquidity trap, market friction, minimum wage unemployment, price discrimination, rent control, road to serfdom, Ronald Reagan, secular stagnation, Simon Kuznets, the market place, The Wealth of Nations by Adam Smith, union organizing

We do not wish to conserve the state interventions that have interfered so greatly with our freedom, though, of course, we do wish to conserve those that have promoted it, Moreover, in practice, the term conservatism has come to cover so wide a range of views, and views so incompatible with one another, that we shall no doubt see the growth of hyphenated designations, such as libertarian-conservative and aristocratic-conservative. Partly because of my reluctance to surrender the term to proponents of measures that would destroy liberty, partly because I cannot find a better alternative, I shall resolve these difficulties by using the word liberalism in its original sense—as the doctrines pertaining to a free man. 1 Joseph Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954) p. 394. Chapter I The Relation between Economic Freedom and Political Freedom IT IS WIDELY BELIEVED that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem; and that any kind of political arrangements can be combined with any kind of economic arrangements.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

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airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

If this is our goal, it is unwise to try to revive the patterns of demand before the recession, following the same monetary policies that led to disaster. The idea that interest rates low enough to promote full employment would somehow be an obstacle to economic adjustment seems odd, but it also sounded familiar to those of us who had looked at the flailing of economists trying to come to grips with the Great Depression. In particular, Rajan’s discussion closely echoed an infamous passage from Joseph Schumpeter, in which he warned against any remedial policies that might prevent the “work of depressions” from being achieved: In all cases, not only in the two which we have analyzed, recovery came of itself. There is certainly this much of truth in the talk about the recuperative powers of our industrial system. But this is not all: our analysis leads us to believe that recovery is sound only if it does come of itself.


pages: 238 words: 73,824

Makers by Chris Anderson

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3D printing, Airbnb, Any sufficiently advanced technology is indistinguishable from magic, Apple II, autonomous vehicles, barriers to entry, Buckminster Fuller, Build a better mousetrap, business process, commoditize, Computer Numeric Control, crowdsourcing, dark matter, David Ricardo: comparative advantage, death of newspapers, dematerialisation, Elon Musk, factory automation, Firefox, future of work, global supply chain, global village, industrial robot, interchangeable parts, Internet of things, inventory management, James Hargreaves, James Watt: steam engine, Jeff Bezos, job automation, Joseph Schumpeter, Kickstarter, Lean Startup, manufacturing employment, Mark Zuckerberg, means of production, Menlo Park, Network effects, profit maximization, QR code, race to the bottom, Richard Feynman, Richard Feynman, Ronald Coase, Rubik’s Cube, self-driving car, side project, Silicon Valley, Silicon Valley startup, Skype, slashdot, South of Market, San Francisco, spinning jenny, Startup school, stem cell, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, supply-chain management, The Nature of the Firm, The Wealth of Nations by Adam Smith, transaction costs, trickle-down economics, Whole Earth Catalog, X Prize, Y Combinator

Four hundred years ago, nearly everyone you’d know would be involved in producing the staples of existence: food, clothing, shelter. Today, odds are, almost none of them are. Rao writes: The primary effect of steam was not that it helped colonize a new land, but that it started the colonization of time. Many people misunderstood the fundamental nature of Schumpeterian growth [a reference to the innovation and entrepreneurship growth theories of the economist Joseph Schumpeter] as being fueled by ideas rather than time. Ideas fueled by energy can free up time which can then partly be used to create more ideas to free up more time. It is a positive feedback cycle.17 The Third Industrial Revolution? There are those who argue that the Information Age is the Third Industrial Revolution. Computing and communications are also “force multipliers,” doing for services what automation did for manufacturing.


pages: 297 words: 77,362

The Nature of Technology by W. Brian Arthur

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Andrew Wiles, business process, cognitive dissonance, computer age, creative destruction, double helix, endogenous growth, Geoffrey West, Santa Fe Institute, haute cuisine, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, knowledge economy, locking in a profit, Mars Rover, means of production, Myron Scholes, railway mania, Silicon Valley, Simon Singh, sorting algorithm, speech recognition, technological singularity, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions

Technologies somehow must come into being as fresh combinations of what already exists. So far, this is only a hint of something we can use to explain novelty. But built up properly it will be central to my argument. Novel technologies must somehow arise by combination of existing technologies. Actually, this idea, like evolution itself, is by no means new. It has been mooted about by various people for well over 100 years, among them the Austrian economist Joseph Schumpeter. In 1910 Schumpeter was twenty-seven, and he was concerned not directly with combination and technology but with combination in the economy. “To produce,” he said, “means to combine materials and forces within our reach…. To produce other things, or the same things by a different method, means to combine these materials and forces differently.” Change in the economy arose from “new combinations of productive means.”


pages: 373 words: 80,248

Empire of Illusion: The End of Literacy and the Triumph of Spectacle by Chris Hedges

