Is Creative Destruction being stifled by risk aversion?

Breaking the wall K2 Partners Business Blog

In his 1942 work, Capitalism, Socialism and Democracy, the economist Joseph Schumpeter introduced the idea of Creative Destruction as an essential ingredient for sustaining long-term economic growth.

In a nutshell, it is the entrepreneur and his or her innovation that acts as a brake on, or actually destroys, established companies, thus protecting an economy’s health by allowing new companies and ideas to rise.

Schumpeter’s thesis was that while healthy capitalism is about constant change, inevitably the drive for maximum productive performance, if successful, will tend to kill competition and thus the system contains the seeds of its own destruction. Therefore, the entrepreneur and innovation are essential to capitalism’s healthy survival.

Managing capitalism in a global marketplace

Over time, ever since the Great Depression of the 1930s both political action and economic theory, have been evolving, prompted in part by the distressing consequences to many individuals when things “go wrong” in countries’ economies.

So, for example, Keynes’ solution to the Depression was that governments should step in with deficit financing, stimulating projects that could be started quickly to provide people with work and pay, which would stimulate economic activity and be paid off by increased tax payments. Equally governments, such as in the US, moved to regulate excessive risk-taking and speculation in the financial sectors to prevent a recurrence.

Gradually Governments took more responsibility for people’s welfare, in health, education and for stimulating employment. This has contributed to a shift in the balance of power from the employer to the worker.

A failure to manage the resulting imbalances and the consequences for national economies eventually led to disenchantment with the mixed economy and a return to completely unregulated free market capitalism, aka Neoliberalism, as promoted by Margaret Thatcher in the UK and by Ronald Reagan in the US.

After the 2008 Financial crash and the difficulty countries have had in recovering the question in the mature economies of the 21st Century, therefore, is what place capitalism has in our current and future society, especially in a now-global marketplace.

The businessman is no longer an entrepreneur or hero

Businesses constantly complain about the time absorbed and constraints imposed by “Government red tape”.  But we would argue regulation has moved further from things like Health and Safety regulation and employment protection into trying to regulate in a way that prevents risk.

Consequently, businesses are focusing on dealing with red tape and bureaucracy rather than on doing things, or getting out and selling. Dealing with red tape is disproportionately expensive in time and money for the SME compared with the larger companies and therefore inhibits their capacity for growth. Even in the larger companies there has been a rise in the professional manager whose chief aim is to look for safe returns and short term decision-making that protects her/his bonus and job. There is a lot of dysfunctional activity going on but not the kind that encourages risk taking.

Is state legislation helping businesses or compounding this problem?

It is only human to want to prevent further toxic economic shocks to people’s economic stability and wellbeing but if Schumpeter is right unless the correct balance is stuck it could well lead to the demise of capitalism.

It might be an unpalatable fact but knowledge is best gained by experimenting and learning from failure. The quicker and more failure, the quicker and greater success.

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