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(1883-1950)
Joseph Allois Schumpeter
 
:American Scholar, Summer91, Vol. 60 Issue 3, p371, 22p
McCraw, T.K.
SCHUMPETER ASCENDING
A Schumpeter boom has been underway for about a decade now, animated by several different trends. One is the relative rise of the German and Japanese economies and the corresponding decline of the British and American, all of which are hard to explain using only Keynesian and neoclassical methods of analysis. Another is a re-emerging intellectual interest in each of the three mainstays of the Schumpeterian system: entrepreneurship, innovation, and economic development. Whether or not the Age of Keynes is in fact giving way to the Age of Schumpeter, as a German scholar has argued in the American Economic Review, Schumpeter's life and work are ripe for re-examination. His life alone is the stuff of melodrama. As Paul Samuelson, the best of his many famous pupils, once put it, Schumpeter was a great scholar and personality, but "his comparative advantage was if anything almost greater as a personality."
He was born in 1883, the same year as Keynes. It was also the year in which Karl Marx died. His birthplace was Triesch, Moravia (now part of Czechoslovakia), where his bourgeois Catholic family had long been involved in the textile business. Joseph ("Jozsi," as he was called) was an only child. When he was four, his father died. When he was ten, his thirty-two-year-old mother, whom he adored, married a man twice her own age, a retired lieutenant general in the Austro-Hungarian army. The new family then moved to Vienna, where Jozsi's mother became a dedicated social climber, mixing with the aristocratic society of this glittering capital of the dual monarchy.
Between the ages of ten and eighteen, Jozsi attended the There sianum, a well-known preparatory school for high-born Austrian boys. Without his aged stepfather's connections, he could never have qualified for this school. Clearly, his mother's second marriage had been undertaken with just this kind of opportunity in mind. As Schumpeter's Harvard colleague Gottfried Haberler later remarked, Jozsi acquired at the Theresianum his lifelong aristocratic bearing, his "sometimes quaintly overpolite old-world manner." Afterward, he went on to take his law degree at the University of Vienna, graduating in 1906.
His real interest was not law but economics, which was then taught by the law faculty according to the custom of Continental Europe. At that time, Vienna was the best place in the world to study economics, as Cambridge, England, would become in the 1920s, Cambridge, Massachusetts, in the 1940s, and perhaps Chicago in the 1960s. Schumpeter's teachers included Friedrich von Wieser and Eugen von Bohm-Bawerk. He had as seminar mates Ludwig von Mises as well as several bright young Marxists such as Rudolf Hilferding and Emil Lederer. The Marxian view of capitalism as a dynamic process profoundly influenced not only these young men but also Schumpeter himself.
In other fields of intellect besides economics, fin de siecle Vienna provided an exciting ambience. Psychoanalysis was being developed by Sigmund Freud. In art, the contours of Modernism were being shaped by the painting of Gustav Klimt, the architecture of Otto Wagner, the music of Arnold Schoenberg. So Schumpeter could hardly have grown up in a more stimulating milieu.
After graduation he spent a summer term in Berlin and then a longer period at the London School of Economics as a research student. He had a glorious time in England, visiting Oxford and Cambridge, taking in concerts and plays, weekending at country houses. As many of Schum peter's friends later remarked, the combination of his bourgeois birth and aristocratic boyhood created serious tensions, but all were resolved in favor of upper-class values. "He adopted," said his student and Harvard colleague Arthur Smithies, "the manners, the habits, and the tastes of an aristocrat."
In 1907, at the age of twenty-four, Schumpeter married the very attractive young daughter of an official in the Church of England. Soon the two went off to Egypt, where Schumpeter managed the financial affairs of an Egyptian princess, kept a stable of horses, and practiced law. He also completed and brought out his first book, a long treatise on economic theory. This was in 1908, when he was only twenty-five years of age.
