In Capitalism, Socialism and Democracy, Joseph Schumpeter described capitalism as an evolutionary economic growth theory. [J. A. Schumpeter, Capitalism, Socialism and Democracy, George Allen & Unwin, 1942.].
If there is a dynamic force within the free market system that can be explained by the natural laws of supply and demand, then Schumpeter explained that the free market economy is either growing or it is dying.
“The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. ... Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary...The funndamental 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. ... 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.”
The creative destructive force is caused by entrepreneurial innovation in new products and new technology. [J. A. Schumpeter, The Theory of Economic Development. Harvard University Press. First published in German, 1911.].
From any point of equilibrium, according to Schumpeter, the economy could trace out an upward path of economic growth, to a new equilibrium, or, it could trace out a downward path of economic decline.
We offer a depiction of Schumpeter’s economic evolutionary theory in Diagram 1.
Schumpeter’s concept of economic evolution was in contrast to the prevailing wisdom of the time that the economy would return to the prior equilibrium after a perturbation knocked the economy out of equilibrium,
Schumpeter also broke with traditional macro economic theory by suggesting that the source of capital for investment for new manufacturing ventures was from capital gain exit events from prior ventures.
In Schumpeter’s analysis of the source of investment capital, it could either be a loan from a commercial bank, or it could be the capital gain profit from an earlier successful venture.
The source of capital was rarely from the personal savings of the entrepreneur.
“However great the role of self-financing may be in the course of the development of an enterprise, the original nucleus of means [capital] has been but rarely acquired by the entrepreneur’s own saving activity which in fact is one of the reasons, and a significant one, for distinguishing the entrepreneur as sharply as I think he should be distinguished from the capitalist.”
His break with the neo classical economic tradition was that the supply of capital for new investment was not derived from price-based retail and wholesale exchanges in either the intermediate demand sphere of production, or in the finished goods, final demand market.
As Schumpeter stated,
“By far, the greater part of it [capital] does not come from thrift in the strict sense, that is from abstaining from the consumption of part of one's regular income, but it consists of funds which are themselves the result of successful innovation, and in which we shall see later recognize entrepreneurial profit.”
Schumpeter believed that, if and when, the capitalist system was growing, the benefits of the economic growth would be widely distributed throughout the society.
“The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.” [Capitalism, Socialism, and Democracy.].
Towards the end of his life, Schumpeter became pessimistic about the trends that he saw in the U. S. economy towards monopoly capitalism, which would act as a barrier to further technological innovation, and consequently lead to declining rates of economic growth.
In the absence of technological innovation, the economy would stop growing, leading to Schumpeter’s analysis that the next logical step of the economy was to national socialism, as citizens turned against the political-economic structure of monopoly capitalism.
Schumpeter explained that the relationship between entrepreneurship and national economic growth was a result of technology innovation caused by capital investments in new technology ventures.
Schumpeter emphasized that the process of technological innovation brought about by capital investments in new entrepreneurial ventures made existing products and older manufacturing processes obsolete [extinct].
He used the term economic evolution to describe this process of technological innovation, and his use of the term “evolution” was probably 100 years ahead of its time.
He wrote during a period of time when the basic unit of economic analysis for macro economic growth and international trade was the sovereign nation state.
For example, both David Ricardo’s theory of comparative advantage, and the Heckscher–Ohlin theory of international trade begin with an initial assumption that the units of analysis are one national economy compared to a second national economy.
Their theories of the benefits of international trade were based upon the diverse national factor endowments between nations. Their theories were designed to explain and predict how different factor endowments would lead to increased national social welfare, in both national economies, as a result of international trade.
In his Nobel Laureate speech, Simon Kuznets also places the economic unit of analysis for macro economics into the nation-state framework. [Modern Economic Growth: Findings and Reflections, 1971.].
“A country’s economic growth may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it (technological advancement) demands… Mass application of technological innovations, which constitutes much of the distinctive substance of modern economic growth, is closely connected with the further progress of science, in its turn the basis for additional advance in technology.”
