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Joseph Schumpeter

Joseph Alois Schumpeter (February 8, 1883January 8, 1950) was one of the greatest 20th century economists and one of the best read.

Born in Trest (then part of Austria-Hungary, now in the Czech Republic), he began his career studying under the great Austrian capital theorist Eugen von Bhm-Bawerk. He became a professor of anthropology at the University of Czernowitz (now Ukraine, then a German-language university) in 1911, then Graz, where he remained until the end of World War I. In 1919-1920, he served as the Austrian Minister of Finance; in 1920-1924, as President of the private Biederman Bank; both with fairly little success. From 1925-1932, he held a chair at the University of Bonn, Germany; having to leave central Europe because of the rise of the Nazis, he moved to Harvard, where he taught from 1932 to 1950. He wasn't generally considered to be a very good classroom teacher because he tried to pack too much into each lecture, but he acquired a school of loyal followers.

Although Schumpeter encouraged some young mathematical economists and was even the founding president of the Econometric Society (1933), 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's vast erudition is apparent in his posthumous History of Economic Analysis, although some of his judgments seem quite idiosyncratic and sometimes cavalier. For instance, Schumpeter thought that the greatest 18th century economist was Turgot, not Adam Smith, as many consider. Some of these judgments are partly explained by his opinion that there is one general system of economic analysis, and Lon Walras found it. Other economists are rated by how much of Walras' theory could be read into them. 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.

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. From the above, the reader might conclude that Schumpeter followed Walras and that his analysis shared nothing in common with Keynes. But this conclusion would be wrong, as illustrated by Schumpeter's The Theory of Economic Development. Schumpeter starts 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. The entrepreneur disturbs this equilibrium and is the 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 communist Nikolai Kondratiev's ideas on 50-year cycles, Kondratieff Waves.

Modern economists have not, however, been able to empirically confirm the existence of systematic business cycles and they attribute the major changes in growth to disturbances of an ad hoc character.

So 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, who was a conservative, rejected Keynesianism. Some have seen this to be partly due to jealousy - Schumpeter might have seen that he would be judged by history as the second-greatest economist of his day, and he knew who would be first. During his lifetime and even on his own campus, this certainly was the case; since the 1980s, however, this is at least not so clear anymore - the Wall Street Journal has called him "the most important economist of the 20th century."

Schumpeter's most popular book in English is probably Capitalism, Socialism, and Democracy. This book opens with a good treatment of Karl Marx. Schumpeter is quite sympathetic to Marx's analysis, although Schumpeter concludes capitalism will be replaced by socialism for non-Marxist reasons. It is in this book that Schumpeter's characterizes capitalism by the phrase "creative destruction" in which old ways of doing things are endogenously destroyed and replaced by the new. Schumpeter thinks that the success of capitalism will lead to a form of corporation and a fostering of values, especially among intellectuals, of hostility to capitalism. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism and it will be succeeded by socialism of some form or another. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. Schumpeter emphasizes that he is analyzing trends, not engaging in political advocacy. Some have thought John Kenneth Galbraith was influenced in his The New Industrial State by Schumpeter's views on corporations.

For some time after his death, Schumpeter's views were most influential among 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 as Schumpeter and were often also influenced by Keynes, Karl Marx, and Thorstein Veblen. Today, Schumpeter is a protagonist of the mainstream, not (yet) in academic economics ("standard textbook economics"), but in economic policy, management studies, industrial policy, and the entire area of innovation. The European Union's innovation program, and its main development plan, the Lisbon Strategy, are based on Schumpeter.

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Last updated: 05-07-2005 10:39:24
Last updated: 05-13-2005 07:56:04