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Albert Einstein, Ayatollah Khomeini, Cal Newport, clean water, collective bargaining, corporate governance, creative destruction, Credit Default Swap, haute couture, Honoré de Balzac, Howard Zinn, illegal immigration, income inequality, Joseph Schumpeter, Naomi Klein, offshore financial centre, Ralph Nader, Ronald Reagan, single-payer health, statistical model, uranium enrichment

The national treasury, meanwhile, is being drained on behalf of speculative commercial interests. The government—the only institution citizens have that is big enough and powerful enough to protect their rights—is becoming weaker, more anemic, and increasingly unable to help the mass of Americans who are embarking on a period of deprivation and suffering unseen in this country since the 1930s. Creative destruction, Joseph Schumpeter understood, is the essential fact about unfettered capitalism. “You are going to see the biggest waste, fraud, and abuse in American history,” Ralph Nader told me when I asked about the bailouts. “Not only is it wrongly directed, not only does it deal with the perpetrators instead of the people who were victimized, but they don’t have a delivery system of any honesty and efficiency. The Justice Department is overwhelmed.


pages: 272 words: 64,626

Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs by Andy Kessler

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23andMe, Andy Kessler, bank run, barriers to entry, Berlin Wall, Bob Noyce, British Empire, business process, California gold rush, carbon footprint, Cass Sunstein, cloud computing, collateralized debt obligation, collective bargaining, commoditize, computer age, creative destruction, disintermediation, Douglas Engelbart, Eugene Fama: efficient market hypothesis, fiat currency, Firefox, Fractional reserve banking, George Gilder, Gordon Gekko, greed is good, income inequality, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, libertarian paternalism, low skilled workers, Mark Zuckerberg, McMansion, Netflix Prize, packet switching, personalized medicine, pets.com, prediction markets, pre–internet, profit motive, race to the bottom, Richard Thaler, risk tolerance, risk-adjusted returns, Silicon Valley, six sigma, Skype, social graph, Steve Jobs, The Wealth of Nations by Adam Smith, transcontinental railway, transfer pricing, wealth creators, Yogi Berra

Markets value those profits and set the price for the enterprise so they can raise more money to grow. The stock market allocates precious capital to companies it thinks can maximize profits and starves those that can’t. In other words, the stock market is democracy’s half-evil henchman, whose tool is the size of the carrot, not the use of the stick. The tenets of capitalism’s great economists, from Adam Smith’s Invisible Hand to Joseph Schumpeter’s Creative Destruction and Gordon Gekko’s Greed Is Good, are all powerful concepts, but it’s profits and the stock market that carry out the dirty work. No Five-Year Plans. All men are created equal, but a few of you need to be canned and retrained so progress can happen again. New industries get funded and start hiring again. But which ones? The ones with the best prospects for profits. Remember, markets don’t create wealth.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

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Albert Einstein, Bayesian statistics, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, naked short selling, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

While at the New School, Marschak was reunited with other economists in exile, including Emil Lederer (1882–1939), his former mentor at Heidelberg, and Hans Neisser (1895–1975). Both these kindred spirits were political and intellectual activists in Germany. Neisser had been instrumental in the formation of the influential Vienna Colloquium, which helped motivate, hone, and publicize some of John von Neumann’s most significant work in the early to mid-1930s. Neisser, who the renowned economist Joseph Schumpeter once described as “one of the most brilliant economic minds (of his generation),” remained at the New School until he died in 1975.1 The Early Years 13 Lederer and Neisser were most influential in Marschak’s early work. These former participants of what was known as the “Kiel School” had exposed Marshak to an approach to economics that was developed by some reform-oriented economists in the Kiel Institute of World Economics from 1914 until the rise of fascism forced them to seek refuge elsewhere.


pages: 309 words: 78,361

Plenitude: The New Economics of True Wealth by Juliet B. Schor

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Asian financial crisis, big-box store, business climate, carbon footprint, cleantech, Community Supported Agriculture, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, decarbonisation, dematerialisation, demographic transition, deskilling, Edward Glaeser, en.wikipedia.org, Gini coefficient, global village, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Joseph Schumpeter, Kenneth Arrow, knowledge economy, life extension, McMansion, new economy, peak oil, pink-collar, post-industrial society, prediction markets, purchasing power parity, ride hailing / ride sharing, Robert Shiller, Robert Shiller, sharing economy, Simon Kuznets, single-payer health, smart grid, The Chicago School, Thomas L Friedman, Thomas Malthus, too big to fail, transaction costs, Zipcar

Even when growth picks up again, there will be large sectors in permanent decline—automobiles, industrial farming, and perhaps even fossil fuels will be smaller and less profitable industries, if they’re profitable at all. With a downturn this severe, there will be a protracted and difficult process of weeding out low-performing industries, companies, and products, or what the Austrian economist Joseph Schumpeter called creative destruction. It will take time to re-create the classic conditions for prosperity, such as confidence, financial regulation, monetary stability, consumer demand, and a steady policy hand. Due to the complexity of the global economy, the challenges are far greater than we’ve ever faced. As we move forward, the fatal flaw of the current growth regime—climate change and other ecological limits—will rear its ugly head.


