Joseph Schumpeter

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Joseph Schumpeter
Bastiat · Walras · Schmoller · Pareto · Smith • Marx • Keynes • Menger · Weber · Sombart
ContributionsBusiness cycles
Creative destruction
Economic development
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Evolutionary economics
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Joseph Alois Schumpeter (German: [ˈʃʊmpeːtɐ]; February 8, 1883 – January 8, 1950)[3] was an Austrian political economist. He served briefly as Finance Minister of Austria in 1919. In 1932, he emigrated to the United States to become a professor at Harvard University, where he remained until the end of his career, and in 1939 obtained American citizenship.

Schumpeter was one of the most influential economists of the early 20th century, and popularized the term "creative destruction", coined by Werner Sombart.[4][5][6]

Early life and education

Schumpeter was born in 1883 in

ethnic German.[7] His father, who owned a factory, died when Joseph was only four years old.[8] In 1893, Joseph and his mother moved to Vienna.[9] Schumpeter was a loyal supporter of Franz Joseph I of Austria.[7]

Schumpeter was educated at the Theresianum, and began his career studying law at the University of Vienna under Eugen von Böhm-Bawerk, an economic theorist of the Austrian School. In 1906, he received his doctoral degree from the University of Vienna's faculty of law, with a specialisation in economics.[10] In 1909, after some study trips, he became a professor of economics and government at the University of Czernowitz in modern-day Ukraine. In 1911, he joined the University of Graz, where he remained until World War I.

In 1913–1914, Schumpeter taught at

economic theory and met Irving Fisher and Wesley Clair Mitchell.[12] Columbia awarded him an honorary doctorate.[13]

In 1918, Schumpeter was a member of the Socialisation Commission established by the Council of the People's Deputies in Germany. In March 1919, he was invited to take office as Minister of Finance in the Republic of German-Austria. He proposed a capital levy as a way to tackle the war debt and opposed the socialization of the Alpine Mountain plant.[14] In 1921, he became president of the private Biedermann Bank. He was also a board member at the Kaufmann Bank. Problems at those banks left Schumpeter in debt. His resignation was a condition of the takeover of the Biedermann Bank in September 1924.[15]

From 1925 until 1932, Schumpeter held a chair at the

FBI investigated him and his wife, Elizabeth Boody (a prominent scholar of Japanese economics) for Nazi sympathies, but found no evidence of such leanings.[18][19]

At Harvard, Schumpeter was considered a memorable character, erudite, and even showy in the classroom. He became known for his heavy teaching load and his personal and painstaking interest in his students. He served as the faculty advisor of the Graduate Economics Club and organized private seminars and discussion groups.

Keynesianism, which was fashionable; others resented his criticisms, particularly of their failure to offer an assistant professorship to Paul Samuelson, but recanted when they thought him likely to accept a position at Yale University.[21] This period of his life was characterized by hard work and comparatively little recognition of his massive 2-volume book Business Cycles. However, Schumpeter persevered, and in 1942 published what became the most popular of all his works, Capitalism, Socialism and Democracy, reprinted many times and in many languages in the following decades, as well as cited thousands of times.[22]

Career

Influences

The source of Schumpeter's dynamic, change-oriented, and innovation-based economics was the

Austrian School of economics without major qualifications[25] while others maintain the opposite.[26]

The Austrian sociologist Rudolf Goldscheid's concept of fiscal sociology influenced Schumpeter's analysis of the tax state.[27] A 2012 paper showed that Schumpeter's writings displayed the influence of Francis Galton's work.[28]

Evolutionary economics

Main article: Evolutionary economics

According to Christopher Freeman (2009), "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'".[29]

History of Economic Analysis

Schumpeter's scholarship is apparent in his posthumous History of Economic Analysis,

monotonic
fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model.

In this book, Joseph Schumpeter recognized the implication of a

bourgeois era."[32]

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

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 cyclically along with 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. A Kondratiev wave could consist of three lower-degree Kuznets waves.[34] 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.

