Business Cycle Fluctuations: 1940s - today

Schumpeter's Thinking


One of the best books on the subject of business lives is “Business Cycles” (1939) by Joseph Schumpeter. The book examines the capitalist process, and how it works.

Schumpeter cites historical examples of adaptive innovation from the American West in the 1800s, such as how the train systems were financed, in spite of scarce capital, and the various solutions to chronic shortage issues, and delivering new immigrants to quarter-sections of land in the Midwest to grow wheat. He lists many other creative ideas.

The Library of Economics & Liberty offers a great summary of Schumpeter’s big-picture thinking.

Economic Dynamics

Some elements from Schumpeter’s stories of the past still happen in our data-driven “tech” era today.

Joseph Schumpeter was an economist who studied the dynamics of economic systems and wrote about what he saw. Therefore, many scholars agree that he assessed the big-picture connections for the capitalist system fairly well.

In 1939, at the time when he published “Business Cycles,” a two-book work, cycles were of great interest in the academic community, the government, the banking community, and the businesses. Various panics and recessions had occurred in the late 1800s and 1900s, plus the Great Depression. They were desperately trying to understand why.

Wikipedia gives an overview of various types of business cycle fluctuations, such as Kitchin, Juglar, Kuznets, and Kondratiev. Schumpeter names all of these cycles (and more) in his book, in connection with business activity,  economic conditions, and financial stability. Today, these pioneering works are of classical interest, revealing a slow process of discovery over many decades, as economists puzzled over causes and effects in economic dynamics.

Bursts of Innovation & Creative Destruction

Schumpeter studied the entrepreneurial process in general. His center-stage focus was on the entrepreneur, the entity that discovers something, then invents something to improve the current state of the art. In turn, the creative process (ostensibly) results in the possibility of higher standards of living. However, at the same time, entrepreneurs in turn were (are) copied by “swarms” of imitators who set off wavelike expansions in business activity he called “bursts of innovation.” And, from that effect, periods of business growth resulted from the clustering of innovations.

He noticed other effects, such as the historical role of technological innovation in fostering instability in capitalist societies. For the businesses, competition from innovations is an “ever-present threat.” Technical progress improves [ … something …], and that has a large effect on the economy, the purchasing power, monetary policy, and on the capitalism. Also, the exuberance can lead to over-capacity and market saturation, followed by massive slumps in the economy (called depressions).

By 1942, Schumpeter’s “Capitalism, Socialism and Democracy” refined his theory of dynamic economic growth succinctly as “creative destruction.” He felt that markets do not passively tend toward some ideal equilibrium point until profit margins are wiped out. Instead, he saw entrepreneurial innovation and experimentation forces constantly destroying the old and introducing new equilibria. In other words, new processes and methods of production were continually replacing older ones, resulting in material progress, and making possible higher standards of living.

However, he saw a possibility that constantly changing progress eventually might be taken for granted by people. In turn, he thought people might resent the ongoing change, due to the dislocations caused by it.

Schumpeter’s book “History of Economic Analysis” (1954), is widely regarded as one of the best intellectual histories written about any social science.

Shaikh: Capitalist Competition

The concept of “constantly changing progress” is relevant today, resulting from ever present business cycle fluctuations. A large percentage of the population faces the possibility of diminishing alternative workplace opportunities, and lower earnings. Plus, there is the question of where to go next, as automation continues to foster changes.

The views of another economist, Anwar Shaikh, are related to Schumpeter’s, but from a different perspective.

Source: New Economic Thinking, What Happens When Economics Doesn’t Reflect the Real World?.

In his book “Capitalism: Competition, Conflict, Crises,” (2016) Shaikh studies patterns found in capitalist economies, such as the recurrence of economic depressions. He believes that the main force causing such inequalities is the mechanism of capitalist competition itself. Capitalist competition produces uneven development within national economies, and in turn produces regional or transnational inequalities.

Anwar Shaikh expresses this conceptual viewpoint in different ways.

When a business seeks profit, it has a “war machine” mentality.
Businesses have a “sociopathic” behavior in “going for the consumer.”
The Four Horsemen are: Product, Marketing, Selling, and Competition.

In this context, he sees the traditional business world is at war, every single day.

Watch: A 15-minute video interview with Shaikh.

Thoughts? Which business cycle are we in right now? Tell us your comments below.

Schumpeter's Book

Title: Business Cycles
Author: Joseph Alois Schumpeter
Publisher: Mansfield Centre, Connecticut: Martino Fine Books (January 25, 2017)
Edition: First Edition


2017 Reprint of 1939 First Edition, Volume 1.
Paperback, 466 pages, ISBN-10 1684220645, or ISBN-13 978-1684220649.

2017 Reprint of 1939 First Edition, Volume 2.
Paperback, 658 pages, ISBN-10 1684220653, or ISBN-13 978-1684220656.

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