John Wilson’s item just republished below inspired me to read the Drucker article. It seems that our current troubles started with the methodology adopted by the nations and identified by Schumpeter in 1918 to fight world war one…. financialize and borrow.
A 1983 article by Peter Drucker
shows us that the reasons for the current alliance between Washington and Wall Street were first clearly enunciated in 1918 in the writings of Joseph Schumpeter more than a decade before Keynes spread the same hypothesis — albeit with much more benign conclusions.
The critical idea is focused upon the availability of profit needed to enable the economic innovation necessary for better products and support on going growth in an economy.
Drucker: If you assume that innovation is what keeps a capitalist economic growing, the basic economic policy question becomes:
“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?”
At the end of World War 1 Schumpeter realized that the war had resulted in the “miniaturization of the economies of all beligerents.” In every country that engaged in the hostilities the government poured in not only troops but mobilized all the liquid wealth of the country not only through taxation but also through borrowing.
Money and credit, rather than goods and services, had become the “real economy,” he wrote in a brilliant essay published in a German economic journal in July 1918. The mechanization of warfare meant operation on such a scale that the government found that it had to combine with the industrialists to centralize and co-opt entire economies on a scale never previously seen in order to get capital needed to achieve an innovation arms race.
Schumpeter “argued that, from now on, money and credit would be the lever of control. What he argued was that neither supply of goods, as the classicists had argued, nor demand for goods, as some of the earlier dissenters had maintained, was going to be controlling anymore. Monetary factors - deficits, money, credit, taxes - were going to be the determinants of economic activity and of the allocation of resources.”
Where Keynes theorized that these changes could mean that the economist could become philosopher king and show governments how to balance conflicting forces to maintain economic stability. Schumpeter however concluded that these changes by revealing the fulcrum on which policy could be so powerfully levered invited tyranny. Drucker concludes: “above all, he saw that it was not going to be economists who would exercise the power, but politicians and generals.”
Also in 1918 Schumpeter published a work he called the Fiscal State. In this work he concluded: that “the modern state, through the mechanisms of taxation and borrowing, has acquired the power to shift income and, through “transfer payments,” to control the distribution of the national product.” Keynes agreed and assumed the government would act with benevolence. But reality showed that once the relationships between government and industry were formed, they were very difficult to dismantle.
However to Schumpeter “this power was an invitation to political irresponsibility, because it eliminated all economic safeguards against inflation. In the past the inability of the state to tax more than a very small proportion of the gross national product, or to borrow more than a very small part of the country’s wealth, had made inflation self-limiting. Now the only safeguard against inflation would be political, that is, self-discipline. And Schumpeter was not very sanguine about the politician’s capacity for self-discipline.”
“But Schumpeter’s real contribution during the thirty-two years between the end of World War I and his death in 1950 was as a political economist.” In 1942 in Capitalism, Socialism and Democracy Schumpeter “argued that capitalism would be destroyed by its own success. This would breed what we would now call the new class: bureaucrats, intellectuals, professors, lawyers, journalists, all of them beneficiaries of capitalism’s economic fruits and, in fact, parasitical on them, and yet all of them opposed to the ethos of wealth production, of saving, and of allocating resources to economic productivity.”
Schumpeter warns that “in a democracy, to be popular, government would increasingly shift income from producer to non producer, would increasingly move income from where it would be saved and become capital for tomorrow to where it would be consumed. Government in a democracy would thus be under increasing inflationary pressure. Eventually, he prophesied, inflation would destroy both democracy and capitalism.”
“It is this constant emphasis in Schumpeter on thinking through the long-term consequences of the expedient, the popular, the clever, and the brilliant that makes him a great economist and the appropriate guide for today.” concluded Drucker in 1983.
In 2010 in the USA, given that the two major parties are both joined at the hip in this relationship to private business, a relationship that, as we have seen, is nearly a century old, and given the current ruinous state of affairs, it makes more sense to look at the questionable sustainability of the relationship and at what might replace it. After all the agencies and functions stay the same and the people involved now carry out basically the same functions no matter which party is in power.
What is troubling is that society’s resources have been shifted no longer to business that innovates in a way that improves the lives of ordinary Americans but to subsidies of business legally incorporated in other countries to move jobs abroad in order to be more competitive in the global market that, in order to carry out their fiduciary duty to shareholders who may be citizens of any country. t The innovation going on is innovation that has turned financial capital into a gambling casino that has destroyed wealth for some hundreds of millions around the globe while leaving vast winnings in the hands of a few thousands who either bet right or were the croupiers running the collateralized securities creation machines.
Given this outcome as the capital that the center has used as a social safety net for its citizens is redirected to the arbiters of global financial capital, the people in the towns and cities will be increasingly lest to their own devices. their future will become a function of how we they can work together to rebuild their economy at a local level.
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