Destructive? Yes. Creative? Ahem

BJP invokes Schumpeter, economists bewildered

By Devadeep Purohit in Calcutta
  • Published 14.09.18
Joseph Schumpeter

Calcutta: Economics lore has it that Joseph Schumpeter had set three goals in life: to be the world's greatest economist, Austria's greatest horseman and Vienna's greatest lover. The Austrian-American economist apparently accomplished two of the three missions but never said which two, other than offering a clue by hinting there were too many fine horsemen in Austria.

A fourth goal - unrecorded by the late economist but no less ambitious than the other three - has now been met: Narendra Modi's party has made Schumpeter a partner in the Prime Minister's demonetisation brainwave.

"Four years ago we inherited a crumbling, corrupt and crony capitalist economy. We had the challenge to turn it around. The Prime Minister undertook the task of setting its basics right. It called for some harsh action, the kind that the Austrian-American economist Joseph Schumpeter called 'creative destruction'," read the "resolution for New India" that was unveiled in the presence of Modi and BJP president Amit Shah on Sunday at the BJP national executive.

Among the exhibits listed in the BJP resolution as evidence of "creative destruction" are the demonetisation and the goods and services tax (GST).

The resolution has left several economists bemused, not merely because it was reported that several parts of the document, including the reference to Schumpeter, have been lifted word for word from an article BJP leader Ram Madhav had written in a newspaper in July.

"This is an insult to all students of economics. I don't know how the international community would react to it," said a former chief economic adviser to the government, who did not wish to be named.

Schumpeter's "creative destruction" refers to the incessant churn that constantly changes the economic structure in capitalism. Old industries and firms that are no longer profitable close down, enabling the resources (capital and labour) to move into more productive processes.

Creative destruction holds that closures of companies and job losses are good for the long-term well-being of the economy. For instance, when computers replace typewriters or scanners replace fax machines, that can be called creative destruction.

In his seminal Capitalism, Socialism and Democracy (1942), Schumpeter developed the concept by contending that the forces of creative destruction, over a long period of time, allow capitalism to revive from phases of a slump through technological innovation.

Over the years, the term gained popularity among free-market economists as they used it to describe processes such as redeployment of capital as creative destruction in search of higher efficiency.

But the decision to borrow this coinage to justify measures like the demonetisation and the GST was "baffling", said a Delhi-based economist who also requested anonymity. "What's the innovation or creativity they are talking about?" he asked.

Maitreesh Ghatak, professor of economics in London School of Economics, was more forthcoming. "Creative destruction has two parts - the creation part and the destruction part.... The claim is certainly half correct - about the destruction part," Ghatak said, referring to the claim made in the BJP document.

According to Ghatak, the "harsh action" unleashed by the Modi regime could be compared with a "bull in a china shop".

"Demonetisation was like firing cannonballs to kill mosquitoes with significant collateral damage on growth and employment.... The hasty and chaotic implementation of the GST also had a negative impact on growth and employment. Now, come to the question of battling crony capitalism. Growth rates are stagnant, unemployment rate is higher and yet the stock market is up, and according to the Forbes magazine, India's top 10 billionaires have experienced an increase of 66 per cent in their net worth between 2014 and 2018," Ghatak pointed out.

There has been a general consensus among economists that decisions like the demonetisation and rolling out of the GST - billed as brave steps by the Modi government - have proved disruptive and slowed down the economic growth rate.

"You see the spiralling prices of petrol and diesel. There is a fit case to bring these under the GST, but the government won't do that. They have brought most services under the GST net with an applicable tax of 18 per cent, which is affecting everyone. This government is destroying the livelihood of people and there is no creativity in it," said Left economist Prasenjit Bose.