pages: 193 words: 63,618

The Fair Trade Scandal: Marketing Poverty to Benefit the Rich by Ndongo Sylla

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British Empire, carbon footprint, corporate social responsibility, David Ricardo: comparative advantage, deglobalization, Doha Development Round, Food sovereignty, global value chain, illegal immigration, income inequality, income per capita, invisible hand, Joseph Schumpeter, labour mobility, land reform, market fundamentalism, mass immigration, means of production, Mont Pelerin Society, Naomi Klein, non-tariff barriers, offshore financial centre, open economy, Philip Mirowski, Plutocrats, plutocrats, price mechanism, purchasing power parity, Ronald Reagan, Scientific racism, selection bias, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, transatlantic slave trade, trickle-down economics, Washington Consensus, zero-sum game

For him to be seen as a wholehearted partisan of free trade however, not to mention the founding father of this tradition, a good deal of nit-picking and rhetorical contortions must have been undertaken by eminent historians of political economy. In The Tradition of Free Trade (2004), Lars Magnusson dismantles this theory in a very convincing manner. To begin with, he points out that the arguments in favour of free trade existed before Smith. This was actually vigorously claimed by Joseph Schumpeter, an author who saw Smith as an economist lacking in originality, although he managed to faithfully reflect the spirit of his times.3 Magnusson’s analysis is generally similar to that of Schumpeter while completing it on some points. According to Magnusson, there were not one but several faces of Adam Smith. Such was his influence that in most countries (England, the United States, Sweden, Germany), his intellectual authority was mobilised both by the supporters and adversaries of free trade.


pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

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Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, break the buck, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional, zero-sum game

This exporting effect is a standard mechanism emphasized by economists. When a city or country has a collapse in spending, a flexible economy should be able to adjust by lowering wages and making exporting industries more competitive. Another adjustment mechanism should have been migration. Perhaps it was time for workers to pack up and move to other parts of the country with a stronger job market. Economists going back to Joseph Schumpeter have argued that this “creative destruction” process is natural and even healthy. When the economy needs to reallocate its production to new activities, workers move in order to take advantage of new opportunities. But unfortunately, the U.S. economy during the Great Recession didn’t work that way, and unemployment persisted. John Maynard Keynes had it exactly when he wrote: “It may well be that the classical theory represents the way in which we should like our economy to behave.


pages: 246 words: 74,341

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

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accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, new economy, Northern Rock, Own Your Own Home, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

It does not matter that an operation is very popular, that management believes it is going well, or that customers love it. It will still not survive unless it creates something that is valued more highly than the raw materials, components, ideas, capital, and labor from which it is made. And it will die even if nobody understands what happened. Politicians who distribute pork they cannot afford are reelected; butcher shops that sell pork they cannot afford go bankrupt. That is why the Austrian economist Joseph Schumpeter identified creative destruction as the core of capitalism. Competition from other companies and free choice for customers entail that less good operations are constantly being eliminated so that resources go instead to more promising business concepts and operations. Many people today see the recession as a crisis for capitalism. It is not. It is just a crisis for certain capitalists-we have discovered that a number of business models do not work.


pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

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activist fund / activist shareholder / activist investor, banking crisis, basic income, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, creative destruction, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, fixed income, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, late capitalism, liberal capitalism, means of production, moral hazard, Myron Scholes, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, union organizing, winner-take-all economy, Wolfgang Streeck

Even progressive income taxes would simply mean that the state developed hidden interests in the maintenance of inequality and the concentration of profits. Goldscheid was not alone in his pessimistic view of fiscal policy. The possibility of a ‘crisis of the tax state’ was widely discussed in the period immediately after the First World War, an especially influential contribution being the young Joseph Schumpeter’s lecture of 1918 to the Austrian Gesellschaft der Soziologie.46 His conclusion was that the historical institution of the tax state had not yet reached its limits, and that the war debts of Germany and Austria in particular could be settled without general socialization. Looking further ahead, however, he did not rule out the possibility – indeed, he expected it – that the tax state and the capitalist mode of production as a whole would one day cease to be viable.47 This idea would subsequently be banished to the catacombs in the history of economic thought, especially after 1945, when a welfare-state capitalism domesticated along Keynesian lines appeared to usher in a new era.


pages: 279 words: 76,796

The Unbanking of America: How the New Middle Class Survives by Lisa Servon

Affordable Care Act / Obamacare, Airbnb, basic income, Build a better mousetrap, Cass Sunstein, choice architecture, creative destruction, Credit Default Swap, employer provided health coverage, financial exclusion, financial independence, financial innovation, gender pay gap, George Akerlof, gig economy, income inequality, informal economy, Jane Jacobs, Joseph Schumpeter, late fees, Lyft, M-Pesa, medical bankruptcy, microcredit, Occupy movement, payday loans, peer-to-peer lending, precariat, Ralph Nader, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, sharing economy, too big to fail, transaction costs, unbanked and underbanked, underbanked, universal basic income, Unsafe at Any Speed, We are the 99%, white flight, working poor, Zipcar

