Joseph Schumpeter

Joseph Schumpeter

Austrian School
Institution	Harvard University 1932-50 University of Bonn 1925-32 Biedermann Bank 1921-24 University of Graz 1912-14 University of Czernowitz 1909-11
Field	Economics
Alma mater	University of Vienna
Influences	Böhm-Bawerk, Wieser, Menger, Walras, Juglar
Influenced	Friedman, Samuelson, Tobin, Williams, Bergson, Georgescu-Roegen, Heilbroner, Schiff
Contributions	Business cycles Economic development Entrepreneurship Evolutionary economics

Joseph Alois Schumpeter (8 February 1883 – 8 January 1950)^[1] was an Austrian economist and political scientist born in Moravia, then part of Austria-Hungary, now in the Czech Republic. He popularized the term "creative destruction" in economics.^[2]

Contents 1 Life 2 Most important work 2.1 History of economic analysis 2.2 Business cycles 2.3 Schumpeter and Keynesianism 2.4 Schumpeter and capitalism's demise 2.5 Schumpeter and democratic theory 2.6 Schumpeter and entrepreneurship 2.7 Schumpeter and the Gold Standard 2.8 Evolutionary economics 3 His legacy 4 Major works 5 See also 6 References 7 Further reading 8 External links

Life

Born in Třešť, Moravia, Schumpeter began his career studying law at the University of Vienna under the Austrian capital theorist Eugen von Böhm-Bawerk, taking his PhD in 1906. In 1909, after some study trips, he became a professor of economics and government at the University of Czernowitz. In 1911 he joined the University of Graz, where he remained until World War I. In 1919-1920, he served as the Austrian Minister of Finance, with some success, and in 1920-1924, as President of the private Biedermann Bank. That bank, as great part of that regional economy, collapsed in 1924 leaving Schumpeter bankrupt.

From 1925-1932, he held a chair at the University of Bonn, Germany. He lectured at Harvard in 1927-1928 and 1930. Due to the rise of Nazism in Germany he moved to the United States where he would teach from 1932 until his death in 1950.

During his Harvard years he was not generally considered a good classroom teacher, but he acquired a school of loyal followers. His prestige among colleagues was likewise not very high because his views seemed outdated and not in synch with the then-fashionable Keynesianism. This period of his life was characterized by hard work but little recognition of his core ideas.

Although Schumpeter encouraged some young mathematical economists and was even the president of the Econometric Society (1940-41), Schumpeter was not a mathematician but rather an economist and tried instead to integrate sociological understanding into his economic theories. From current thought it has been argued that Schumpeter's ideas on business cycles and economic development could not be captured in the mathematics of his day - they need the language of non-linear dynamical systems to be partially formalized.

Schumpeter claimed that he had set himself three goals in life: to be the greatest economist in the world, to be the best horseman in all of Austria and the greatest lover in all of Vienna. He said he had reached two of his goals, but he never said which two.^[3][4]

Most important work

History of economic analysis

Schumpeter's scholarship is apparent in his posthumous History of Economic Analysis, although some of his judgments seem idiosyncratic and sometimes cavalier. For instance, Schumpeter thought that the greatest 18th century economist was Turgot, not Adam Smith, as many consider, and he considered Léon Walras to be the "greatest of all economists", beside whom other economists' theories were "like inadequate attempts to catch some particular aspects of Walrasian truth".^[5] Schumpeter criticized John Maynard Keynes and David Ricardo for the "Ricardian vice." According to Schumpeter, Ricardo and Keynes reasoned in terms of abstract models, where they would freeze all but a few variables. Then they could argue that one caused the other in a simple monotonic fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model.

Business cycles

Schumpeter's relationships with the ideas of other economists were quite complex in his most important contributions to economic analysis - the theory of business cycles and development. Following neither Walras nor Keynes, Schumpeter starts in The Theory of Economic Development^[6] with a treatise of circular flow which, excluding any innovations and innovative activities, leads to a stationary state. The stationary state is, according to Schumpeter, described by Walrasian equilibrium. The hero of his story, though, is, in fine Austrian fashion, the entrepreneur.

Economic Waves series (see Business cycles)
Cycle/Wave Name	Years
Kitchin inventory	3–5
Juglar fixed investment	7–11
Kuznets infrastructural investment	15–25
Kondratiev wave	45–60

The entrepreneur disturbs this equilibrium and is the prime cause of economic development, which proceeds in cyclic fashion along several time scales. In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the Russian Nikolai Kondratiev's ideas on 50-year cycles, Kondratiev waves.