Proposed economic waves
Cycle/wave name Period (years)
Kitchin cycle (inventory, e.g. pork cycle) 3–5
Juglar cycle (fixed investment) 7–11
Kuznets swing (infrastructural investment) 15–25
Kondratiev wave (technological basis) 45–60
This box:

Keynesianism

In Schumpeter's theory,

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 were important and money could be a separate driving force. Both Schumpeter and Keynes were among the latter.[35]

Demise of capitalism

Schumpeter's most popular book in English is probably Capitalism, Socialism and Democracy. While he agrees with Karl Marx that capitalism will collapse and be replaced by socialism, Schumpeter predicts a different way this will come about. While Marx predicted that capitalism would be overthrown by a violent proletarian revolution, which occurred in the least capitalist countries, Schumpeter believed that capitalism would gradually weaken itself and eventually collapse. Specifically, the success of capitalism would lead to corporatism and to values hostile to capitalism, especially among intellectuals.

"Intellectuals" are a social class in a position to critique societal matters for which they are not directly responsible and to stand up for the interests of other classes. Intellectuals tend to have a negative outlook on capitalism, even while relying on it for prestige because their professions rely on antagonism toward it. The growing number of people with higher education is a great advantage of capitalism, according to Schumpeter. Yet, unemployment and a lack of fulfilling work will lead to intellectual critique, discontent, and protests.

Parliaments will increasingly elect

laborism". This will exacerbate "creative destruction" (a borrowed phrase to denote an endogenous
replacement of old ways of doing things by new ways), which will ultimately undermine and destroy the capitalist structure.

Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy.[36]

William Fellner, in the book Schumpeter's Vision: Capitalism, Socialism and Democracy After 40 Years, noted that Schumpeter saw any political system in which the power was fully monopolized as fascist.[37]

Democratic theory

In the same book, Schumpeter expounded on a theory of democracy that 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 they were largely manipulated by politicians, who set the agenda. Furthermore, he claimed that even if the common good was possible to find, it would still not make clear the means needed to reach its end, since citizens do not have the requisite knowledge to design government policy.[38] 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 of individuals is usually severely limited.

Schumpeter defined democracy as the method by which people elect representatives in competitive elections to carry out their will.[39] This definition has been described as simple, elegant and parsimonious, making it clearer to distinguish political systems that either fulfill or fail these characteristics.[40] This minimalist definition stands in contrast to broader definitions of democracy, which may emphasize aspects such as "representation, accountability, equality, participation, justice, dignity, rationality, security, freedom".[39] Within such a minimalist definition, states which other scholars say have experienced democratic backsliding and which lack civil liberties, a free press, the rule of law and a constrained executive, would still be considered democracies.[40][41][42] For Schumpeter, the formation of a government is the endpoint of the democratic process, which means that for the purposes of his democratic theory, he has no comment on what kinds of decisions that the government can take to be a democracy.[43] Schumpeter faced pushback on his theory from other democratic theorists, such as Robert Dahl, who argued that there is more to democracy than simply the formation of government through competitive elections.[43]

Schumpeter's view of democracy has been described as "elitist", as he criticizes the rationality and knowledge of voters, and expresses a preference for politicians making decisions.[44][45][46] Democracy is therefore in a sense a means to ensure circulation among elites.[45] However, studies by Natasha Piano (of the University of Chicago) emphasize that Schumpeter had substantial disdain for elites as well.[44][47]

Entrepreneurship

The field of entrepreneurship theory owed much to Schumpeter's contributions. His fundamental theories are often referred to[48] as Mark I and Mark II. In Mark I, Schumpeter argued that the innovation and technological change of a nation come from entrepreneurs or wild spirits. He coined the word Unternehmergeist, German for "entrepreneur-spirit", and asserted that "... the doing of new things or the doing of things that are already being done in a new way"[49] stemmed directly from the efforts of entrepreneurs.

