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 But this doctrine is no longer applicable to modern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
|