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Openness to Creative Destruction: Sustaining Innovative Dynamism

Author(s):Diamond, Arthur M.
Reviewer(s):Jonsson, Petur O.

Published by EH.Net (February 2020)

Arthur M. Diamond, Jr., Openness to Creative Destruction: Sustaining Innovative Dynamism. New York: Oxford University Press, 2019. xvii + 290 pp. $35 (paperback), ISBN: 978-0-19-026367-6.

Reviewed for EH.Net by Petur O. Jonsson, College of Business and Economics, Fayetteville State University.

 
The title of this book is a bit misleading: The book is an apologia for capitalism and freedom, except it does not put it in those terms. Diamond uses his own proprietary, and frankly rather obtuse, terminology in discussing the consequences of capitalism and freedom and the innovation, creative destruction and economic growth that they bring forth. As explained by Diamond in his introduction, he specifically and explicitly eschews the use of the term “creative destruction,” except for the purpose of bait and switch in his book’s title. Accordingly, the term appears only once (on page 198) in the main text, and then only as part of the title of another book that is mentioned in passing. To make sense of the book itself, we must first understand Diamond’s reasoning for rejecting the term “creative destruction.” First, according to Diamond the terms “entrepreneurial capitalism,” “capitalism,” “creative destruction,” and “innovative dynamism” are roughly synonymous. Next, he suggests that we should not use the term “capitalism,” since today it “is an ambiguous term used to label three or four economic systems” (p. xvi). After that he suggests that the term “‘creative destruction’ is a better label” for what we used to call capitalism and then finally, he suggests that “‘innovative dynamism’ is an even better label” (p. xvi).

I think this is nonsense: Different interpretations of the term “capitalism” notwithstanding, the term is still always used to refer to economies that are characterized by private ownership of capital. Sure, capitalism can take different forms, and the nature of competition in different kinds of capitalistic systems will of course be contingent on how the legal system protects contracts and property rights, on the nature of antitrust provisions, on how the tax system rewards value creation, and finally on the institutions of the economy. All that said, the bottom line is that if and when the owners of capital are free to pursue profits, they will tend to do so. It is in turn the pursuit of profit which generates competition in capitalistic market economies. That competition will not just be based on prices and quantities, but more importantly on innovations in both products and processes.

The bottom line is that capitalism and freedom can generate cascades of innovations (i.e., innovative dynamism) along with innovation’s concomitant creative destruction. But, this hardly suggests that we should conflate capitalism itself with either the innovative dynamism that it generates, nor with the resulting creative destruction.

Aside from its non-standard terminology the book is engaging and reads well, albeit much of it is written in a run-on stream-of-consciousness style, often with multiple examples, anecdotes, and ideas crammed into a single paragraph. In fact, the book is so filled with anecdotes that the bibliography covers thirty-five pages in an extra small (looks like 8 point) font. Many of these anecdotes are quite interesting and insightful, albeit most are only mentioned in passing. And, unfortunately, it is all too easy to oversimplify when you use a single sentence for each example. Moreover, in a few cases, the anecdotes are clearly apocryphal rather than based on well-researched historical facts.

A point made over and over in the book is that economic innovations do not happen automatically, but rather are brought forth by purpose-driven acts of individuals. Diamond uses the term “inevitablism” for the supposedly “popular view” that “innovation runs on autopilot, so the innovative entrepreneur can only be a cog in a machine, an irrelevant bystander” (p. 3). The true popularity of this kind of “inevitablism” notwithstanding, it is certainly true that the economic literature on innovations, entrepreneurship, and economic growth tends to focus more on the economic conditions and incentives that give rise to innovations than on the history and specific actions of individual entrepreneurs per se. The idea is, of course, that if and when individuals are free to benefit from innovations, they will in fact tend to innovate. That said, exactly how they will innovate, is a much harder nut to crack. When we say that there are no hundred dollar bills on the sidewalk, we are implicitly assuming that the first individual to spot one will in fact pick it up. While this seems like a reasonable prediction, it does not mean that the bill will disappear automatically. Somebody will indeed have to pick it up.

Of course, it is generally much harder to spot and implement profitable innovations than it is to pick up a hundred dollar bill from the sidewalk. Moreover, the kinds of innovations that we are likely to benefit from will depend on a variety of different factors that vary from person to person. The incentive to innovate is tied to our knowledge, our creativity, our means, and our circumstances. And, of course, the greater our stake in existing technologies and infrastructure, the less likely we are to wish for disruptions that bring creative destruction. This was Schumpeter’s point when he famously quipped that “in general it is not the owner of stage coaches who builds railways.” The incentives and risk-reward tradeoffs that face small firms with minimal investment in current technologies are very different from those facing large corporations with sunk costs and investments in existing technologies. As a result, smaller and newer firms are more likely to bring forth certain kinds of disruptive innovations. Conversely, when it comes to complex innovations that require teamwork and are built on existing technologies, we are more likely to see those from large corporations. Similarly, the innovation opportunities facing a sole proprietor tend to be different from those facing a partnership or a stock corporation. While Diamond makes much of the differences between different kinds of entrepreneurs, he makes little attempt to analyze the underlying incentives facing innovators in different situations and how these shape the innovations that they bring. Moreover, he does not really discuss entrepreneurial opportunities derived either from arbitrage or else from technology transfer. Thus, the work of Israel Kirzner is not even mentioned in this book.

All that said, there is no doubt that this book represents a labor of love. It is written in an appealing and earnest voice, especially in its eager defense of capitalism and freedom, the book’s refusal to use those specific terms notwithstanding. So, all the quibbles above aside, if one can get past the book’s terminology it is an interesting, useful and enjoyable read.

 

 

Petur O. Jonsson, Professor of Economics and MBA Director, Fayetteville State University, is the author of “On the Term ‘Entrepreneur’ and the Conceptualization of Entrepreneurship in the Literature of Classical Economics,” International Journal of English Linguistics 7, no. 6 (2017): 16-29.

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Subject(s):Business History
History of Technology, including Technological Change
Markets and Institutions
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):General or Comparative
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII