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Category — Schumpeter, Joseph

Energy & Creative Destruction: Fossil Fuels Triumphant

Creative destruction , a term popularized by Joseph Schumpeter, is the market process whereby bad is eliminated, the better replaces the good, and past performance gives way to new strategies and victors. No firm is forever, and financial loss is a characteristic of capitalism, as is the more used term profit.

Energy is the story of creative destruction. Coal gas and later coal oil replaced a variety of animal and vegetable oils, including whale oil, camphene oil, and stearin oil. Crude (mineral) oil then displaced manufactured (coal) oil, just as later natural gas would displace manufactured (coal) gas.

Coal itself displaced primitive biomass (burned plants and wood) and other forms of renewable energy, such as falling water and wind. Fossil fuel was a concentrated, continuous-burn industrial-grade energy.

The intensity of fossil energy can be understood as a stock of the sun’s work over the ages, not a dilute flow from the sun (solar, wind)–or a low-density mass from limited years of sunshine (biomass). “The ancient resource pattern depends primarily on animate energy and hence on current solar radiation,” Erich Zimmermann explained. “The modern resource pattern is built around stored-up solar radiation.”

Beginning with Jevons (1865)

W. S. Jevons explained how coal (and by implication, gas and oil) were uniquely suited for—and indeed, prerequisites for—the machine age. [T]he economy of power … consists in withdrawing and using our small fraction of force in a happy mode and moment,” said Jevons, the father of modern energy thought. [Read more →]

January 4, 2012   8 Comments

Capitalist Reality and Creative Destruction (Part II: Enron’s Political Capitalism Play)

Enron’s revolution-always approach to energy in its latter years was Schumpeter on steroids. Adding to the company tumult was another complicating factor: Enron’s business model was dependent on political, not free-market, capitalism.

In early 2001, Enron founder and chairman Ken Lay proclaimed a new corporate vision: to become the world’s leading company. But this goal was not about beating oil majors like ExxonMobil or Chevron at their game. It was about mandatory open-access with gas and electricity transmission to trade the commodities; reducing tax bills with solar and wind investments (what GE does today with what was once Enron Wind); developing infrastructure in risky countries with government-guaranteed financing; and more.

Enron’s Business Guru

Lay’s super-Schumpeterian view of business strategy drew upon Peter Drucker’s The Age of Discontinuity, which Professor Lay taught to his graduate economics students at George Washington University in the early 1970s. But it was a quarter-century later, as head of Enron, when Lay discovered Gary Hamel, the leading business guru of the high-flying 1990s.

Also a Drucker disciple, Hamel brought the discontinuity-revolution theme to new heights. Hamel’s Competing for the Future (1994, 1996) and Leading the Revolution (2000) fueled Enron’s vision, values, and corporate culture. The admiration was mutual. “As much as any company in the world,” Hamel reported in 2000, “Enron has institutionalized a capacity for perpetual innovation.” [Read more →]

January 3, 2012   2 Comments

Capitalist Reality and ‘Creative Destruction’: Remembering Joseph Schumpeter (Part I: Entrepreneurship)

Ed. Note: Occasional posts at MasterResource include big-picture entries on key social science thinkers that are relevant to understand dynamic market capitalism versus its opposite, political capitalism. This entry examines a leading twentieth-century thinker whose work continues to frame many debates in applied economics and political economy.

Brilliant, blithe, eclectic, and obsessive, the immaculately attired, aristocratic scholar [Joseph Schumpeter] captured the essence of entrepreneurial capitalism and introduced the terms “creative destruction” and “business strategy.”

- Robert Bradley, Capitalism at Work: Business, Government, and Energy, p. 100.

“I set out to become the greatest lover in Vienna, the greatest horseman in Austria, and the greatest economist in the world. Alas, for the illusions of youth: as a horseman, I was never really first-rate.”

- Joseph Schumpeter, as recalled by student M. A. Adelman (Quoted in Ibid.)

Joseph Schumpeter (1883–1950) was the conscience of his profession, questioning the relevancy of an equilibrium-only approach for understanding business competition and economic growth. (Remember how static just about everything was that you learned in Micro 1.0 and 2.0?) Schumpeter was a methodological realist interested in the actual workings of capitalism, what he called capitalist reality.[1]

He also had a contrarian streak. He claimed allegiance to no school of thought and even feared becoming the orthodoxy himself. “When I see those who espouse my cause,” he averred, “I begin to wonder about the validity of my position.”

Entrepreneur as Revolutionary

Schumpeter’s theory of capitalist development centered upon the entrepreneur, a “swashbuckling … quasi-heroic” figure who disrupted routines and forged a new menu for consumers. Innovation was less about economizing within a known framework than about creating wholly new vistas.

The Schumpeterian entrepreneur did not say, “If it ain’t broke, don’t fix it.” He said, in effect, “Break it and make it better!” Incremental improvement was about routines and managers; by contrast, “the function of entrepreneurs,” Schumpeter stated, “is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on.”

Equilibrium Not

Such thinking led to a profound conclusion from the Austrian-born-and-trained economist: “The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them.”

In the energy field, dense fossil fuels ‘creatively destructed’ renewables in the 19th century and continue to do so today.

No equilibrium box could hold the Schumpeterian entrepreneur. Automatons populate equilibrium; human innovators preclude it. Many economists abandoned the study of entrepreneurship because it was not amenable to mathematical and diagrammatic portrayal. They were right, but the wrong thing was discarded. The open-ended world of disequilibrium was the reality that had to be comprehended, even if mathematical economics had to be demoted. [Read more →]

January 2, 2012   3 Comments