Schumpeter suggested a model in which the four main cycles, Kondratiev (54 years), Kuznets (18 years), Juglar (9 years) and Kitchin (about 4 years) can be added together to form a composite waveform. (Actually there was considerable professional rivalry between Schumpeter and Kuznets. The wave form suggested here did not include the Kuznets Cycle simply because Schumpeter did not recognize it as a valid cycle. See "Business Cycle" for further information.) A Kondratiev wave could consist of three lower degree Kuznets waves.^[7] Each Kuznets wave could, itself, be made up of two Juglar waves. Similarly two (or three) Kitchin waves could form a higher degree Juglar wave. If each of these were in phase, more importantly if the downward arc of each was simultaneous so that the nadir of each was coincident it would explain disastrous slumps and consequent depressions. (As far as the segmentation of the Kondratiev Wave, Schumpeter never proposed such a fixed model. He saw these cycles varying in time - although in a tight time frame by coincidence - and for each to serve a specific purpose)

Schumpeter and Keynesianism

Unlike Keynes, in Schumpeter's theory, Walrasian equilibrium is not adequate to capture the key mechanisms of economic development. Schumpeter also thought that the institution enabling the entrepreneur to purchase the resources needed to realize his or her vision was a well-developed capitalist financial system, including a whole range of institutions for granting credit. One could divide economists among (1) those who emphasized "real" analysis and regarded money as merely a "veil" and (2) those who thought monetary institutions are important and money could be a separate driving force. Both Schumpeter and Keynes were among the latter. Nevertheless, Schumpeter rejected Keynesianism.

Schumpeter and capitalism's demise

Schumpeter's most popular book in English is probably Capitalism, Socialism and Democracy. This book opens with a treatment of Karl Marx. While he is sympathetic to Marx's theory that capitalism will collapse and will be replaced by socialism, Schumpeter concludes that this will not come about in the way Marx predicted. To describe it he borrowed the phrase "creative destruction", and made it famous by using it to describe a process in which the old ways of doing things are endogenously destroyed and replaced by new ways.

Schumpeter's theory is that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism's collapse from within will come about as democratic majorities vote for restrictions upon entrepreneurship that will burden and destroy the capitalist structure, but also emphasizes non-political, evolutionary processes in society where "liberal capitalism" was evolving into democratic socialism because of the growth of workers' self-management, industrial democracy and regulatory institutions.^[8] Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy. In his vision, the intellectual class will play an important role in capitalism's demise. The term "intellectuals" denotes a class of persons in a position to develop critiques of societal matters for which they are not directly responsible and able to stand up for the interests of strata to which they themselves do not belong. One of the great advantages of capitalism, he argues, is that as compared with pre-capitalist periods, when education was a privilege of the few, more and more people acquire (higher) education. The availability of fulfilling work is however limited and this, coupled with the experience of unemployment, produces discontent. The intellectual class is then able to organize protest and develop critical ideas.

Schumpeter and democratic theory

In the same book, Schumpeter expounded a theory of democracy which sought to challenge what he called the "classical doctrine". He disputed the idea that democracy was a process by which the electorate identified the common good, and politicians carried this out for them. He argued this was unrealistic, and that people's ignorance and superficiality meant that in fact they were largely manipulated by politicians, who set the agenda. This made a 'rule by the people' concept both unlikely and undesirable. Instead he advocated a minimalist model, much influenced by Max Weber, whereby democracy is the mechanism for competition between leaders, much like a market structure. Although periodic votes by the general public legitimize governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role for individuals is usually severely limited.

Schumpeter and entrepreneurship

The research of entrepreneurship owes a lot to his contributions. He was probably the first scholar to develop its theories. He gave two theories, sometimes called Mark I and Mark II. In the first one, the early one, Schumpeter argued that the innovation and technological change of a nation comes from the entrepreneurs, or wild spirits. He coined the word Unternehmergeist, German for entrepreneur-spirit. He believed that these individuals are the ones who make things work in the economy of the country. In Mark II, developed later as professor at Harvard, he asserted that the actors that drive innovation and the economy are big companies which have the resources and capital to invest in research and development. Both arguments might be complementary today.

The English literature uses the term entrepreneurship, from the French "entreprise". When studying entrepreneurship and Schumpeter, it is helpful to keep in mind he used the German term (Unternehmergeist), acknowledging these "fiery souls" or "spirits".

