Joseph Schumpeter

Historical School
Born	(1883-02-08)8 February 1883 Triesch, Moravia, Austria–Hungary (now Třešť, Czech Republic)
Died	8 January 1950(1950-01-08) (aged 66) Taconic, Connecticut, U.S.
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
Opposed	Marx, Keynes
Influences	Tocqueville, Marx, Spencer, Menger, Böhm-Bawerk, Wieser, Schmoller, Weber, Sombart, Durkheim, Walras, Pareto, Juglar, Kondratiev, Wicksell, Wicksteed
Influenced	C. Freeman, Dahl, Kirzner, Hicks, Friedman, Samuelson, Tobin, Williams, Bergson, Georgescu-Roegen, Heilbroner, Huntington, Wallerstein, Perez, H. G. Johnson, Downs, Sowell, Reinert, Drucker, Yegorov
Contributions	Business cycles Economic development Entrepreneurship Evolutionary economics

Joseph Alois Schumpeter (8 February 1883 – 8 January 1950)^[1] was an Austrian-American economist and political scientist. He briefly served as Finance Minister of Austria in 1919. One of the most influential economists of the 20th century, Schumpeter popularized the term "creative destruction" in economics.^[2]

Life [edit]

Schumpeter was born in Třešť, Habsburg Moravia (now Czech Republic, then part of Austria-Hungary) in 1883 to Catholic ethnic German parents. His father owned a factory, but he died when Joseph was only four years old.^[3] In 1893, Joseph and his mother moved to Vienna.^[4]

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, he served briefly as the Austrian Minister of Finance, with some success, and in 1920–1924, as president of the private Biedermann Bank. That bank, along with a great part of that regional economy, collapsed in 1924 leaving Schumpeter bankrupt.

From 1925 to 1932, Schumpeter held a chair at the University of Bonn, Germany. He lectured at Harvard in 1927–1928 and 1930. In 1931, he was a visiting professor at The Tokyo College of Commerce. In 1932, he moved to the United States, in 1939 he became a US citizen. Schumpeter had a highly conservative political attitude. In the beginning of WWII, the FBI investigated him for pro-Nazi leanings, but no evidence was found that he had any sympathies for Nazism.^[5]

During his Harvard years he was not generally considered a good classroom teacher, but he acquired a school of loyal followers^{[citation needed]}. His prestige among colleagues was likewise not very high because his views seemed outdated and not in tune 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,^[6][7] although he is reported to have said that there were too many fine horsemen in Austria for him to succeed in all his aspirations.^[8]

He died in his home in Taconic, Connecticut, at the age of 66, on the night of 7 January 1950.^[9]

He was married three times, first to Gladys Ricarde Seaver, an Englishwoman nearly 12 years his senior (married 1907, separated 1913, divorced 1925); then to Anna Reisinger, the daughter of the concierge of the apartment where he grew up, twenty years his junior; they married in 1925; she died in childbirth along with their newborn son, two months after the death of Schumpeter's mother; and finally, in 1937, he married the American Elizabeth Boody, who possessed a PhD in English and business cycles, and helped him to popularize his work.^[10]

Most important work [edit]

Influences [edit]

The source of Joseph Schumpeter's dynamic, change-oriented, and innovation-based economics was the Historical School of economics. Although his writings could be critical of the School, Schumpeter's work on the role of innovation and entrepreneurship can be seen as a continuation of ideas originated by the Historical School, especially the work of Gustav von Schmoller and Werner Sombart.^[11][12]

Evolutionary economics [edit]

This section may be confusing or unclear. Please help clarify the article. Suggestions may be on the talk page. (March 2009)

According to Christopher Freeman (2009), a scholar who devoted much time researching Schumpeter's work: "the central point of his whole life work [is]: that capitalism can only be understood as an evolutionary process of continuous innovation and 'creative destruction' [This] is still not taken into the bosom of mainstream theory, although many now pay lip service to it."^[13]

History of Economic Analysis [edit]

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".^[14] 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 [edit]

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^[15] 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 is the entrepreneur.

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^{[clarification needed]}. See "Business Cycle" for further information. A Kondratiev wave could consist of three lower degree Kuznets waves.^[16] 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 [edit]

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.^{[citation needed]}

Schumpeter and capitalism's demise [edit]

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.^[17]

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 lack, 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 [edit]

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 [edit]

The research of entrepreneurship owes much to his contributions. He was probably the first scholar to develop theories in this field. His fundamental theories are often referred to as Mark I and Mark II. In the first, Schumpeter argued that the innovation and technological change of a nation come from the entrepreneurs, or wild spirits. He coined the word Unternehmergeist, German for entrepreneur-spirit. Mark II was developed when Schumpeter was a professor at Harvard. He asserted that the agents that drive innovation and the economy are large companies which have the resources and capital to invest in research and development. These arguments may be complementary today.

Schumpeter and innovation [edit]

Schumpeter identified innovation as the critical dimension of economic change.^[18] He argued that economic change revolves around innovation, entrepreneurial activities, and market power. He sought to prove that innovation-originated market power could provide better results than the invisible hand and price competition. He argues that technological innovation often creates temporary monopolies, allowing abnormal profits that would soon be competed away by rivals and imitators. He said that these temporary monopolies were necessary to provide the incentive necessary for firms to develop new products and processes.^[18]

Schumpeter and the gold standard [edit]

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.

—Schumpeter, History of Economic Analysis^[19]

His legacy [edit]

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".^[20] Other outstanding students of Schumpeter's include the economists Nicholas Georgescu-Roegen and Hyman Minsky and former chairman of the Federal Reserve, Alan Greenspan.^[21] Future Nobel Laureate Robert Solow was his student at Harvard, and he expanded on Schumpeter's theory.^[22]

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.

The Schumpeter School of Business and Economics opened in October 2008 at the University of Wuppertal. According to University President Professor Lambert T. Koch, "Schumpeter will not only be the name of the Faculty of Management and Economics, but this is also a research and teaching programme related to Joseph A. Schumpeter."^[23]

On 17 September 2009, The Economist inaugurated a column on business and management named "Schumpeter."^[24] 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 to be far ahead of its time.^[25]

Major works [edit]

See also [edit]

• List of Austrians
• Austrian School of economics
• List of Austrian scientists
• Social innovation
• Creative destruction
• Capitalism
• Socialism
• Innovation
• Schumpeterian rent

References [edit]

Further reading [edit]

External links [edit]

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