Enormous advances in technology, significant changes in consumer behavior, and a radically revised regulatory environment are coming together in ways that offer hope for more efficient, effective, and equitable provision of consumer financial services. This moment is notable for its rarity—this business sector “hasn’t changed materially in hundreds of years,” according to Brett King, an expert in retail banking. Creative destruction, a term coined by the Austrian economist Joseph Schumpeter, denotes the process by which capitalism destroys old economic orders and reinvents them through innovation. Here’s an example of this process at work: innovations in refrigeration and transportation technologies enabled the creation of supermarkets, which ultimately put many smaller food shops out of business. More recently, Amazon, in its use of the Internet, its innovative approaches to shipping, and the creation of the Kindle reader, profoundly changed book selling.


pages: 222 words: 70,132

Move Fast and Break Things: How Facebook, Google, and Amazon Cornered Culture and Undermined Democracy by Jonathan Taplin

1960s counterculture, 3D printing, affirmative action, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, American Legislative Exchange Council, Apple's 1984 Super Bowl advert, back-to-the-land, barriers to entry, basic income, battle of ideas, big data - Walmart - Pop Tarts, bitcoin, Brewster Kahle, Buckminster Fuller, Burning Man, Clayton Christensen, commoditize, creative destruction, crony capitalism, crowdsourcing, data is the new oil, David Brooks, David Graeber, don't be evil, Donald Trump, Douglas Engelbart, Douglas Engelbart, Dynabook, Edward Snowden, Elon Musk, equal pay for equal work, Erik Brynjolfsson, future of journalism, future of work, George Akerlof, George Gilder, Google bus, Hacker Ethic, Howard Rheingold, income inequality, informal economy, information asymmetry, information retrieval, Internet Archive, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Joseph Schumpeter, Kevin Kelly, Kickstarter, labor-force participation, life extension, Marc Andreessen, Mark Zuckerberg, Menlo Park, Metcalfe’s law, Mother of all demos, move fast and break things, move fast and break things, natural language processing, Network effects, new economy, Norbert Wiener, offshore financial centre, packet switching, Paul Graham, Peter Thiel, Plutocrats, plutocrats, pre–internet, Ray Kurzweil, recommendation engine, rent-seeking, revision control, Robert Bork, Robert Gordon, Robert Metcalfe, Ronald Reagan, Sand Hill Road, secular stagnation, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, smart grid, Snapchat, software is eating the world, Steve Jobs, Stewart Brand, technoutopianism, The Chicago School, The Market for Lemons, Tim Cook: Apple, trade route, transfer pricing, trickle-down economics, Tyler Cowen: Great Stagnation, universal basic income, unpaid internship, We wanted flying cars, instead we got 140 characters, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator

Anyone with a ranking of five got axed, but not without first having been humiliated on a website featuring his or her portrait. Under this so-called “Rank & Yank” policy, people proved perfectly willing to slit one another’s throats, resulting in a corporate atmosphere marked by appalling dishonesty within and ruthless exploitation outside the company. Since at least 1995, professors at business schools have dismissed this kind of behavior as a natural outgrowth of the Austrian economist Joseph Schumpeter’s notion of “creative destruction.” The growth of the tech economy with its constant change would create a new kind of employee: oriented to the short term and focused on potential ability rather than acquired knowledge. But most of us are like Epicurus or even the monks of Camaldoli. We need a life narrative in which we take pride in being good at a specific task, and we value the experiences we have lived through.


Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Pérez

agricultural Revolution, Big bang: deregulation of the City of London, Bob Noyce, Bretton Woods, capital controls, commoditize, Corn Laws, creative destruction, David Ricardo: comparative advantage, deindustrialization, distributed generation, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Hyman Minsky, informal economy, joint-stock company, Joseph Schumpeter, knowledge economy, late capitalism, market fundamentalism, new economy, nuclear winter, offshore financial centre, post-industrial society, profit motive, railway mania, Robert Shiller, Robert Shiller, Sand Hill Road, Silicon Valley, Simon Kuznets, South Sea Bubble, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, trade route, tulip mania, Upton Sinclair, Washington Consensus

Carlota Perez made the vital point that countries and regions vary in their capacity and their desire to make such institutional changes, depending on social and political factors, the particular historical circumstances and other social and political conflicts and ideas. In this book, she makes an even more original and seminal contribution. She examines the interaction between that part of the economy commonly known as financial capital and the upsurge of new technologies from their first beginnings to the time when they predominate in the structure and behavior of the economy. In his major work, Business Cycles (1939), Joseph Schumpeter, whilst interpreting the major waves of economic growth and technological transformation as ‘successive industrial revolutions’, insisted that these clusters of radical innovations also depended on financial capital. In fact, more space is devoted to finance in his book than to technology but, rather strangely, his followers – often known as ‘neo-Schumpeterians’ – neglected this aspect of his work.


