Creative Destruction: How Capitalism Undermines Rule of Law

Abstract

Joseph Schumpeter described capitalism as a system of creative destruction. Innovative new ideas, new products, and new production methods displace the old. This works to the advantage of entrepreneurial individuals who bring innovations to market, enabling them to get ahead by producing more value for consumers. After those entrepreneurs get ahead, the forces of creative destruction work against them, threatening to displace them in the economic hierarchy. The system that helps those who want to get ahead threatens those who want to stay ahead. An examination of the institutional framework that supports capitalism shows that it contains incentives for the political elite to cooperate with the economic elite for their mutual benefit. An extensive literature on rent-seeking, rent extraction, regulatory capture, and interest group activity explains why the legal system that supports capitalism is susceptible to capture itself, for the benefit of the elite. Capitalists are the biggest threat to capitalism.

Keywords: Capitalism, Rule of Law, Creative Destruction, Joseph Schumpeter, Cronyism, Political Capitalism

JEL Classification: K0 Law & Economics, P1 Capitalist Systems