Schumpeter and the Gold Standard

Joseph Schumpeter recognized the implication of a gold monetary standard compared to a fiat monetary standard. In History of Economic Analysis he stated the following:

“

An ‘automatic’ gold currency is part and parcel of a laissez-faire and free-trade economy. It links every nation’s money rates and price levels with the money-rates and price levels of all the other nations that are ‘on gold.’ It is extremely sensitive to government expenditure and even to attitudes or policies that do not involve expenditure directly, for example, to foreign policy, to certain policies of taxation, and, in general, to precisely all those policies that violate the principles of [classical] liberalism. This is the reason why gold is so unpopular now and also why it was so popular in a bourgeois era. It imposes restrictions upon governments or bureaucracies that are much more powerful than is parliamentary criticism. It is both the badge and the guarantee of bourgeois freedom—of freedom not simply of the bourgeois interest, but of freedom in the bourgeois sense. From this standpoint a man may quite rationally fight for it, even if fully convinced of the validity of all that has ever been urged against it on economic grounds. From the standpoint of etatisme and planning, a man may not less rationally condemn it, even if fully convinced of the validity of all that has ever been urged for it on economic grounds.[9] (italics in original)

”

Evolutionary economics

His legacy

For some time after his death, Schumpeter's views were most influential among various heterodox economists, especially European, who were interested in industrial organization, evolutionary theory, and economic development, and who tended to be on the other end of the political spectrum from Schumpeter and were also often influenced by Keynes, Karl Marx, and Thorstein Veblen. Robert Heilbroner was one of Schumpeter's most renowned pupils, who wrote extensively about him in The Worldly Philosophers. In the journal Monthly Review John Bellamy Foster wrote of that journal's founder Paul Sweezy, one of the leading Marxist economists in the United States and a graduate assistant of Schumpeter's at Harvard, that Schumpeter "played a formative role in his development as a thinker".^[10] Other outstanding students of Schumpeter's include the economist Nicholas Georgescu-Roegen and former chairman of the Federal Reserve, Alan Greenspan.^[11] Robert Solow, Nobel Prize in Economics, was his student at Harvard, and he expanded on Schumpeter's theory.^[12]

Today, Schumpeter has a following outside of standard textbook economics, in areas such as in economic policy, management studies, industrial policy, and the study of innovation. Schumpeter was probably the first scholar to develop theories about entrepreneurship. For instance, the European Union's innovation program, and its main development plan, the Lisbon Strategy, are influenced by Schumpeter. The International Joseph A. Schumpeter Society awards the Schumpeter Prize.

On 17 September 2009, The Economist inaugurated a column on business and management named "Schumpeter."^[13] The publication has a history of naming columns after significant figures or symbols in the covered field, including naming its British affairs column after former editor Walter Bagehot and its European affairs column after Charlemagne. The initial Schumpeter column praised him as a "champion of innovation and entrepreneurship" whose writing showed an understanding of the benefits and dangers of business that proved far ahead of its time.

