Destruction and reconstruction of the capital structure

Abstract

One of the entrepreneurial strategies that, according to Schumpeter, is responsible for the capitalistic process of Creative Destruction is the introduction of a new method of production (Schumpeter 2003, 83).

Austrian economics characterizes a «method of production» as a set of capital goods and original factors of production inserted into an entrepreneurial plan, which is directed to satisfy consumer needs. Therefore, we could say that capital goods do not work in isolation, but as parts of two structures: they develop a role in the individual plan of the entrepreneur and also in the spontaneous social order that unintentionally results from the coordination of the different entrepreneurial plans.

In this context, the introduction of a new method of production implies that at least one entrepreneur tries to modify his plan either by rearranging his combination of capital goods and original factors of production (due to a change in consumer preferences or due to the appearance of some new technology) or by using new capital goods or new original factors of production (due to the discovery of a new technology or due to an increase in savings). Thus, both cases require the entrepreneur to disrupt not only his previous plan, but also the existing links with other plans in the incumbent capital structure.

This obviously raises the question of whether these disruptions lead to a progressive and sustained capital accumulation or if, on the contrary, they cause a necessary destruction of some capital goods.

At least since Cantillon and Turgot economists have taught that progress and growth depend partially on the quantity of capital, which tends to increase gradually with the level of savings. However, Schumpeter’s claim —that the introduction of a new method of production implies a Creative Destruction process— seems to suggest that some capital will be lost with the new investments. We would have, on the one hand, more capital by means of the creation of new plans but, on the other, less capital because of the disruption of the existing plans.

Although this approach may be initially shocking, only by departing from the erroneous idea that all capital goods are homogeneous one could consistently claim that new methods of production do not destroy any capital at all, i.e., only supposing that capital goods combinations and structures are irrelevant in relation to their final output, the view of a non-disturbable capital accumulation could be held. Once heterogeneity of capital goods comes into the picture, it is no longer possible to believe in such a hypothesis.