"This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, "I'm very angry, frankly, at the oil companies not only because of the obscene profits they've made, but their failure to invest in alternate energy."...
Mr. McCain's angry statement shows a lack of understanding of the insights of Joseph Schumpeter, the 20th century economist who explained that capitalism is inherently unstable because a "perennial gale of creative destruction" is brought on by entrepreneurs who create new goods, markets and processes. The entrepreneur is "the pivot on which everything turns," Schumpeter argued, and "proceeds by competitively destroying old businesses."
Most dramatic change comes from new businesses, not old ones. Buggy whip makers did not create the auto industry. Railroads didn't create the airplane. Even when established industries help create new ones, old-line firms are often not as nimble as new ones. IBM helped give rise to personal computers, but didn't see the importance of software and ceded that part of the business to young upstarts who founded Microsoft.
So why should Mr. McCain expect oil and gas companies to lead the way in developing alternative energy? As with past technological change, new enterprises will likely be the drivers of alternative energy innovation.
Messrs. Obama and McCain both reveal a disturbing animus toward free markets and success. It is uncalled for and self-defeating for presidential candidates to demonize American companies. It is understandable that Mr. Obama, the most liberal member of the Senate, would endorse reckless policies that are the DNA of the party he leads. But Mr. McCain, a self-described Reagan Republican, should know better."
Karl Rove, "Obama and McCain Spout Economic Nonsense", Wall Street Journal (19 June 2008).
Karl Rove is the former senior adviser and deputy chief of staff to President George W. Bush.
Sad to say, it is probably true that neither McCain nor Obama has ever heard of The Great Schump or, if they did, have forgotten the importance of Schumpeter's vision and wisdom. Both Presidential candidates seem unable to get beyond a shallow focus on the immediate and do not seem to care about the longer-term implications of the policies they advocate. They live for today, and by doing so it is not only that they give no thought to tomorrow, they seem to not care where the country will be in the future.
The point Rove makes is a valid one, and it is a point Schumpeter made when discussing the process of production: Oil companies, like all companies, are in a specialized business, in their case the oil business. They know how to produce oil and that's about all they know how to do. Just as an auto company doesn't know how to make tires and doesn't know how to make windshield glass and doesn't know how to build a road for its cars to run on, oil companies don't know how to produce electricity from sunlight or run an atomic power plant. Like all firms -- like you and me -- if it needs something outside of its narrow specialty, it does what all of us do when in need of something we don't know how to make: It buys what it wants from someone else who produces the item with greater efficiency than we could produce the item. This, Schumpeter (and Adam Smith) would note, is the entire point of specialization in production and is why we seek the advantages wrought by a greater division of labor rooted in international trade.
Schumpeter would also note that the success of a firm, even a giant one like Exxon, is temporary. And he would argue it is temporary precisely because success breeds both competitors and incompetence. The high price of oil means a slow death for Exxon and the other oil companies as competitors chip away at their customer base with cheaper substitutes for their product and more secure alternatives for their supply. Add to this, laziness and the comfortable stupidity that comes from the huge profits they now enjoy, not to mention the unthinking hostility of the state, and the stage is set for their decline. As Schumpeter said, all great firms rise from nothing, dominate the economy for a time, and die a lingering death. "From overalls to overalls in three generations", as he put it.
And Rove is right to say that the innovation and entrepreneurship are found in new businesses, not the dinosaurs of the corporate world. It is the small determined firm with an unstoppable idea -- a firm one might note that, like Microsoft, is vicious in the marketplace -- that wipes out its inefficient competitors and displaces the dinosaurs in an act Schumpeter called "creative destruction". Do not look to the oil and gas companies for new ideas about energy. They are the dinosaurs who even now are being replaced but have yet to realize their fate.
And do not look to the United States for the answer to the energy problem. We are less than 5 per cent of the earth's population and despite our constant crying about how high our energy prices are, others pay even more and find their lives more disrupted by energy shortages than we do. We cannot even bring ourselves to drill for oil when we know where it is and we have the technology to bring it to market cheaply. The other 95 per cent of the world's population is more serious about this problem, and therefore they are more likely to overcome it. We will of course, like every else, benefit from their innovations.
Finally, Rove is right to criticize both Obama and McCain for their anti-business attitudes, another reason the oil companies are doomed. "Capitalism [read the oil companies] stands its trial before judges who have the death sentence in their pockets," wrote Schumpeter. "The only success a victorious defense can possibly produce is a change in the indictment." But there is no end to the list of indictments the critics of the oil companies have compiled, from the immiseratation of working people, acts of imperialism against poor countries, maltreatment and alienation of its workers, and now environmental decay and obscene profits. One would think that the critics would understand that indicting an industry that delivers a gallon of gasoline (sans taxes) to the consumer cheaper than a gallon of Coca-Cola is not wise.
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