Major works

• "Über die mathematische Methode der theoretischen Ökonomie", 1906, ZfVSV.
• "Das Rentenprinzip in der Verteilungslehre", 1907, Schmollers Jahrbuch
• Wesen und Hauptinhalt der theoretischen Nationalökonomie (transl. The Nature and Essence of Theoretical Economics), 1908.
• "Methodological Individualism", 1908, ^[14]
• "On the Concept of Social Value", 1909, QJE
• Wie studiert man Sozialwissenschaft, 1910 (transl. by J.Z. Muller, "How to Study Social Science", Society, 2003)
• "Marie Esprit Leon Walras", 1910, ZfVSV.
• "Über das Wesen der Wirtschaftskrisen", 1910, ZfVSV
• Theorie der wirtschaftlichen Entwicklung (transl. 1934, The Theory of Economic Development: An inquiry into profits, capital, credit, interest and the business cycle) 1911.
• Economic Doctrine and Method: An historical sketch, 1914. ^[15]
• "Das wissenschaftliche Lebenswerk Eugen von Böhm-Bawerks", 1914, ZfVSV.
• Vergangenkeit und Zukunft der Sozialwissenschaft, 1915.
• The Crisis of the Tax State, 1918.
• "The Sociology of Imperialisms", 1919, Archiv für Sozialwissenschaft und Sozialpolitik ^[16]
• "Max Weber's Work", 1920, Der österreichische Volkswirt
• "Carl Menger", 1921, ZfVS.
• "The Explanation of the Business Cycle", 1927, Economica
• "Social Classes in an Ethnically Homogeneous Environment", 1927, Archiv für Sozialwissenschaft und Sozialpolitik. ^[16]
• "The Instability of Capitalism", 1928, EJ
• Das deutsche Finanzproblem, 1928.
• "Mitchell's Business Cycles", 1930, QJE
• "The Present World Depression: A tentative diagnosis", 1931, AER.
• "The Common Sense of Econometrics", 1933, Econometrica
• "Depressions: Can we learn from past experience?", 1934, in Economics of the Recovery Program
• "The Nature and Necessity of a Price System", 1934, Economic Reconstruction.
• "Review of Robinson's Economics of Imperfect Competition", 1934, JPE
• "The Analysis of Economic Change", 1935, REStat.
• "Professor Taussig on Wages and Capital", 1936, Explorations in Economics.
• "Review of Keynes's General Theory", 1936, JASA
• Business Cycles: A theoretical, historical and statistical analysis of the Capitalist process, 1939.
• "The Influence of Protective Tariffs on the Industrial Development of the United States", 1940, Proceedings of AAPS
• "Alfred Marshall's Principles: A semi-centennial appraisal", 1941, AER.
• "Frank William Taussig", 1941, QJE.
• Capitalism, Socialism and Democracy, 1942.
• "Capitalism in the Postwar World", 1943, Postwar Economic Problems.
• "John Maynard Keynes", 1946, AER.
• "The Future of Private Enterprise in the Face of Modern Socialistic Tendencies", 1946, Comment sauvegarder l'entreprise privée
• Rudimentary Mathematics for Economists and Statisticians, with W.L.Crum, 1946.
• "Capitalism", 1946, Encyclopaedia Britannica.
• "The Decade of the Twenties", 1946, AER
• "The Creative Response in Economic History", 1947, JEH
• "Theoretical Problems of Economic Growth", 1947, JEH
• "Irving Fisher's Econometrics", 1948, Econometrica.
• "There is Still Time to Stop Inflation", 1948, Nation's Business.
• "Science and Ideology", 1949, AER.
• "Vilfredo Pareto", 1949, QJE.
• "Economic Theory and Entrepreneurial History", 1949, Change and the Entrepreneur
• "The Communist Manifesto in Sociology and Economics", 1949, JPE
• "English Economists and the State-Managed Economy", 1949, JPE
• "The Historical Approach to the Analysis of Business Cycles", 1949, NBER Conference on Business Cycle Research.
• "Wesley Clair Mitchell", 1950, QJE.
• "March into Socialism", 1950, AER.
• Ten Great Economists: From Marx to Keynes, 1951. ^[17]
• Imperialism and Social Classes, 1951 (reprints of 1919, 1927)
• Essays on Economic Topics, 1951.
• "Review of the Troops", 1951, QJE.
• History of Economic Analysis, (published posthumously, ed. Elisabeth Boody Schumpeter), 1954.
• "American Institutions and Economic Progress", 1983, Zeitschrift fur die gesamte Staatswissenschaft
• "The Meaning of Rationality in the Social Sciences", 1984, Zeitschrift fur die gesamte Staatswissenschaft
• "Money and Currency", 1991, Social Research.
• Economics and Sociology of Capitalism, 1991.

See also

• List of Austrians
• Austrian School of economics (Schumpeter was associated with the movement)
• List of Austrian scientists
• Social innovation
• Creative destruction
• Capitalism
• Socialism
• Innovation
• Schumpeterian rent