pages: 446 words: 578

The end of history and the last man by Francis Fukuyama

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affirmative action, anti-communist, Ayatollah Khomeini, Berlin Wall, Bonfire of the Vanities, centre right, cuban missile crisis, deindustrialization, Deng Xiaoping, European colonialism, F. W. de Klerk, Fall of the Berlin Wall, Francis Fukuyama: the end of history, full employment, Gini coefficient, Gunnar Myrdal, Hernando de Soto, income inequality, Isaac Newton, Joseph Schumpeter, kremlinology, labour mobility, land reform, long peace, Mikhail Gorbachev, nuclear winter, open economy, post-industrial society, postindustrial economy, RAND corporation, Ronald Reagan, Socratic dialogue, strikebreaker, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, zero-sum game

For an example of the confusion into which events in Eastern Europe have thrown the left, see André Gunder Frank, "Revolution in Eastern Europe: Lessons for Democratic Social Movements (and Socialists?)" Third World Quarterly 12, no. 2 (April, 1990): 3 6 - 5 2 . 4. James Bryce, Modern Democracies, vol. I (New York: Macmillan, 1931), pp. 5 3 - 5 4 . 5. Accepting Schumpeter's qualifications of eighteenth-century definitions of democracy, we can say with him that democracy is "free competitions among would-be leaders for the vote of the electorate." Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper Brothers, 1950), p. 284. See also the discussion of definitions of democracy in Samuel Huntington, "Will More Coun­ tries Become Democratic?" Political Science Quarterly 99, no. 2 (Summer 1984): 193-218. 6. Expansion of the franchise was a gradual process in most democracies including those of England and the United States; many contemporary democ­ racies did not achieve universal adult franchise until fairly late in the twentieth century, and yet could meaningfully have been spoken of as democracies before that point.

See Nathan Tarcov, Locke's Education for Liberty (Chicago: University of Chicago Press, 1984), particularly pp. 5—8 and 2 0 9 - 2 1 1 ; Tarcov, "The Spirit of Liberty and Early American Foreign Policy," in Zuckert (1988), pp. 1 3 6 - 1 4 8 . See also Pangle (1988), pp. 194, 227; and Harvey C. Mansfield, Taming the Prince: The Ambivalence of Modern Executive Power (New York: Free Press, 1989), pp. 204— 211. 16. The potential incompatibility of capitalism and family life is discussed in Joseph Schumpeter's Capitalism, Socialism, and Democracy (New York: Harper Brothers, 1950), pp. 1 5 7 - 1 6 0 . 368 NOTES, PAGES 1 6 2 - 1 6 9 Chapter 15. A Vacation in Bulgaria 1. Republic 386c, quoting Homer's Odyssey, XI, 4 8 9 - 4 9 1 . 2. There have been very few systematic studies of the phenomenon of thymos or recognition in the Western philosophical tradition, despite its impor­ tance to that tradition.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

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Affordable Care Act / Obamacare, Airbus A320, airline deregulation, anti-communist, asset allocation, banking crisis, Bonfire of the Vanities, British Empire, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, full employment, global supply chain, Gordon Gekko, guest worker program, hiring and firing, housing crisis, Howard Zinn, income inequality, index fund, industrial cluster, informal economy, invisible hand, Joseph Schumpeter, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, laissez-faire capitalism, late fees, Long Term Capital Management, low cost carrier, manufacturing employment, market fundamentalism, Maui Hawaii, mega-rich, mortgage debt, negative equity, new economy, Occupy movement, Own Your Own Home, Paul Samuelson, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Powell Memorandum, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Steve Jobs, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

The United States built a system of deterrence through alliances with NATO in Europe, SEATO in Southeast Asia, CENTO in the Middle East, and special defense links to Japan and South Korea in the Far East. Every region, every country, every civil war, every coup d’état, every nascent threat, became a potential trip wire for U.S. involvement. From Harry Truman to George W. Bush, America’s leaders gauged U.S. national interests as broadly as the rulers of ancient Rome. Economist Joseph Schumpeter’s description of the Roman Empire resonates vividly today: “There was no corner of the known world where some interest was not alleged to be in danger or under actual attack. If the interests were not Roman, they were those of Rome’s allies; and if Rome had no allies, then allies would be invented. When it was utterly impossible to contrive such an interest—why, then it was the national honor that had been insulted.

