Joseph Schumpeter’s Unternehmergeist

Behind every great business story you'll usually find an Unternehmergeist. Say it again. Three times fast.

Is there a better example of Unternehmergeist than Andrew Forrest? Forrest has become Australia's richest man by taking a series of risks everyone else thought was crazy (llama farming, an experimental method for leaching laterite nickel deposits, and becoming the third-great iron ore producer in the Pilbara. He's richer, on paper, than James Packer and Rupert Murdoch.

What's Unternehmergeist?

That's the term coined by Joseph Schumpeter, the economist from the Austrian school born near the turn of the 19th century (a time of huge, disruptive change in the global economy). You've probably heard Schumpeter's name in association with the phrase for which he is most famous, creative destruction. It is, we confess, the spiritual heart and soul of our research efforts at the Australian Small Cap Investigator.

Creative destruction was a popular expression during the dot.com boom, when every Silicon Valley start-up dreamt not of competing with Microsoft, Oracle, and Intel, but destroying them. These entrepreneurs wanted to be Henry Ford to Microsoft's buggy whip.

Of course it didn't turn out that way for many firms. They did not have truly disruptive technologies or services that wholly replaced what already existed. But Schumpeter's point stills stands.

"Every piece of business strategy," he wrote "acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction."

The "perennial gales of creative destruction" are still blowing early in the 21st century. Like a big bad wolf, they are blowing down Wall Street's house of financial cards. And in the energy sector, they are shaking the very foundation of the world's petroleum economy.

But don't lose site of the creation. Schumpeter realised that wild human spirits (his term for it was Unternehmergeist) are always prowling on the periphery of the economy. These men and women challenge the established way of doing things. They are not after merely marginal profits, but massive ones. And they are not necessarily (indeed hardly ever) inventors.

They are, however, innovators. These entrepreneurs, Schumpeter argued, popularize new products, technologies, and services that replace the established order. They are not just disruptive but destructive. Schumpeter argued that in the grand scheme of business cycles, resources (capital, labour, land, energy) gravitate toward better solutions (the winners) and away from losers.

He described an inherently evolutionary process of wealth creation, albeit a process punctuated with great, disturbing leaps forward. He identified five types of situations in which new profits could be made on a large scale: (1) The introduction of a new or higher quality good (2) the introduction of a new method of production (3) The opening of a new market, (4) The conquest of a new source of supply of raw materials or half-manufactured goods, (5) a new way or organising an old industry.

Dan Denning
The Daily Reckoning Australia

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