Plate ix in print

The Gale

Schumpeter's creative destruction: the recurring storm of invention that topples each monopoly with the next, and the hard suggestion that the prize of a temporary monopoly is the very spur that drives the progress.

The competition that counts is not the competition of many sellers shaving a price, but the competition of the new thing — the new good, the new method, the new kind of firm — that strikes the incumbent not at the margin of his profits but at his foundations and his life. This perennial gale of destruction and creation is the essential fact about the system; and the monopoly the still photograph condemns is, seen in motion, only the next thing about to be swept away.

— the vision of this plate, after Joseph Schumpeter, 1942

Every plate so far has photographed the monopolist. It has caught him at an instant, alone in his market, holding back his wares to lift his price, and it has measured the harm of that instant precisely: the output forgone, the buyers overcharged, the triangle of trades that vanish because the price stands above the cost. The picture is accurate, and it is damning, and it is still. But a market is not a photograph; it is a film, and the still frame, however sharp, may mislead about the motion. The monopolist the volume has condemned did not fall from the sky to sit astride his market. He climbed there, most often, by being first with something — a product, a process, a way of organizing — that the firms before him did not have; and the throne he now abuses is, on a longer view, a seat that the next such firm is already coming to take from him. Joseph Schumpeter built his whole quarrel with the static picture on this observation, and the plate's question is his: if every monopoly is a thing in passage, soon to be overthrown by the next invention, is its reign the harm the snapshot shows, or the price the system pays for the progress that overthrows it?

The first move is to see what competition actually is, once time is let into the picture. The volume's earlier plates studied competition within a market — many sellers of the same good, each too small to move the price, shaving it down toward cost. Schumpeter held this to be the trivial kind. The competition that matters, that does the real work of the system, is competition for the market, and it is fought not with price but with novelty: the new commodity that makes the old one obsolete, the new technique that undercuts the established one not by a penny but by a generation, the new organization that renders an entire way of doing business quaint. This competition does not nibble at the incumbent's margin; it goes for his throat, threatening not his profit but his existence. And it arrives not as a smooth and constant pressure but as a gale — intermittent, violent, and total — that periodically levels the standing order and builds a new one on the rubble. In the long sweep of such a process, a monopoly is not a permanent fixture to be assessed as a steady state, but a momentary high point in a landscape that is always being torn down and rebuilt. The firm that looks unassailable in the photograph is, in the film, merely the one whose fall has not yet been filmed.1

1. Let time into the picture and competition changes character. The earlier plates studied competition within a market: many sellers shaving a price toward cost. Schumpeter held this trivial. The competition that matters is for the market, fought with novelty not price — the new good that makes the old obsolete, the new method that undercuts by a generation. It goes not for the incumbent's margin but his throat, and arrives as a gale: intermittent, violent, total. A monopoly is then not a steady state but a momentary high point in a landscape always being rebuilt.

The second move is the one that turns the volume's verdict on its head, and it concerns the prize. Why does anyone mount the enormous effort and bear the staggering risk of the innovation that drives the gale? Not for the thin and fleeting margin of a competitive market, where price is shaved to cost and profit to nothing. The lure is precisely the prospect of the monopoly — the temporary dominion, the years of fat profit, that a successful novelty confers before the next gale arrives to take it. The deadweight triangle the earlier plates condemned is, on this reading, not a pure waste at all but a payment: the reward held out to the innovator, the carrot without which the donkey does not move. Take away the prospect of the transient monopoly — let every novelty be instantly copied and competed to cost — and you have not abolished monopoly's harm so much as abolished the innovation that the hope of monopoly was buying. So the static loss and the dynamic gain are not two separate things to be weighed independently; they are bound together, the first the price of the second. The monopoly profit that looks, in the snapshot, like value extracted from buyers is, in the film, the mechanism by which the buyers are induced the better goods of the following decade. To condemn the one is, if Schumpeter is right, to forbid the other.2