Writing more recently, Edmund Phelps links the prosperity generated by technological innovation to a nation’s economic progress. [Edmund S. Phelps, Refounding Capitalism, Capitalism and Society, 2009, Reprinted in SSRN.].
“Over the past decade I have maintained that countries would still benefit from the innovative activity of original thinkers, visionary entrepreneurs, canny investors, pioneering managers and devoted employees that, starting in the 19th century and in some countries ending in the 20th, drew an ever widening share of people in an ever-growing number of nations into engaging jobs, exciting explorations and remarkable commercial advances of innovation: the conception of novel commercial ideas, the selection by financiers of some of these ideas for development, the realization by entrepreneurs of the envisioned products or methods, and the adoption or rejection by managers or consumers of some of the new products reaching the market.” [emphasis added].
Like Schumpeter’s analysis of the merits of the capitalist system, Phelps also raised the question of the benefits of free markets over the operation of centralized, collectivist economies.
Kuznets concludes his Nobel Laureate address about capitalism with this statement,
“For many, capitalism’s main merits are the wealth accumulation it fosters and the “individual freedom” it helps to protect… Could it be that the value of a well-functioning capitalism in providing participants with opportunities to act on their own knowledge, intuition and judgment, and in providing opportunities to be engaged and to flourish serves to justify that capitalism?”
We argue that it is not the virtues of corporate monopoly capitalism that serves as the justification of capitalism.
Rather, we point to Schumpeter’s advocacy of entrepreneurial capitalism, cited above by Kuznets, as the logical justification of the U. S. economic system.
Our term for that form of capitalism is “entrepreneurial capitalism,” a description first coined by William Baumol, et al., in 2007.
“The U.S. economy has achieved a remarkable transformation over the last several decades from an economy characterized by large, bureaucratic firms into one increasingly powered by entrepreneurial innovation. The challenge ahead therefore is to cement and strengthen the entrepreneurial form of capitalism… the continuing emergence and growth of innovative companies -- or what we label “entrepreneurial capitalism” stands in stark contrast to the dominance of large firms and unions in the United States in the decades immediately after the end of World War II, and also to the continuing dominance of large firms in Western Europe and Japan.” [William J. Baumol, Robert E. Litan, Carl J Schramm, Sustaining Entrepreneurial Capitalism, Capitalism and Society, 2007. Reprinted SSRN. 2013.].
While we agree with Baumol on the promotion of an entrepreneurial capitalist economy, we disagree with Baumol about the factual history of the emergence of the entrepreneurial capitalist society in the United States.
Our interpretation of history is that after the collapse of the Berlin Wall, in 1989, a new theory of global trade began to emerge that featured an open, borderless global market, where large corporations traded goods in a seamless international market.
This new form of global trade subordinated the role of national governments, and replaced the unit of economic analysis from nation states to an analysis of the economics of a global stateless market dominated by trade among large corporations.
In this new version of global corporatism, large corporations collaborate with two other interest groups, labor unions, and agencies of the deep-state institutional apparatus, to set the rules of international trade and negotiate over the distribution of income among social classes.
For example, in 2019, The Business Roundtable adopted a new mission statement calling for more collaboration and negotiation over the distribution of benefits from corporations.
The new Business Roundtable mission describes the new form of global capitalism as “stakeholder capitalism.”
In the new global stakeholder economy, the purposes of the large corporations to “create value for customers, invest in employee’s [welfare], foster [multicultural] diversity and inclusion, deal fairly and ethically with suppliers, support the communities where the corporation is located [globalism], and protect the environment.”
Our term for this new version of capitalism is crony global corporatism.
This shift in the unit of economic analysis from nation states to corporations has been described as a new world order, which does not require the existence of nation state governments in order to function in the global market.
In the U.S., a version of crony corporate capitalism replaced the former constitutional representative republic with the operation of a Leviathan that functions entirely independent of the consent of the governed.