Schumpeter developed Mark II while a professor at

Harvard. Many social economists and popular authors of the day argued that large businesses had a negative effect on the standard of living of ordinary people. Contrary to this prevailing opinion, Schumpeter argued that the agents that drive innovation and the economy are large companies that have the capital to invest in research and development
of new products and services and to deliver them to customers more cheaply, thus raising their standard of living. In one of his seminal works, Capitalism, Socialism and Democracy, Schumpeter wrote:

As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the door of the large concerns – which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector – and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down.[50]

As of 2017 Mark I and Mark II arguments are considered complementary.[48]

Cycles and long wave theory

Schumpeter was the most influential thinker to argue that long cycles are caused by innovation and are an incident of it. His treatise on how business cycles developed was based on Kondratiev's ideas which attributed the causes very differently. Schumpeter's treatise brought Kondratiev's ideas to the attention of English-speaking economists. Kondratiev fused important elements that Schumpeter missed. Yet, the Schumpeterian variant of the long-cycles hypothesis, stressing the initiating role of innovations, commands the widest attention today.[51] In Schumpeter's view, technological innovation is the cause of both cyclical instability and economic growth. Fluctuations in innovation cause fluctuations in investment and those cause cycles in economic growth. Schumpeter sees innovations as clustering around certain points in time that he refers to as "neighborhoods of equilibrium" when entrepreneurs perceive that risk and returns warrant innovative commitments. These clusters lead to long cycles by generating periods of acceleration in aggregate growth.[52]

The technological view of change needs to demonstrate that changes in the rate of innovation govern changes in the rate of new investments and that the combined impact of innovation clusters takes the form of fluctuation in aggregate output or employment. The process of technological innovation involves extremely complex relations among a set of key variables: inventions, innovations, diffusion paths, and investment activities. The impact of technological innovation on aggregate output is mediated through a succession of relationships that have yet to be explored systematically in the context of the long wave. New inventions are typically primitive, their performance is usually poorer than existing technologies and the cost of their production is high. A production technology may not yet exist, as is often the case in major chemical and pharmaceutical inventions. The speed with which inventions are transformed into innovations and diffused depends on the actual and expected trajectory of performance improvement and cost reduction.[53]

Innovation

Schumpeter identified innovation as the critical dimension of economic change.[54] He argued that economic change revolves around innovation, entrepreneurial activities, and market power.[55] He sought to prove that innovation-originated market power can provide better results than the invisible hand and price competition.[56] He argued that technological innovation often creates temporary monopolies, allowing abnormal profits that would soon be competed away by rivals and imitators. These temporary monopolies were necessary to provide the incentive for firms to develop new products and processes.[54]

Doing Business

The World Bank's "Doing Business" report was influenced by Schumpeter's focus on removing impediments to creative destruction. The creation of the report is credited in part to his work.

Personal life

Schumpeter was married three times.[57] His first wife was Gladys Ricarde Seaver, an Englishwoman nearly 12 years his senior (married 1907, separated 1913, divorced 1925). His best man at his wedding was his friend and Austrian jurist Hans Kelsen. His second was Anna Reisinger, 20 years his junior and daughter of the concierge of the apartment where he grew up. As a divorced man, he and his bride converted to Lutheranism to marry.[58] They married in 1925, but within a year, she died in childbirth. The loss of his wife and newborn son came only weeks after Schumpeter's mother had died. Five years after arriving in the US, in 1937, at the age of 54, Schumpeter married the American economic historian Dr. Elizabeth Boody (1898–1953), who helped him popularize his work and edited what became their magnum opus, the posthumously published History of Economic Analysis.[59] Elizabeth assisted him with his research and English writing until his death.[60]

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,[61][62] although he is reported to have said that there were too many fine horsemen in Austria for him to succeed in all his aspirations.[63][64]

Later life and death

Schumpeter died in his home in

Taconic, Connecticut, at the age of 66, on the night of January 7, 1950.[65]

Legacy

For some time after his death, Schumpeter's views were most influential among various

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".[66] Other outstanding students of Schumpeter's include the economists Nicholas Georgescu-Roegen and Hyman Minsky and John Kenneth Galbraith and former chairman of the Federal Reserve, Alan Greenspan.[67] Future Nobel Laureate Robert Solow was his student at Harvard, and he expanded on Schumpeter's theory.[68]

Today, Schumpeter has a following outside standard textbook economics, in areas such as 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, Germany. 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."[69]

On September 17, 2009, The Economist inaugurated a column on business and management named "Schumpeter".[70] 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.[70]

