The Uncanny Predictions of Joseph Schumpeter & Ayn Rand

Editor's Note:

Of late, the exploding deficit and accumulated $21 trillion public debt (i.e., the sum total of past deficits) has become the "in" subject, with many books/articles written about how runaway deficits lead to eroding economies, and massive civil unrest.

Politicians (of all stripes) always turn to printing more money & raising taxes to finance mounting deficits.

Printing money is a potentially galloping inflation solution. Raising taxes inevitably dampens business investment and business spending creating, at best, a slow/no growth economy.

Many of today's millennials remain clueless to what Democratic Socialism means & how all the freebies will be paid for. Answer: printing money & raising taxes.

Washington Post economist Robert Samuelson recently wrote: Unfortunately, "politicians want to win, so they tell voters what they want to hear. So on we stumble, blind to the dangers ahead…"

Take-for example-the recent riots in Paris. It's being called one of the worst disturbances the capital has seen since 1968.

The reason for the riots? The protesters claim they are upset with increasing taxes and the ever-increasing high cost of living. Activist’s torched cars, banks, smashed windows, looted stores, engaged in physical violence, and more.

The message? Printing money and raising taxes leads to civil unrest. Anyone familiar with economic history understands this.

Yet according to a recent Harvard poll, approximately one- third of America's citizenry say they prefer democratic socialistic system to capitalism.

President Trump's government turnaround plan for reducing the federal debt – by reigniting economic growth & continuously eliminating trillions of dollars in result-less government spending – is a far better option than printing money/raising taxes which destroys the purchasing power of middle-class incomes.

This is the first in a series of articles that explain – in clear, plain language – time-tested solutions to economic issues that now threaten America's prosperity, freedom, and safety.

Introduction

Both celebrated Harvard economist Joseph Schumpeter and famed book author Ayn Rand made uncanny predictions in 1942 & 1957 respectively about societal/economic trends that would inevitably endanger capitalism and destroy Democracies.

Schumpeter (1883 – 1950) was named Austria's finance minister after World War I. He experienced, firsthand, the horrific consequences of runaway inflation caused by inept politicians who resorted to printing money and raising taxes to pay for ever-increasing deficits.

Four hundred years of economic history tells us the inevitable final result of politically driven inflation is hyper- inflation which, in turn, leads to massive civil unrest as people's lives and accumulated wealth are rapidly destroyed.

Schumpeter showed why raising taxes to finance mounting deficits is also a surefire way to destroy productive economies and all chances to narrow income inequality.

Schumpeter was dismissed from government service; and became a deservedly famed Harvard professor because of his rock solid economic theories and practices that will (or should) shape economic policies for the decades just ahead.

It should be mentioned – indeed, emphasized – Peter F. Drucker developed prescriptions for avoiding the need to print money and raise taxes.

We do believe President Trump is attempting (but not using the same language as Drucker) to implement what Drucker proposes. (A future article will detail these Drucker prescriptions).

Why must we painfully re-learn what every economist since the late 16th century has known about preventing a possible galloping inflation: Cut result-less government spending and with it the creation of money?

Today's new socialists (not any different from yesterday's socialists) present a very tempting "utopian coddling" sales presentation to all those willing to listen.

Socialism has been abandoned in virtually all the developing countries because of the disastrous consequences of the need to print money and raise taxes to pay for state-sponsored giveaways.

Given all the documented evidence that socialism brings pain not gain, especially for the poor, it seems its resurgence among young people in the United States is the result of economic ignorance and naïveté with respect to how deficits are financed and the historical record of state -controlled economies.

About Ayn Rand

Ayn Rand (1905 – 1982) was a Russian-born American novelist, philosopher, playwright & screenwriter. She is best known for her two best-selling novels The Fountainhead and Atlas Shrugged.

Without doubt, Ayn Rand's writings & philosophy are guaranteed to provoke controversy.

Every argument she stirs, however, is quite relevant to today's crystal-clear challenge of building and sustaining a functioning civil society that has repeatedly shown to create by itself, and optimal, free, just, and equal society.

Schumpeter's 1942 Prediction of "The Future That Had Already Happened"

Drucker believed Schumpeter's contribution to economics was monumental. Said Drucker:

“… In 1942…Joseph Schumpeter (1883 – 1950) published his best-known book, Capitalism, Socialism and Democracy, still, and deservedly, read widely… In this book he argued that capitalism would be destroyed by its own success…

… This would breed what we now call the 'new class': bureaucrats, intellectuals, professors, lawyers, journalists, all of them beneficiaries of capitalism's economic fruits and, in fact, parasitical on them, and yet all of them opposed to the ethos of wealth production, of savings and of allocating resources to economic productivity…

… He then proceeded to argue that capitalism would be destroyed by the very democracy it helped create and make possible…

… For in a democracy, to be popular, government would increasingly become the ' tax state,' would increasingly shift income from producer to non-producer, would increasingly move income from where it would be saved and become capital for tomorrow to where it would be consumed…

…Government in a democracy would thus be under increasing inflationary pressure… Eventually, he prophesied, inflation would destroy both democracy and capitalism…"

Excerpted from Peter F. Drucker's Schumpeter and Keynes, Forbes, May 23, 1983

Now Ayn Rand's Prophetic Vision…

Ayn Rand in her best-selling book, Atlas Shrugged (1957), captured the essence of Schumpeter's prediction when she described a society in which its most productive citizens refuse to be exploited any longer by increasing taxation and mounting government regulations.

Rand describes how business leaders rebel by shutting down their enterprises and join a rebel leader named John Galt who is spearheading a rebellion to demonstrate that the "war on profits" will inevitably lead to the destruction of a functioning civil society.

Only if these leaders return to society, will a vibrant, growing economy continue to provide the highest possible standard living for the bulk of its members.

Rand infuses the idea (originally credited to Schumpeter by economic historians) that profit is part of a moral and ethical system.

Profit in this sense is a future cost, that is, the surplus to cover today's unintended operating crisis and tomorrow's uncertain, risky innovative decisions.

The political elite still talk about the evils of "profit maximization" which Rand- in a roundabout way- demonstrates why profit maximization is not the way most organizations survive and thrive (trading off short-term profits for long-term growth is the only way most organizations sustain themselves).

Rand attributes the pending collapse of society to the "looters and "moochers " created by politicians motivated by the outward appearance of the spirit of collectivism, but, In essence, are actually fueled by the need to gain power over others and riches for themselves.

Looters appropriate property belonging to contributing members of society (i.e., producers) through force and fear tactics.

Moochers just mooch; they create no value; they prefer to take away the property of others through never-ending taxation and other means; they cannibalize the wealth-contributing members of society under the guise of seemingly limitless social programs based on iffy moral causes designed to help the less fortunate.

Atlas Shrugged was an instant success. Of course, it drew it share of outspoken critics, who appeared horrified (and expressed what could be called "injured innocence") concerning Rand's major thesis. A thesis that many believe is proving remarkably true.

But Rand to this day has an astonishing number of followers who view the world from an individualistic, self-reliant lens…and believe that capitalism has been a success story in improving the lives of people and has delivered more growth and freedom than any other system.

[Originally posted in 2016; updated in 2018]