Modern Prophets: Schumpeter or Keynes? - Page 6

Schumpeter's "innovator" with his "creative destruction" is the only theory so far to explain why there is something we call "profit." The classical economists very well knew that their theory did not give any rationale for profit. Indeed, in the equilibrium economics of a closed economic system there is no place for profit, no justification for it, no explanation of it. If profit is, however, a genuine cost, and especially if profit is the only way to maintain jobs and to create new ones, then capitalism becomes again a moral system.
Morality and profits: The classical economists had pointed out that profit is needed as the incentive for the risk taker. But is this not really a bribe and thus impossible to justify morally? This dilemma had driven the most brilliant of the nineteenth-century economists, John Stuart Mill, to embrace socialism in his later years. It had made it easy for Marx to fuse dispassionate analysis of the "system" with the moral revulsion of an Old Testament prophet against the exploiters. The weakness on moral grounds of the profit incentive enabled Marx at once to condemn the capitalist as wicked and immoral and assert "scientifically" that he serves no function and that his speedy demise is "inevitable." As soon, however, as one shifts from the axiom of an unchanging, self-contained, closed economy to Schumpeter's dynamic, growing, moving, changing economy, what is called profit is on longer immoral. It becomes a moral imperative. Indeed, the question then is no longer the question that agitated the classicists and still agitated Keynes: How can the economy be structured to minimize the bribe of the functionless surplus called profit that has to be handed over to the capitalist to keep the economy going?

The question in Schumpeter's economics is always, Is there sufficient profit? Is there adequate capital formation to provide for the costs of the future, the costs of staying in business, the costs of "creative destruction"?
This alone makes Schumpeter's economic model the only one that can serve as the starting point for the economic policies we need. Clearly the Keynesian - or classicist - treatment of innovation as being "outside," and in fact peripheral to, the economy and with minimum impact on it, can no longer be maintained (if it ever could have been). The basic question of economic theory and economic policy, especially in highly developed countries, is clearly: How can capital formation and productivity be maintained so that rapid technological change as well as employment can be sustained? What is the minimum profit needed to defray the costs of the future? What is the minimum profit needed, above all, to maintain jobs and to create new ones?
Schumpeter gave no answer; he did not much believe in answers. But seventy years ago, as a very young man, he asked what is clearly going to be the central question of economic theory and economic policy in the years to come.