The common name for the modern Leviathan is the “Deep State.”
This transition to the global corporatism, after 1989, has been called the “great reset,” which implies a reset from sovereign nation states to a new world order of global corporate fascism, where global corporations direct non-governmental organizations [NGOs], to perform functions previously performed by the governments of nations.
In other words, a “one-world-government,” that functions on a rule-based framework, not a citizen democratic framework, is required by corporations to manage trade relationships among global corporations.
The emphasis of economic analysis in the new world order shifts, from examining the welfare differences among nations, caused by economic growth, to the analysis of how global corporations can meet concerns of global fairness and global environmental issues brought to their attention by NGO constituencies [stakeholders].
In other words, under new world order globalism, the macro general equilibrium economic analysis changes from the dynamics of national economic welfare to the maintenance of a negotiated global technological status quo, in a zero-sum corporate globalism.
The data for global analysis shifts from improvements of national social welfare to the analysis of how the profits of large corporations are distributed to meet social issues, as if profits of global corporations are surrogate indicators of improvements in global social welfare.
The initial, unstated, unverified assumption of the new corporate world order, after 1989, is that global social welfare would be better under the new world order than it would be under the national sovereignty model of economic growth because all nations, including China, would transition to a middle class society as a consequence of global trade.
The public relations ploy of the corporations, after 1989, was that China was just like the U. S. and would transition from a communist society to a pluralist democracy as a result of admitting China into the World Trade Organization.
In the 2018 annual report to Congress, the U.S. Trade Representative’s Office stated,
“It seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime,”
Rather than move in the direction of open competitive markets, Xi entrenched communist control over the economy in his bid for world domination.
In 2012, the year before Xi’s elevation to permanent power, more than half of Chinese bank loans went to private firms; by 2015, that fell to 19 percent. Loans to state-ruling owned enterprises, by comparison, doubled to 69 percent.
Newt Gingrich is quoted in October, 2019, explaining this American misconception about trade with China,
“For many decades, Americans thought communist-ruled China would evolve into a free China. Under Xi, China is developing an ultra-high-tech police state, wherein powerful cameras and facial recognition artificial intelligence are being utilized to control the Chinese people in ways we had previously only imagined in science fiction. We thought that the trade agreements would lead to open systems similar to our own. We were completely wrong.” [The Hill, October 25, 2019.].
Robert Lighthizer, a U. S. Trade representative under President Trump, made the same point in 2019, when he stated,
"The United States made the mistake of treating China as if it was another democracy. The world trading system created by the General Agreement on Tariffs and Trade in 1947 excluded countries like China for good reason, the earlier trade agreements excluded communist countries because they thought such countries would sabotage GATT.”
The rhetoric and propaganda of proponents of the new world order is that the global middle class is growing faster, and therefore, global social welfare is improving more than it would under the national sovereignty economic model.
The logic about the welfare benefits of the new world order is flawed because it assumes, without verification, that the global middle class is increasing in size, and that the presumed growth of the middle class is, ipso facto, proof of the benefits of globalism.
The improvement in global social welfare can never be empirically tested or verified, under traditional macro general equilibrium theory, because global trade’s unit of analysis is one global economy, not a comparative analysis of social welfare improvements of the middle class, in independent nation states.
In his article, "Critical Theory," the socialist thinker, James Bohman, describes that the new globalism means that citizen democracy must be replaced by autocratic corporate elite decision-making,
“Existing forms of democracy within the nation-state must be transformed and that institutions ought to be established that solve problems that transcend national boundaries. Globalization is thus taken as a constraint on democracy as it is realized in existing liberal representative systems.” [James Bohman, Critical Theory, Republicanism, and the Priority of Injustice: Transnational Republicanism as a Nonideal Theory,” Journal of Social Philosophy, 2012.].
The corporate logic of admitting China into the World Trade Organization [WTO], was summarized, in 2000, by Michael Bonsignore, CEO of Honeywell, in his testimony to Congress, in favor of Normal Trade Relations, with China.
