Pat asked that I give a quotation.

In this chapter of my book, I begin with Wells, then run through the 
gamut of economists. Here is the short Wells section.


_David Wells and the Theory of Creative Destruction_

Wells reversed his former master's analysis of competition. Where Carey 
deplored foreign competition, Wells viewed it in a positive light. For 
the mature Wells, foreign competition was benign, because it posed 
little threat to the advanced technology of the United States. In 
contrast, unlike Carey, who viewed the domestic economy as a system of 
harmonies, Wells warned that domestic competition was rife with danger. 
Unlike Carey, who saw shrinking capital values as a sign of progress, 
Wells worried that the combination of violent competition coupled with 
rapid technological advances was destroying capital values too rapidly. 
This process was driving the economy into chaos.

In order to avert disaster, Wells called for an even more dramatic break 
with the market than Carey had ever considered. He reasoned that the 
combination of the extraordinary rate of investment in modern 
technologies, together with an inadequate rate of exit on the part of 
inefficient producers, made overproduction the inevitable consequence of 
modern industry. These conditions destroyed business's ability to earn 
adequate profits. Wells cited a German professor, Wilhelm Lexis, in this 
regard:

It was formerly a general assumption that, when price no longer equaled 
the cost of production and a fair profit on capital, production would be 
restricted or suspended; and that the less favored producers would be 
crowded out, and by the relief thus afforded to the market normal prices 
would be restored. But this doctrine is no longer applicable to modern 
methods of production. Those engaged in great industrial enterprises, 
whether they form joint-stock companies or are simply wealthy 
individuals, are invested with such economic powers that none of them 
can be easily pushed to the wall, inasmuch as they can continue to work 
under conditions that would not permit a small producer to exist. 
Examples are familiar of joint-stock companies that have made no profit 
and paid no dividends for years, and yet continue active operation. The 
shareholders are content if the plant is kept up and the working capital 
preserved intact, and even when this is not done, they prefer to submit 
to assessments, or issue preference shares and take them up themselves 
rather than go into liquidation, with the chance of losing their whole 
capital. [Wells 1889, p. 73]

[N]o other means of avoiding such results [over-production] than that 
the great producers should come to some understanding among themselves 
as to the prices they will ask; which in turn naturally implies 
agreements as to the extent to which they will produce. [ibid., p. 74]

In short, Wells realized that competitive forces would not allow 
producers to recover their investments in fixed capital. As a result, 
the market would self-destruct. He recommended that industry be allowed 
to organize itself into trusts, monopolies and cartels. Nothing could be 
further from the teachings of Adam Smith and the merchants!

David Wells realized that overproduction was not the only threat to 
capitalism; rapid technical progress also destroys capital values. 
Although Wells failed to link this phenomenon to Carey's insight about 
falling reproduction costs, in other respects he went far beyond Carey. 
Wells wrote of "the relentless impartiality with which the destructive 
influences of material progress coincidentally affect capital (property) 
as well as labor" (Wells 1889, p. 369). He concluded:

It seems to be in the nature of a natural law that no advanced stage of 
civilization can be attained, except at the expense of destroying in a 
greater or less degree the value of the instrumentalities by which all 
previous attainments have been affected. [ibid.]

For Wells, anticipating Joseph Schumpeter's widely acclaimed idea of 
creative destruction (1950), the measure of the technical success of any 
invention was the extent to which it could destroy capital values (Wells 
1889, p. 369). He offered the example of "[t]he notable destruction or 
great impairment in the value of ships consequent upon the opening of 
the [Suez] Canal" (Wells 1889, p. 30). He asserted that each generation 
of ships becomes obsolete within a decade. Generalizing from the 
shipping industry, he concluded, "nothing marks more clearly the rate of 
material progress than the rapidity with which that which is old and has 
been considered wealth is destroyed by the results of new inventions and 
discoveries" (ibid., p. 31).

In slighting Carey, Wells claimed no originality for his work. Instead, 
he credited his idea a friend:

by an economic law, which Mr. [Edward] Atkinson, of Boston, more than 
others, has recognized and formulated, all material progress is effected 
through the destruction of capital by invention and discovery, and the 
rapidity of such destruction is the best indicator of the rapidity of 
progress. [Wells 1885, p. 146; see Atkinson 1889]

Wells may have had a good reason for not linking his theory with that of 
Carey. For Wells, Carey's theory might have some long-run relevance, but 
Wells was writing in the midst of the immediate threat of a crisis of 
overproduction. At the time, falling capital values compounded the 
problems created by the tendency of competition to drive prices toward 
marginal costs, threatening, rather than reinforcing prosperity.

Wells's analysis was not lost on the generation of influential 
economists who were most actively confronting the nature of the 
economics of railroads. During the second half of the nineteenth 
century, railroading was the most dynamic industry in the United States. 
It attracted economists who were accustomed to being close to the seat 
of power.


Michael Perelman