Department of Defense, http://​www.​acq.​osd.​mil/​ie/​download/​bsr/​bsr2011​baseline.​pdf. 56 Hot war zones—then 411 in Afghanistan Nick Turse, “Empire of Bases 2.0,” CBS News Opinion, January 10, 2011, http:​www.​cbsnews.​com. 57 “No other military in world history” Tom Kane, “Global U.S. Troop Deployment, 1950–2005,” 10, Heritage Foundation, May 24, 2006, http://​www.​heritage.​org. 58 Simply maintaining those bases Deputy Undersecretary of Defense Dorothy Robyn, cited in Christine Anh and Sukjong Hong, “Bring War Dollars Home by Shutting Down Bases,” Institute for Policy Studies, March 31, 2011, http://​www.​ips-​dc.​org. 59 “There was no corner of the known world” Joseph Schumpeter, Imperialism and Social Classes: Two Essays (Cleveland: Meridian Books, 1951), 51. 60 Rumsfeld made plans to bring seventy thousand troops home Donald H. Rumsfeld, testimony, Senate Armed Services Committee, September 23, 2004, http://​www.​defense.​gov. 61 “America stands alone” President William Clinton, Second Inaugural Address, January 20, 1997, http://​www.​gpo.​gov. 62 “The survival of liberty” President George W.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Money and the games played are intangible, unreal, and increasingly virtual. Electronic displays flashing red or green price signals are the distilled essence of the financial world. Traders do not experience the underlying reality directly but only in terms of gains or losses—money made or lost that can be lost or made back in the next few seconds. The author Tom Wolfe once summed up the world of money by citing the Austrian economist Joseph Schumpeter: “Stocks and bonds are what he called evaporated property. People completely lose touch of the underlying assets. It’s all paper—these esoteric devices. So it has become evaporated property squared. I call it evaporated property cubed.”11 Extreme money is eviscerated reality—the monetary shadow of real things. The Greek word Hubris means arrogant, excessive pride that often results in fatal retribution.

Keynesian economics would not solve the problems but would create inflation. Keynes was equally critical of Hayek’s work, commenting that one article started “with a mistake” and then moved on to “bedlam.” Another article constituted “a farrago of nonsense.” Although he got on well with the Austrian personally, and thought Hayek’s 1944 The Road to Serfdom was “a grand book,” Keynes was unpersuaded, concluding: “what rubbish his theory is.”5 Joseph Schumpeter’s worldview was shaped by his role as Austria’s minister of finance, paying off debts incurred in the collapse of central European financial institutions. Intending to be the world’s greatest economist, lover, and horseman, the colorful, thrice-married Austrian acknowledged only having to work at his horsemanship. Capitalism’s strength, Schumpeter argued, was creative destruction, where economic incentives encouraged entrepreneurs to develop new ideas to take advantage of profit opportunities, sweeping away old defunct businesses and processes.


pages: 827 words: 239,762

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite by Duff McDonald

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Albert Einstein, barriers to entry, Bayesian statistics, Bernie Madoff, Bob Noyce, Bonfire of the Vanities, business process, butterfly effect, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate raider, corporate social responsibility, creative destruction, deskilling, discounted cash flows, disintermediation, Donald Trump, family office, financial innovation, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, Gordon Gekko, hiring and firing, income inequality, invisible hand, Jeff Bezos, job-hopping, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Whale, Long Term Capital Management, market fundamentalism, Menlo Park, new economy, obamacare, oil shock, pattern recognition, performance metric, Peter Thiel, Plutocrats, plutocrats, profit maximization, profit motive, pushing on a string, Ralph Nader, Ralph Waldo Emerson, RAND corporation, random walk, rent-seeking, Ronald Coase, Ronald Reagan, Sand Hill Road, Saturday Night Live, shareholder value, Silicon Valley, Skype, Steve Jobs, survivorship bias, The Nature of the Firm, the scientific method, Thorstein Veblen, union organizing, urban renewal, Vilfredo Pareto, War on Poverty, William Shockley: the traitorous eight, women in the workforce, Y Combinator

When the School launched the Journal of Business and Economic History in 1928, Edwin Gay served as editor and Gras as managing editor. But the journal was shuttered in 1932 due to a lack of funding and clarity as to its ultimate mission.1 A successor, Business History Review, wasn’t founded until 1954. Another pre-Chandler effort at business history at Harvard was its Research Center in Entrepreneurial History, a joint effort between Arthur Cole, the School’s librarian, the economist Joseph Schumpeter (the man who coined the term creative destruction), Edwin Gay, and others. Active for just a single decade, from 1948 to 1958, the center helped solidify one of Western capitalism’s main tenets—that the ongoing destruction of individual businesses and fortunes was the price of a better life for all. HBS remains firmly of the opinion that the general prosperity produced by the “capitalist engine” far outweighs the wreckage it leaves behind.