The book, entitled Das Wesen und der Hauptinhalt der theoretischen Nationalokonomie (The nature and substance of theoretical economics), has never been translated into English, although, significantly, a Japanese edition appeared in 1936. Schumpeter's purpose in writing it was to introduce a more rigorous theoretical framework into German economics. At the time, in the aftermath of the notorious Methodenstreit led by the historicist Gustav Schmoller on one side and the theorist Carl Menger on the other, German scholarship remained relatively hostile to theory. Schumpeter's admiration of the highly theoretical system of Leon Walras, the French-born mathematical economist who pioneered marginal analysis and led the Lausanne School, is evident throughout the book. To the end of his life he regarded Walras as the greatest of all economists.
Schumpeter also foreshadowed in Das Wesen another lifelong prejudice: a disinclination to apply theory prematurely to economic policymaking. At the same time, he accepted neoclassical tools and hypotheses, such as static analysis, perfect competition, and the constant tendency toward equilibrium. These basic tenets of the neoclassical system, set forth by Walras and others, would not all survive intact in Schumpeter's future writings.
In 1909, he left Egypt and returned to Austria. The publication of Das Wesen had won him immediate recognition as an economist of outstanding promise, and he was appointed professor at the University of Czernowitz, located in the easternmost part of the Austro-Hungarian Empire. According to Schumpeter's own accounts, this city, now a part of the Soviet Union, was extremely "eastern" and exotic. In later years he liked to regale friends with the lessons in advanced sensuality he enjoyed during his time there. (In much the fashion of Benjamin Franklin, Schumpeter sought the company of beautiful women throughout his life.) He was fond of saying that he had aspired to become the greatest economist, lover, and horseman in Austria, or, as he sometimes put it, the world. Then came the punch line: things hadn't worked out well with the horses.
In 1911, through the influence of his mentor Bohm-Bawerk, he moved to a better school, the University of Graz. He remained there for nearly a decade, even though he still hated being away from Vienna and took frequent trips to the capital. Yet at Graz he proved to be an extraordinarily facile and prolific scholar. In 1912, he published Theorie der wirtschaftlichen Entwicklung (The Theory of Economic Development), a path-breaking book that linked the name Schumpeter permanently with the idea of entrepreneurship.
In the hypothetical system he describes in this book, which begins with a "circular flow" analogous to the static system of Walras and other neoclassicists, economic routine is periodically interrupted by bursts of entrepreneurial energy. These bursts come in clusters. Together they disrupt equilibrium, and this dynamic process, says Schumpeter, is the basis of economic development. More than that, it embodies the essence of capitalism. Here, as in his later work, Schumpeter is primarily concerned with the phenomenon of economic evolution. Most economists, then and to this day, have contented themselves with the study of static systems of exchange governed by "laws" of supply and demand. Schumpeter, on the other hand, as he himself later put it in a rare autobiographical letter, "began at an early age to look upon economic life essentially as a process of change, and I tried to make the main features of this change the center of my own type of theory." Hence his preoccupation with entrepreneurship. Hence also his careful specification of broad categories of development: the opening of a new market, the conquest of a new source of supply, the reorganization of an industry, the introduction of a new good or new way of production.
Schumpeter always assigned a vital role to entrepreneurship, a factor of production that he thought had never been well understood. John Stuart Mill and Alfred Marshall had written about it, and others used the term as well, although no good English equivalent to the French word has appeared even to this day. Marshall's equating of entrepreneurship with "management" seemed sensible enough, but in fact it missed the essence of the entrepreneurial function. In trying to communicate the true role of entrepreneurship, Schumpeter shows in The Theory of Economic Development early signs of becoming, as he did, one of the great aphorists in the history of economic thought: "The upper strata of [a capitalist] society are like hotels which are indeed always full of people, but people who are forever changing." Also, "Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it." As this second quotation implies, Schumpeter saw tremendous obstacles to successful innovation. Vested interests would fight it at every turn, and so the energy required of entrepreneurs must be all the greater.
The last element in The Theory of Economic Development is "the swarm-like appearance of entrepreneurs." A concentration of innovative behavior in certain periods of time constitutes the underlying cause of the business cycle under capitalism. In making such an argument, Schumpeter related entrepreneurship to the most difficult analytical problem of capitalist economies: the "jerky disturbance" of equilibrium--not any gentle ebb and flow, but rather something of an altogether "different order of magnitude." Overall, The Theory of Economic Development is a tour de force of imaginative synthesis. It represented the earliest expression of a coherent system of ideas that made Schumpeter famous throughout the world. Coming from a man only twenty-eight years of age, it was a remarkable performance.
