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"Can capitalism survive? No, I do not think it can."
Joseph Schumpeter, 1942

The banks are finding new and creative ways of losing billions of dollars. The auto companies are doing it the old-fashioned way. Large retailers had a dismal holiday season. The housing market is in its worst slump since the Great Depression. The Federal Reserve has loaned out billions to a banking system that finds it has no non-borrowed reserves, something that has never happened before. No one wants to buy bank-issued commercial paper. For many, it is the worst of times. For us practitioners of the dismal science, now is the time to get happy.

Don't Worry, Be Happy
Joseph Schumpeter was an unusual economist to say the least. He was a successful finance minister for the newly created state of Austria in the early 1920s. Later, he would be a failed banker, having presided over the bankruptcy of a major Austrian bank. Late in life, he modestly stated that his three goals in life had been to be a great economist, a great horseman and a great lover, and by his own account, he had achieved two out of three of his goals. Schumpeter was little appreciated in his day by his contemporaries, with the possible exception of his horse.

As it turns out, Schumpeter's apparent pessimism about capitalism was more a literary ploy to get readers interested in his book Capitalism, Socialism and Democracy than a heartfelt belief. It also stemmed from his view that populist politicians bemoaning the loss of jobs to creative destruction would work to halt this process, producing more security but much less growth, innovation or freedom. It was the process of creative destruction that was so little appreciated in his day that has proved to be so prescient about our day.

In Schumpeter's day, the conventional wisdom was that capitalism would not survive. On the far left, Marxists believed that the need to maximize profits made for exploited workers who would overthrow the system. The more moderate Keynesians saw the productivity of capitalism always outrunning demand, creating ever-deeper recessions that could only be resolved by government spending. As is often the case with conventional wisdom, both turned out to be wrong.

What both the Keynesians and the Marxists missed was the ability of capitalism to adapt and innovate. Capitalism would not only sweep away the less efficient feudalism as the Marxists saw it, it would also sweep away less efficient capitalism. To accomplish this task, Schumpeter put his confidence in the entrepreneur. Entrepreneurs innovate by introducing new means of production, new products and new forms of organization.

By repackaging debt, financial entrepreneurs have been able to get financing to businesses and individuals for whom financing would never have been available in the past. At the same time, the ownership of this debt has been spread globally. Both of these innovations have enabled the financial system to take on more debt and to withstand much greater losses than in the past. It has also contributed to much higher rates of growth worldwide.

For the gourmet food industry, this has meant more innovation and growth, not just in the U.S. but around the world. No product is more global than food. As incomes rise around the world, so does demand for better quality and greater variety of food. With rising global demands has come a sharp rise in the price of both food and the energy to produce it.



Higher prices create all manner of opportunities for the gourmet food businesses. These relative price increases will change the structure of the supply chain for food, benefiting local producers at the expense of distant competitors. Creating distinctive local offerings will not only improve one's local market appeal, it will also lower costs. It also means that the growth we have seen in local farmers' markets over the last decade is only just the beginning. At the end of the day, innovation and entrepreneurship will reshape this industry once again.

With so many problems in the financial system, it is easy to be pessimistic about the future. The pessimists of today, like those in Schumpeter's time, little appreciate the value of entrepreneurship and innovation in generating growth. While large bank losses make for great headlines in the press and great applause lines for populist politicians, they represent the process of creative destruction at its very best. Far from bringing down the economic system, if allowed to run its course, it will create a future system that is more productive, more creative and more adaptive to the needs of consumers.

Comments? csteidtmann@deloitte.com