And no wonder—it effectively divided the faculty in two.15 Hayes even said so himself: “My own problem was really with my colleagues. One could read into the articles that I was being critical of finance. I was being critical of control measurement systems, and of strategy. And a lot of my good friends on the faculty were teaching those things.” For the next fifteen years, the article was the most requested reprint from HBR. Fans of cutthroat capitalism love to quote Joseph Schumpeter on creative destruction. Less known are concerns he voiced in his 1942 work, Capitalism, Socialism, and Democracy, in which he worried that by giving control of the modern corporation to salaried managers, the people who would then be at the economy’s steering wheel would no longer have any incentive to innovate and generate new wealth (that is, creative destruction) but instead be focused on minimizing risk to maximize personal job security.16 And when they weren’t overly focused on their own money, they were overly focused on the corporation’s money, at the expense of paying attention to product management.


pages: 337 words: 103,273

The Great Disruption: Why the Climate Crisis Will Bring on the End of Shopping and the Birth of a New World by Paul Gilding

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airport security, Albert Einstein, Bob Geldof, BRICs, carbon footprint, clean water, cleantech, Climategate, commoditize, corporate social responsibility, creative destruction, decarbonisation, energy security, Exxon Valdez, failed state, fear of failure, income inequality, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, market fundamentalism, mass immigration, Naomi Klein, new economy, nuclear winter, oil shock, peak oil, Ponzi scheme, purchasing power parity, Ronald Reagan, shareholder value, The Spirit Level, The Wealth of Nations by Adam Smith, union organizing, University of East Anglia

I do so partly because many readers will be working in business and will be wondering what it means for them. I also do so because I have believed for many years that we are going to need business and markets fully mobilized if we are to achieve the historic task ahead of us. This is where my favorite economist comes in. Both as an activist and as an entrepreneur, I have always been particularly fond of the Austrian economist Joseph Schumpeter and his theories of creative destruction. He pointed out that markets are basically “a process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” When I first read these words, I realized they could be describing an ecosystem like a rain forest. It is, after all, a stable overall system, but within it there is a process of constant and dynamic change as old things die or are destroyed and new life is created.


pages: 281 words: 95,852

The Googlization of Everything: by Siva Vaidhyanathan

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1960s counterculture, activist fund / activist shareholder / activist investor, AltaVista, barriers to entry, Berlin Wall, borderless world, Burning Man, Cass Sunstein, choice architecture, cloud computing, computer age, corporate social responsibility, correlation does not imply causation, creative destruction, data acquisition, death of newspapers, don't be evil, Firefox, Francis Fukuyama: the end of history, full text search, global village, Google Earth, Howard Rheingold, informal economy, information retrieval, John Markoff, Joseph Schumpeter, Kevin Kelly, knowledge worker, libertarian paternalism, market fundamentalism, Marshall McLuhan, means of production, Mikhail Gorbachev, moral panic, Naomi Klein, Network effects, new economy, Nicholas Carr, PageRank, pirate software, Ray Kurzweil, Richard Thaler, Ronald Reagan, side project, Silicon Valley, Silicon Valley ideology, single-payer health, Skype, social web, Steven Levy, Stewart Brand, technoutopianism, The Nature of the Firm, The Structural Transformation of the Public Sphere, Thorstein Veblen, urban decay, web application, zero-sum game

John Battelle, The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture (New York: Portfolio, 2005); Randall E. Stross, Planet Google: One Company’s Audacious Plan to Organize Everything We Know, vol. 1 (New York: Free Press, 2008); Alexander Halavais, Search Engine Society (Cambridge, MA: Polity, 2009). 10. Todd Gitlin, Media Unlimited: How the Torrent of Images and Sounds Overwhelms Our Lives (New York: Metropolitan Books, 2001). 11. The phrase is Joseph Schumpeter’s. See Schumpeter, Capitalism, Socialism, and Democracy (London: Allen and Unwin, 1952), 81. 12. Lucas D. Introna and Helen Nissenbaum, “Shaping the Web: Why the Politics of Search Engines Matters,” Information Society 16, no. 3 (2000): 169. 13. In another context I have used the term technocultural imagination to describe the conditions and habits that contemporary artists have enjoyed since the dissemination of digital technologies and networks.


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

They need other complex organizations to provide inputs and sometimes to buy their output. Equally important, they need finance, infrastructure—for example, electric power, and transport and communication networks—and governance institutions to provide security to property and life as well as to facilitate business transactions. How the Early Developers Built Organizational Capital The great Austrian economist Joseph Schumpeter argued that capitalism grew through innovation, with newcomers bringing in creative new processes and techniques that destroyed the businesses of old incumbents. Much of capitalism’s dynamism in industrial countries does reflect this process: in the past few years, for example, the whole business of film photography has been almost completely eclipsed by the digital photography revolution.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, labour market flexibility, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

Cold War economics If we are to succeed in the war of ideologies and to win over the decent element in the enemy countries we must first of all regain the belief in the traditional values [of individual freedom, truth, and democracy]… —Friedrich August von Hayek, 1944 While in the early 1930s there was a great worry that capitalism might collapse due to lack of demand, as the Second World War approached the worry became that capitalism might simply be replaced outright. There was a pervasive sense of dismay and defeat among the intellectuals THE ECONOMICS OF THE POWERFUL 19 of the West. Support for communism grew and it was considered a very acute challenge for the Western economic model even among leading economists (Amadae 2003). Joseph Schumpeter (1943/2003), famous for describing entrepreneurship as a process of creative destruction, expressed his conviction that “a socialist form of government will inevitably emerge from an equally inevitable decomposition of capitalist society.” Frank Knight of the Chicago School, which later became famous for its uncompromising support of free markets, also expressed serious doubts. “Economics and politics based on competitive mass selling is bankrupt and it is only the question of a successor to bid in the effects of the defunct at a nominal figure,” he wrote in 1933 and argued that elites under communism might be well suited to provide the government control that markets needed (Amadae 2003).


