… is from pages 82-83 of the 1975 HarperPerennial printing of the third (1950) edition of Joseph Schumpeter’s profound 1942 volume, Capitalism, Socialism, and Democracy (original emphasis; footnote deleted):
Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process 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. Nor is this evolutionary character due to a quasi-automatic increase in population and capital or to the vagaries of monetary systems of which exactly the same thing holds true. 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….
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation – if I may use that biological term – that incessantly revolutionizes 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.
DBx: Yes. Without doubt or condition, Schumpeter is here correct.
As Deirdre McCloskey also makes clear, what we call “capitalism” is not merely the reign of private property and contract rights and free markets. While reasonably secure private property and contract rights, and reasonably free markets, are necessary for capitalism to operate, they are not sufficient. An openness to innovation and (for lack of a better term) a culture that accepts economic change are also necessary. If fear of innovation and opposition to change are widespread throughout a society, that society cannot and will not be capitalist. And the typical denizens of that society cannot and will not be as materially prosperous as are even the poorest denizens of capitalist societies.
I cannot speak for other economists or classical liberals, but as for me, the economic reasons for my support for free markets in general, and for free trade and open immigration in particular, have very little to do with the efficiency conditions that are the stuff of mainstream economics textbooks and papers (although I believe these conditions to be far more important than most non-economists appear to think them to be). The reason I press so hard for free trade and for more open borders is to add my minuscule voice to those who speak to maintain and reinforce the attitudes that are essential for capitalism to survive.
The business whose existence is threatened by greater consumer freedom to patronize foreign rivals is simply part of the capitalist-competitive process. Attempts to treat such a business differently from other businesses whose existence is threatened by any of the many other sources of economic change undermine the attitudes that are essential for capitalism to survive. The popular proclivity to assess the current performance of an economy by how well existing producers perform is wholly antagonistic to capitalism. (By the way, it’s not only non-economists who have this proclivity; some economists have it – for example, Keynesians.)
The constant struggle for capitalism’s supporters is to champion tomorrow – to defend not only that which is today unseen but that which is today also unknowable in any detail. It is to defend a faith in competition and market-tested betterment – faith that market-driven competition will continue to perform in the future as it has performed in the past. But this faith – this confidence that the capitalist process and progress tomorrow will reflect with high fidelity the ‘logic’ of the capitalist process and progress of today and of yesterday – is not anything to which any person must ‘leap’; it’s not a prediction based upon whimsy or dogma or superstition. This faith is founded on scientific conclusions drawn from knowledge of history and from an understanding of market processes (including, but not limited to, excellent microeconomic theory as practiced by the likes of Armen Alchian and Harold Demsetz).