The Austrian School
Here’s a fun fact to consider: for the first time ever, just yesterday Tesla’s market capitalization surpassed General Electric. Wow! Is this a case of “out with the old and in with the new”? Or the yin and yang of Schumpeter’s “creative destruction”? Creative destruction is defined as the normal product and process innovation by which new production replaces outdated production or processes. Everything about Tesla seems new. Are all of GE’s business outmoded? Good questions to consider as we recognize the milestone. But more on Schumpeter.
Schumpeter coined the term creative destruction during his lifelong study of entrepreneurs. Because he is most recognized for his thoughts on creative destruction, many don’t realize that Schumpeter was most interested in the ability of entrepreneurs to find ways to solve human problems. What drives entrepreneurs? What are the keys to their success? What is the role of government in the process? He is considered part of the Austrian School of economic thought, a group of brilliant thinkers who studied business creativity, the power of the individual in the economy, the theory of money, economic fluctuations, and rational decision making, among other things.
Other influential economists from the Austrian School include Friedrich Hayek and his mentor, Ludwig Von Mises. Hayek’s work on money and economic fluctuations should be required reading, in my opinion. He was writing about events that influenced economies fifty or a hundred years ago, but today we see stunningly similar events occurring around the globe. Money is abundant. Interest rates around the world are low. What impact is this having on the economy? What are the unintended consequences? If loose lips sink ships, does loose money have a similar effect? Hayek was also a major political philosopher. He authored “The Road to Serfdom”, a book well worth reading. Hayek won the Nobel Prize in Economics in 1974.
Last but certainly not least, Ludwig Von Mises mentored Hayek and others. His particular field of study involved rational decision-making. “All economic activity is rational action”. Not sure I always agree with this – market fads/bubbles never seem rational to me – but it is worth more thought. Von Mises also commented on the influence of religious freedom in society, the importance of individual liberty, and socialism. I bet he would love to be part of the current domestic political debate. A very insightful quote from Von Mises: “Peace and not war is the father of all things.”
Entrepreneurs will solve many more problems in the years ahead. Companies that fail to adapt will fall. It may be totally rational that the market value of Tesla exceeds General Electric. My gut tells me, however, that it may not be rational at all. Time will tell.
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James.
The forgoing is not a recommendation to buy or sell any individual security mentioned. Be sure to contact a qualified professional regarding your particular situation before making any investment decision. Investing always involves risk and you may incur a profit or loss. Past performance may not be indicative of future results.