Bonsignore, was the lead corporate lobbyist for the Business Roundtable, and he stated that Honeywell was doing over half a billion dollars, annually, in supply chain trade with China.
"On virtually every Boeing aircraft shipped to China, Honeywell's avionics, auxillary power units, wheels, and brakes are on board. We ship industrial instruments and systems to help modernize a wide range of Chinese industries, from pulp and paper to petrochemicals."
After China was admitted to the WTO, the Chinese government used Honeywell’s technology to create nuclear missile guidance systems that can land a nuclear bomb within 80 yards of its intended target.
The new world order of the global corporatism features a global macrotechnology that is the same for all corporations around the globe. Internet communication technology [ICT], allows every corporation to see, and implement, a technology innovation at the same time as any other corporation.
Hyman Minsky has called global corporatism “managed corporate capitalism,” because both the pace and direction of technological innovation and the market price of goods must be managed, under a collaborative, not a price-competitive model of the economy. [Hyman Minsky “Schumpeter: Finance and Evolution,” in Arnold Heertje and Mark Perlman [Eds], Evolving Technology and Market Structure: Studies in Schumpeterian Economics, University of Michigan Press, 1990.].
Under the conditions of global managed capitalism, the big pension funds, mutual funds, trust funds, otherwise known as institutional money, require predictable cash flows in the near term to support the stock prices and the bond prices in their heavy levels of indebtedness on liability structures, such as mortgage backed securities, which they have securitized.
Prices of goods must be managed by the corporations to provide stable, predictable flows of revenues to provide consistent flows of interest payments to the institutional investment banks.
Corporate control over the global macrotechnology is the weak link, and vulnerable point of attack, for updating Schumpeter’s gales of creative destruction of the new world order.
Global corporations require controlled technological innovation, and global crony capitalism, in order to direct the benefits of innovation to themselves, and their crony stakeholders.
The vulnerability of the new world order is that Schumpeter’s updated entrepreneurial blockchain innovation is beyond the control of global corporations.
If global corporations cannot control the pace of technological innovation, they would lose control over managing and setting prices in the collaborative global economic model.
Consequently, if they lose control over the prices of products, they would lose control over the distribution of income that benefits themselves and their crony government agents.
We update Schumpeter’s original analysis, by placing his concept of the gales of creative destruction within the modern framework of Clayton Christensen’s concept of blockchain innovation.
The income and wealth benefits of blockchain entrepreneurial economic growth are widely distributed, and geographically decentralized, throughout the national society.
In blockchain entrepreneurial innovation, open flows of tacit knowledge are enhanced by the ability of the computer algorithm to identify the participants in the knowledge chain who are contributing shared tacit knowledge.
In the global macrotechnology, the formerly open flows of tacit knowledge are internalized within the legal organizational entities of large corporations in order to avoid technological knowledge from slipping off the plate of a corporation, [spillover], and potentially falling onto the plate of a new venture not controlled by the corporations.
Clayton Christensen has called this inadvertent release of technological knowledge a “disruptive technological innovation.”
What Christensen means is that the inadvertent release of technological knowledge potentially disrupts the revenue flows of large corporations in the managed global economy.
Christensen’s term for non-disruptive innovation is “sustaining innovation,” because it is controlled within the corporate legal structure.
Sustaining innovation within the corporation is primarily created by “codified” knowledge, which means the knowledge is in the form of proprietary written text, which can only be shared with selected interested parties, outside the corporate structure.
Christensen writes from the perspective of what improves the welfare of the corporation, not in terms of how economic growth benefits the social welfare of citizens in nation-states.
However, Christensen’s classification of the types of innovation that affect the welfare of global corporations provides the strategy for exploiting the weakness of the new world order of corporate fascism.
The weakness of global corporatism is that codified technological innovation does not create global economic growth.
Kuznets makes a distinction in the classification of technological innovations, some of which may provide future economic welfare benefits.