Schumpeter's thoughts inspired the economic theory of Adam Przeworski.[71]

Major works

Books

  • Schumpeter, Joseph A. (1906). Über die mathematische Methode der theoretischen Ökonomie. Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung. Germany: Wien.
    OCLC 809174553
    .
  • Schumpeter, Joseph A. (1907). Das Rentenprinzip in der Verteilungslehre. Germany: Jahrbuch für Gesetzgebung, Verwaltung and Volkswirtschaft im Deutschen Reich.
  • Schumpeter, Joseph A. (1908). Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie. Germany: Leipzig, Duncker & Humblot.
    OCLC 5455469
    .
Translated as: Schumpeter, Joseph A. (2010). The nature and essence of economic theory. New Brunswick, New Jersey: Transaction Publishers.
ISBN 978-1412811507
. Translated by: Bruce A. McDaniel

Journal articles

Memoriams

Reviews

See also

References

  1. ^ Tobin, James (1986). "James Tobin". In Breit, William; Spencer, Roger W. (eds.). Lives of the Laureates, Seven Nobel Economists. Cambridge, Massachusetts, London, England: MIT Press. Archived from the original on August 26, 2003.
  2. ^ McCulloch, Rachel. "Interview with Anne Carter".
  3. ^ "Joseph Alois Schumpeter 1883–1950". econlib.org. Retrieved December 5, 2023.
  4. ISBN 9781137520197. Archived from the original
    on March 10, 2021. Retrieved July 23, 2022.
  5. ISBN 978-0465025503
    . Retrieved December 19, 2019. popularized the term creative destruction.
  6. ^ Stone, Brad; Vance, Ashlee (January 25, 2009). "$200 Laptops Break a Business Model". The New York Times. Retrieved September 21, 2010.
  7. ^
    ASIN B00ZY8X8D4
    .
  8. ISBN 978-1845420857
    . Retrieved July 23, 2022 – via Google Books.
  9. ISBN 978-0521037969
    . Retrieved December 19, 2019.
  10. ^ Ebeling, Richard M. (January 13, 2020). "Joseph A. Schumpeter, Outsider Looking In". American Institute for Economic Research. Retrieved December 5, 2023.
  11. ISBN 978-0-691-19449-3
    . Retrieved January 17, 2024.
  12. ISBN 978-0-7456-6870-3
    . Retrieved January 17, 2024.
  13. ISBN 978-1-351-50152-1
    . Retrieved January 17, 2024.
  14. JSTOR 23722217
    .
  15. ISBN 9781412815611
    . Retrieved December 19, 2019. Schumpeter Biedermann Bank
  16. ^ McCraw, Prophet of Innovation, pp. 231–232.
  17. ^ McCraw, pp. 317–321
  18. ISBN 9781847203274
    .
  19. ^ McCraw, pp. 337–343
  20. ^ McCraw, Prophet of Innovation, pp. 210–217.
  21. ^ McCraw, pp. 273–278, 306–3311.
  22. ^ McCraw pp. 347 et seq.
  23. ^ "PG Michaelides, The Influence of the German Historical School on Schumpeter, 17th International Conference of the European Association for Evolutionary Political Economy" (PDF). Bremen, Germany. November 2005.
  24. doi:10.1093/cje/ben052
    .
  25. ISBN 978-9400921818
    . Retrieved January 23, 2022.
  26. ISSN 0144-3585
    . Retrieved July 23, 2022.
  27. ISBN 978-0691042534
    .
  28. doi:10.4000/interventionseconomiques.1753
    – via journals-openedition-org.translate.goog.
  29. ISBN 9781843317852
    .
  30. ^ Schumpeter, Joseph (1954). History of Economic Analysis. London: George Allen and Unwin.
  31. ^ "Phases of the Marginalist Revolution". HET. Archived from the original on May 26, 2013. Retrieved May 9, 2015.
  32. ^ Timberlake, Richard (August 2005). "Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy" (PDF). Econ Journal Watch. Archived (PDF) from the original on September 10, 2005. Retrieved July 23, 2022.
  33. ^ Schumpeter, J.A. The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle translated from the German by Redvers Opie (1961) New York: OUP