2. Why bear the cost and risk of innovation? Not for the shaved margin of a competitive market, where profit is nothing. The lure is the prospect of temporary monopoly — the years of fat profit a successful novelty confers before the next gale takes it. The deadweight triangle is then not pure waste but a payment, the carrot without which the donkey does not move. Static loss and dynamic gain are bound together, the first the price of the second: the monopoly profit that looks like extraction is the mechanism inducing next decade's better goods.
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If the trade is real, its terms are lopsided, and this is the third move — a matter of magnitudes. The harm of static monopoly, for all the severity of the earlier plates, is a bounded thing: a triangle of forgone trades, a one-time loss measured against the competitive benchmark, typically reckoned by economists at a few percent of the value at stake. The gain from the gale is not bounded in the same way, because it compounds. A single decade's worth of new goods and cheaper methods, retained and built upon, raises the standard of living by a margin that dwarfs any triangle; and the centuries of such gains, stacked one upon another, are the difference between the material life of the present and the material life of any age before the modern. Set the two on a scale — the recurring static losses of a world that tolerates temporary monopoly against the cumulative dynamic gains of the innovation those monopolies buy — and the second, in Schumpeter's reckoning, is so much the larger that the first all but vanishes beside it. The economist who trains his whole attention on the deadweight triangle, on this view, is straining at a gnat while the elephant of progress walks by unremarked. The thing that matters about capitalism is not how efficiently it allocates a fixed set of goods at a moment, which is what the static picture measures, but how relentlessly it replaces that set with a better one, which is what the static picture cannot see.3

3. The terms are lopsided. Static monopoly's harm is bounded — a triangle of forgone trades, reckoned at a few percent of the value at stake. The gale's gain compounds: a decade of new goods and cheaper methods, retained and built upon, raises living standards beyond any triangle, and centuries of such gains are the gap between modern material life and every age before it. Set the recurring static losses against the cumulative dynamic gains, and the second so dwarfs the first that the economist fixed on the triangle strains at a gnat while the elephant of progress walks by.

And yet the argument can be abused, and the fourth move is to mark where it stops, for not every monopoly is a runner soon to be passed. The defense rests entirely on the monopoly being temporary — on the gale being free to arrive. It exonerates the firm whose dominance is the fresh prize of its own innovation, held precariously, certain to be taken by the next innovator in turn: that firm rode the gale here and will be carried off by it, and its profit is the system working as Schumpeter described. It does not exonerate the firm that, having reached the top by whatever means, sets about pulling the ladder up behind it — buying the rivals who might invent the displacing thing, lobbying for the rules that bar them, binding customers and suppliers so the new entrant finds no opening. Such a firm does not await the gale; it builds a shelter against it, and collects the monopoly profit without performing the innovation that was supposed to justify it. This is the very power the flagship found most dangerous, the dominance that suppresses creative destruction rather than submitting to it; and against it the Schumpeterian defense not only fails but inverts, for the firm that blocks the gale steals twice — the static toll of its monopoly, and the dynamic loss of all the inventions its shelter prevents. The line the volume needs falls exactly here, between the monopoly that races and the monopoly that blocks.4

4. The defense rests on the monopoly being temporary, the gale free to arrive. It exonerates the firm whose dominance is the fresh prize of its own innovation, certain to be taken by the next innovator: that firm rode the gale and will be carried off by it. It does not exonerate the firm that pulls the ladder up — buying rivals, lobbying for barriers, binding customers — collecting the profit without the innovation. That firm steals twice: the static toll, and the dynamic loss of the inventions its shelter prevents. The line falls between the monopoly that races and the monopoly that blocks.

So the gale resolves the volume's question by splitting it. Asked flatly whether monopoly is a harm or the price of progress, the honest answer is that it depends on which monopoly, and on whether the gale that should unseat it is allowed to blow. The reign of the racer — the firm that is dominant because it was lately first, and will lose its place to whoever is first next — is, near enough, the price of progress: its profit is the lure that drew its innovation, and its fall is already on the way. The reign of the blocker — the firm that is dominant because it has shut the door behind it — is the harm the earlier plates described, made worse, for it has added to the old static loss the new and larger loss of the progress it forecloses. The static picture, then, was not wrong, but partial: it saw the harm of monopoly truly and missed the use of it entirely, because it could not see motion. Let the film run, and monopoly divides into two things the snapshot had merged — the transient crown of the innovator, which is the engine of the system, and the dug-in fortress of the incumbent, which is its enemy5; and the whole task of policy toward power, which the static plates cast as the suppression of monopoly as such, reveals itself instead as the far harder work of telling these two apart, and of keeping the gale blowing hard enough that the first kind can never harden into the second.

5. The static picture was not wrong but partial: it saw monopoly's harm truly and missed its use, because it could not see motion. Let the film run and monopoly divides into two things the snapshot merged — the transient crown of the innovator, the engine of the system, and the dug-in fortress of the incumbent, its enemy. The task of policy toward power is then not the suppression of monopoly as such but the harder work of telling these apart, and keeping the gale blowing hard enough that the first never hardens into the second.