References

Further reading

• "The Theory of Economic Development: An Inquiry into Profits, Capital , Credit, Interest, and the Business Cycle". Was firstly published in German in 1911. See major works above
• Cheung, Edward "Baby Boomers, Generation X and Social Cycles" "The latest findings on Schumpeter's Creative Destruction."
• Harris, Seymour E., ed (1951). Schumpeter: Social Scientist. Harvard University Press. ISBN 9780836911381. 
• Robbins, L. C., 1955, "Schumpeter's History of Economic Analysis," Quarterly Journal of Economics 69: 1-22.
• Muller, Jerry Z., 2002. The Mind and the Market: Capitalism in Western Thought. Anchor Books.
• Groenewegen, Peter, 2003. Classics and Moderns in Economics: Essays on Nineteenth And Twentieth Century Economic Thought: Vol. 2. Routledge. Chpt. 22, pp 203+.
• McCraw, Thomas K. (2007). Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Belknap Press. ISBN 9780674025233. 
• Carayannis, E. G.; Ziemnowicz, C., eds (2007). Rediscovering Schumpeter. Palgrave Mcmillan. ISBN 9781403942418. 
• Dahms, Harry (1995). "From Creative Action to the Social Rationalization of the Economy: Joseph A. Schumpeter's Social Theory". Sociological Theory 13 (1): 1-13. http://www.suz.uzh.ch/fux/lehre/semwandel/dahms_schumpeter.pdf. Retrieved 2 July 2010. 
• Swedberg, Richard (1992). Schumpeter: A Biography. Princeton University Press. ISBN 9780691042961. 
• Michaelides, Panayotis; Milios, John (2005). "Did Hilferding Influence Schumpeter?" (PDF). History of Economics Review 41 (Winter): 98–125. http://www.hetsa.org.au/pdf/41-A-8.pdf. Retrieved 2 July 2010. 

External links

• Andersen, Esben Sloth. "Review of Schumpeter: A Biography". Journal of Economic Literature. http://www.business.aau.dk/evolution/esapapers/esa90-93/R93-1.pdf.  Retrieved on December 4, 2007.
• Kilcullen, John. "Reading Guide 10: Schumpeter, Capitalism, Socialism and Democracy". Macquarie University. http://www.humanities.mq.edu.au/Ockham/y6410.html.  Retrieved on December 4, 2007.
• "Joseph A. Schumpeter". The New School. http://cepa.newschool.edu/het/profiles/schump.htm.  Retrieved on December 4, 2007.
• Drucker, Peter. "Modern Prophets: Schumpeter and Keynes?". http://www.peterdrucker.at/en/texts/proph_01.html.  Retrieved on December 4, 2007.
• DeLong, J. Bradford. "Creative Destruction's Reconstruction: Joseph Schumpeter Revisited". The Chronicle of Higher Education. http://chronicle.com/free/v54/i15/15b00801.htm.  Retrieved on December 4, 2007.
• McCraw, Thomas. "Schumpeter’s Business Cycles as Business History". Business History Review. http://hbswk.hbs.edu/pdf/20070207_Schumpeter.pdf. 
• Harvard University Archives. "Papers of Joseph Alois Schumpeter : an inventory". http://nrs.harvard.edu/urn-3:HUL.ARCH:hua11007. 
• "International J.A. Schumpeter Society". http://www.iss-evec.de/. 
• "Web Joseph Alois Schumpeter in Memoriam". http://www.schumpeter.org/. 

Austrian School economists Founders Eugen von Böhm-Bawerk • Friedrich Hayek • Carl Menger • Ludwig von Mises • Friedrich von Wieser Public figures Marc Faber • Henry Hazlitt • Ron Paul • Peter Schiff • Thomas E. Woods Jr. Austrian School influences Frédéric Bastiat • Joseph Schumpeter • G.L.S. Shackle • Max Weber • Knut Wicksell Austrian macroeconomics Benjamin Anderson • Frank Fetter • Roger Garrison • Gottfried Haberler • Steven Horwitz • Jesús Huerta de Soto • Ludwig Lachmann • George Selgin • Hans Sennholz  • Mark Skousen • Lawrence White Austrian microeconomics Walter Block • Gene Callahan • Randall Holcombe  • Israel Kirzner • Peter Leeson • Fritz Machlup • Robert P. Murphy Austrian history and methodology Peter Boettke • Bruce Caldwell • Thomas DiLorenzo • Richard Ebeling • Robert Higgs • Hans-Hermann Hoppe • Lionel Robbins • Murray N. Rothbard • Joseph T. Salerno

Schools of economic thought Pre-modern Ancient schools · Medieval Islamic · Scholasticism Early modern School of Salamanca  · Mercantilism · Physiocrats Modern Classical · French liberal · American (National) · German historical · English historical · French historical · Utopian · Marxian · State socialism · Ricardian · Ricardian socialism · Christian socialism · Distributism · Anarchist · Georgism · Neoclassical · Lausanne 20th century Stockholm · Keynesian · New classical · Chicago · Austrian · Carnegie · Neo-Ricardian · New institutional · Post-Keynesian · Islamic · Gandhian · Institutional · Freiburg · Social Credit Related Economics · Heterodox economics · History of economic thought  · History of macroeconomic thought