  34. doi:10.5070/SD941003306
    . Retrieved June 25, 2022.
  35. ^ "Joseph Schumpeter". thelatinlibrary.com. Retrieved October 13, 2022.
  36. S2CID 144892143
    .
  37. ^ Heertje, Arnold (1981). Schumpeter's Vision: Capitalism, Socialism and Democracy After 40 years. New York City: Praeger. pp. 50–54.
  38. ^ Schumpeter, Joseph (1942). Capitalism, Socialism, and Democracy (1st ed.). Harper and Brothers. p. 252.
  39. ^
    ISBN 9780521643887
    .
  40. ^
    ISBN 9780521805124
    . Retrieved June 14, 2022 – via Google Books.
  41. ^ Bidner, Chris; Francois, Patrick; Trebbi, Francesco (2014). "A Theory of Minimalist Democracy". NBER Working Papers.
  42. S2CID 154815836
    . Retrieved July 23, 2022.
  43. ^
    ISBN 9780801896507
    .
  44. ^
    S2CID 159423921
    .
  45. ^
    ISBN 9780199219902
    . Retrieved June 14, 2022 – via Google Books.
  46. ^ Posner, Richard. Law, Pragmatism, and Democracy. Harvard University Press. pp. 183–184.
  47. S2CID 150201729
    .
  48. ^
    ISSN 0874-4548. Archived from the original
    (PDF) on October 8, 2018. Retrieved July 24, 2018.
  49. S2CID 155049567
    .
  50. ^ Schumpeter, Joseph (1942). Capitalism, Socialism and Democracy. New York: Harper and Roe Publishers. p. 82.
  51. ^ Freeman, Christopher, ed. Long Wave Theory, International Library of Critical Writings in Economics: Edward Elgar, 1996
  52. ^ Rosenberg, Nathan. "Technological Innovation and Long Waves." In Exploring the Black Box: Technology, Economics, and History, 62–84. Cambridge, UK: Cambridge University Press, 1994.
  53. JSTOR 1816829
    .
  54. ^
    ISBN 978-0170133005
    .
  55. ISBN 978-3319153469
    .
  56. ^ Nakamura, Leonard I. (July 2000). "Economics and the New Economy: The Invisible Hand Meets Creative Destruction" (PDF). Business Review – Federal Reserve Bank of Philadelphia: 15–30. Retrieved December 19, 2019.
  57. ^ Hawthorn, Geoffrey (February 27, 1992). "Schumpeter the Superior". London Review of Books. 14 (4). Retrieved December 19, 2019.
  58. ISBN 978-0745668703
    . Retrieved December 19, 2019.
  59. ISBN 978-1403996275
    .
  60. ^ "Romaine Elizabeth (Boody) Schumpeter, 1898-1953 - Social Networks and Archival Context". snaccooperative.org.
  61. ISBN 9780787233761
    .
  62. ^ Schumpeter's Diary as quoted in "Prophet of Innovation" by Thomas McCraw, p. 4.
  63. ^ P. A. Samuelson and W. D. Nordhaus, Economics (1998, p. 178)
  64. ^ Humphrey, Thomas M. "Analyst of Change" (PDF). Federal Reserve Bank of Richmond. Retrieved May 12, 2019.
  65. JSTOR 1816338
    .
  66. ^ Foster, John Bellamy (May 2008). "Sweezy in Perspective". Monthly Review. Retrieved September 21, 2010.
  67. ISBN 978-1594201318
    . I've watched the process [creative destruction] at work through my entire career,
  68. ^ Thoma, Mark (May 17, 2007). "Robert Solow on Joseph Schumpeter". Economistsview.typepad.com. Retrieved September 21, 2010.
  69. ^ "Opening ceremony: Schumpeter School of Business and Economics". University of Wuppertal. July 8, 2011. Archived from the original on October 1, 2011.
  70. ^ a b "Schumpeter: Taking flight". The Economist. September 17, 2009. Retrieved December 19, 2019.
  71. ISSN 1474-2659
    . Retrieved December 5, 2023.

Further reading

External links

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Political offices
Preceded by Finance Minister of Austria
1919 		Succeeded by
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