pages: 334 words: 98,950

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang

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affirmative action, Albert Einstein, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labour mobility, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

The monopoly is due to the natural advantages accorded to the innovator, such as imitation lag (due to the time it takes for others to absorb new knowledge); reputational advantage (of being the first and so best-known producer); and the head start in ‘racing down learning curves’ (i.e., the natural increase in productivity through experience).8 The resulting temporary monopoly profit is reward enough for the innovative activity in most industries. This was indeed a popular argument against patents in the 19th century.9 This is also why patents do not feature at all in the Austrian-born American economist Joseph Schumpeter’s famous theory of innovation – Schumpeter believed that the monopoly rent (or what he calls the entrepreneurial profit) that a technological innovator will enjoy through the above mechanisms is a big enough incentive for investing in generating new knowledge.10 Most industries actually do not need patents and other IPRs to generate new knowledge – although they will be more than happy to take advantage of them, if they are offered to them.


pages: 309 words: 91,581

The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It by Timothy Noah

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assortative mating, autonomous vehicles, blue-collar work, Bonfire of the Vanities, Branko Milanovic, call centre, collective bargaining, computer age, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, Deng Xiaoping, Erik Brynjolfsson, feminist movement, Frank Levy and Richard Murnane: The New Division of Labor, Gini coefficient, Gunnar Myrdal, income inequality, industrial robot, invisible hand, job automation, Joseph Schumpeter, low skilled workers, lump of labour, manufacturing employment, moral hazard, oil shock, pattern recognition, Paul Samuelson, performance metric, positional goods, post-industrial society, postindustrial economy, Powell Memorandum, purchasing power parity, refrigerator car, rent control, Richard Feynman, Richard Feynman, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, Stephen Hawking, Steve Jobs, The Spirit Level, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, union organizing, upwardly mobile, very high income, Vilfredo Pareto, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration, Yom Kippur War

Samuelson, “Tribute to Wolfgang Stolper on the Fiftieth Anniversary of the Stolper-Samuelson Theorem,” in The Stolper-Samuelson Theorem: A Golden Jubilee, ed. Alan V. Deardorff and Robert M. Stern (Ann Arbor: University of Michigan Press, 1994), 343; and Jagdish Bhagwati, “The Stolper-Samuelson Theorem: Then And Now,” in Stolper-Samuelson Golden Jubilee, 219. 5. Taussig, who for many years had chaired Harvard’s Economics Department (he was succeeded by Joseph Schumpeter), was a highly influential figure in modern trade theory. He died the year before Stolper and Samuelson published their paper. In the passage they quoted, Taussig went on at cringe-inducing length: “It is a belief held especially in countries of high wages like the United States, and it goes with—indeed, is a part of—the most persuasive argument in favor of a policy of tariff protection. It seems plain as a pikestaff to the average person—to the average employer not less than to the average workman—that the country in which money wages are low can undersell the country paying high money wages; and that if the two compete without restriction, wages must become the same in both.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

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banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

Mergers sometimes make sound business sense, while some companies need stronger management. Economies have to evolve and adjust as some companies fail, new ones emerge and the success stories of the past are overtaken by new technological developments and the industries of the future. Innovation is the lifeblood of economic dynamism and inevitably involves some pain or ‘creative destruction’ as the Austrian economist, Joseph Schumpeter, described it in Capitalism, Socialism and Democracy published in 1942. It is a process of change that inevitably brings winners and losers. If the industrial restructuring of the last thirty years had been driven by business innovation aimed at improving productivity and long-run performance, creating new jobs and wealth along the way, the dislocation involved would have been defensible. But the evidence is that the business restructuring of recent times has been poorly associated with creating greater dynamism and building the productive strength of the economy.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

Up to a point the trade-offs of the trilemma will not bite—for example some efficiency improvements might be possible within the prevailing standards of individuality and equality—but ultimately doing better on one or two of these fronts will involve doing worse on another. The existence of the trilemma is why so often there seems to be an innate dynamic to capitalist economies. Marx and Engels thought that capitalism contained the seeds of its own destruction. Others, notably Joseph Schumpeter, have seen the process as a continual reinvention driven by technology and enterprise. My take on the dynamic is that depending on the circumstances (including technology), the policies and the institutional framework of the economy must change in order to restore a balance between the three aims of efficiency, equity, and liberty. Clarity about the trade-offs between values often plays out in the way people typically think about the role of “the government” and “the market,” especially now that the crisis in the financial markets has tarnished the reputation of markets in general.


pages: 369 words: 94,588