> Markets fail for many reasons. With all the attention to the current
> financial crisis, the time has come to look at another part of market
> failure -- the reluctance to invest in long-lived plant and equipment.
> I'm not merely thinking about the deindustrialization of the US
> economy, but a more general reluctance.
>
> The commitment of funds for fixed capital entails taking a risk. In
> the words of John Hicks, one of the earliest economists to win a
> so-called Nobel Prize, pointed to the obvious problem: "an
> entrepreneur by investing in fixed capital gives hostages to the
> future" (Hicks 1932, p. 183). Unfortunately, neither Hicks nor
> virtually any other economist has explored this fear of investment.
>
> The most popular response to this reluctance to invest came from a
> very conservative Austrian economist, who once served as a socialist
> minister of finance, before landing at Harvard. Joseph Schumpeter was
> indeed one of the giants of 20th century economics. Here his
> reputation to his personal brilliance, as well as a willingness to
> learn from Karl Marx.
>
> I have attached the rest of the piece as a pdf at
>
> http://michaelperelman.wordpress.com/2008/11/11/why-markets-fail/
>
> It was written to help me focus my thoughts for my talk in San
> Francisco tomorrow. Any comments will be appreciated.
This is an important point you're making. But there's another aspect to Schumpeter that you're omitting. He believed, as you say, that the risks of investment would ultimately force all accumulation into the hands of huge corporate bureaucracies that could absorb the risk. But then he went a step further and said that the dominance of routinized corporate bureaucracies would eventually come to stultify capitalism, both economically and culturally; neutralize the "romance" of the "heroic entrepreneur"; and lead people to question why these private bureaucracies couldn't be transformed into public ones. That's why he was so convinced in the 1940's that capitalism was doomed and socialism was the future.
By the 1960's and 70's, it seemed like he was right - Galbraith's New Industrial State seemed to have made the entrepreneur obsolete; business was a series of bureaucracies and young people were rejecting business civilization. But then we all know what happened. Simultaneously in the 1970's and 80's, bona fide, old-fashioned, individualistic entrepreneurs were making the investments necessary to create the computer industry, which eventually generated a massive wave of technical progress and productivity; the entrepreneur was again heroic, Bill Gates and Steve Jobs were on magazine covers. But more importantly, at the same time the Soviet Union and its imitators - which had dispensed with markets and thereby "solved" the problem of investment risk - turned out to be incapable of generating sufficient long-run technical progress and decided to revert to capitalism.
So to say that capitalists are unwilling to generate "enough" investment, or a "rational" pattern of investment, and that this is the Achilles' heel of capitalism, begs the question: How much investment is "enough"? What constitutes "rational"? What is the ultimate purpose of investment? If the answer is a permanent secular rise in living standards then it seems that capitalism generates plenty of investment.
SA