“A technological innovation, particularly one based on a recent major invention, represents a venture into the partly unknown… Those [innovations] of most interest here are the surprises, the unexpected results, which may be positive or negative. An invention or innovation may prove far more productive, and induce a far wider mass application and many more cumulative improvements than were dreamed of by the inventor and the pioneer group of entrepreneurs.”
Chistensen calls “the unexpected results,” of innovation a “radical” innovation, in contrast to the sustaining innovation, that is controlled by the corporations.
According to Christensen, radical innovation creates new future markets, which causes economic growth. Radical innovation, caused by tacit knowledge, creates future economic growth.
Codified knowledge technological innovation, controlled by global corporations, does not cause future economic growth because it does not create new future markets.
To return to Schumpeter’s analysis of the capitalist system, it is either growing or it is dying. And, under controlled corporate technological innovation, the economy is on a path of economic decline.
In the absence of radical innovation, an economy grows slowly, or slips into a lower Nash equilibrium. The vulnerability of the new world order is the emergence of uncontrolled radical innovation, which causes macro economic growth.
In contrast to Baumol’s prediction of the emergence of entrepreneurial capitalism, we explain that the main consequence of the global corporate control over technological innovation, is that the American economy has suffered a lower rate of technological innovation, and consequently reduced rates of economic growth, after China was admitted to the World Trade Organization, in 2001.
In the absence of real economic growth, after 2001, the U. S. economy has reverted to a permanent boom-bust-bubble economy, caused by monetary and currency manipulation, coordinated by the Fed and global central banks, not real economic growth caused by private business capital investment in new technological ventures..
The mirage of economic growth of global central bank monetary manipulation, replaced the real economic growth that was formerly caused by capital investment in small technology ventures, which primarily took place in 300 of the largest U. S. metro regions.
Under corporate globalism, we argue that the benefits of economic growth that result from sustaining technological innovation are internalized and captured by large corporations.
We explain that under Schumpeter’s entrepreneurial economic growth model, national interindustry relationships [supply chains] are the communication pathways of diffusing tacit technical knowledge.
In contrast to entrepreneurial capitalism, the new world order global macrotechnology features corporate supply chains tightly controlled and centralized by large corporations in very few locations, such as the large metro regions of China.
Control over the interindustry supply chains allows the corporations to control the spread of potentially disruptive radical technological knowledge.
Based upon an analysis of the components of U. S. GDP, after the economic collapse of 2008, about 80% of all GDP was related to six service industrial sectors, which employ about 70% of the U. S. workforce, [gig economy].
About 20% of U. S. GDP is related to the industrial sectors engaged in global trade, in the global corporate macrotechnology.
We estimate that the new world order economic model benefits about 20% of the U. S. population, who get richer and richer from the operation of the global corporate model.
We argue that the ultimate economic consequence of new world corporatism is world-wide economic decline because there is insufficient technological innovation to allow the global economy to break free of the trend to a global Nash equilibrium.
In the absence of open, tacit, technological innovation, the rate of private domestic capital investment in new entrepreneurial ventures will continue to decline, causing the economic growth rates in the U. S. national economy to decline.
As the U. S. economic growth rates continue to decline, the social welfare consequences for the 80% of the U. S. population that does not benefit from global trade, will also continue to decline.
The corporate new world order is a failure because the system functions to deliberately lower the rate of economic growth that could be achieved under a fair competitive price system, and limits distribution of the welfare benefits of economic growth to a self-selected social class of elites.
The managed crony capitalist corporate global system allows the large corporations to gain political control over the pace of technological innovation by replacing citizen participatory democracy, in each nation, with an autocratic NGO one-world-government.
We argue that the solution to the new world order of global corporate fascism is to blow the global corporate economy away with radical technological innovation of Updating Schumpeter’s gales of creative destruction with blockchain entrepreneurial capitalist economic growth represents a new economic model that the new world order is unable to control.