Two years later, he brought out yet another book, this one a concise, penetrating analysis of the history of economic thought. Thus, barely out of his twenties, he had produced two major theoretical treatises and an intellectual history of his discipline, in addition to a score of important articles. Although he was never offered a professorship at the University of Vienna, probably because of his arrogant and mercurial temperament, it was now clear that Schumpeter was the most promising Continental economist of his generation. In 1913, he made his first trip to the United States as an exchange professor at Columbia, which recognized his achievements with the award of an honorary degree. At the time he was still only thirty. But he was about to experience a prolonged interruption in his focused routine as a scholar.
When the Great War began in August 1914, Schumpeter's wife was visiting England, and she did not return to Austria. The marriage had failed long before this time, but it was not actually dissolved until the 1920s. Schumpeter, a lifelong pacifist, made no secret during the war of his pro-British sympathies, even though he remained ambitious to make a name and place for himself in Austria. He now became more and more deeply involved in national politics. He talked of severing Austria's alliance with Germany and making a separate peace with the Allies. For a reconstituted Austro-Hungarian Empire, he urged leadership by the aristocracy, a monarch with strong powers over parliament, and limited liberties for the press. (Years later, Arthur Schlesinger, Jr., accurately described Schumpeter as "a reactionary without illusions.") He also showed signs of political opportunism.
In 1919 he was appointed finance minister in the new coalition government of Austria, under the sponsorship of socialist friends from his university years. He was not a success. Given the irresistible pressures of currency inflation, the finance ministry proved an impossible portfolio, and after seven months he was forced out of office.
With his political ambitions scotched, Schumpeter now became president of a private bank in Vienna. After five years, he again had to confess failure. Worse, he was now insolvent, and for the next decade he had to put aside part of his earnings toward the repayment of debts. Yet even at this low point in his life he still had the priceless asset of his worldwide reputation as an economist. When in 1925 he decided to return to academia, he first accepted an offer to be a guest professor in Japan. But soon an invitation came from the University of Bonn, and he accepted that instead. As his friend Haberler recalled, Schumpeter "never forgot" that a Japanese and a German university had afforded him this chance. "His sentimental attachment to both countries and his sharp reaction to chauvinistic wholesale condemnation of the German and Japanese peoples and their culture during the Second World War had one of its roots in that experience." In 1931, he spent several months lecturing in Japan, and he later wrote of the "bonds which unite me to Japan and especially to Japanese economists." He had gone to Harvard as a visiting professor in 1927; he returned for a second visit in 1931, and accepted the offer of a permanent position there in 1932. He was then forty-nine years of age. He remained at Harvard until his death eighteen years later, in 1950.
In 1925, when he was forty-two, Schumpeter had married Annie Reisinger, a beautiful twenty-two-year-old woman whom he had met when she was a girl. Tragically, Annie died in childbirth only a year later, and the child died as well. In this same year, Schumpeter's mother also died, and he never fully recovered from the triple emotional shock. For the rest of his life he was troubled by bouts of melancholy, sometimes to the point of clinical depression. Yet he continued to play the outward role of Continental bon vivant. It was a measure of his loss that after winding up his and his dead mother's affairs he never again set foot in Austria. After leaving Germany for Harvard, he never revisited that country, though he summered annually in Europe for three more years. After 1935, he never returned to Europe at all.
In his early years at Harvard, Schumpeter lived in a large Cambridge house with the aged widower Frank Taussig, a distinguished economist whom he deeply admired. In 1937, Schumpeter married Elizabeth Boody, herself an economist, a well-to-do New Englander, and the divorced wife of a leftist book dealer. Her wealth, devotion, social connections, and comfortable houses in Cambridge and the Berkshires brought to Schumpeter's life a warmth and stability he had not known since his Vienna boyhood.
Although thrice married himself, Schumpeter counseled his young associates against marriage, often in very strong terms. "I want to apologise for [Wassily] Leontief," Schumpeter wrote Keynes in 1933 about a manuscript the future Nobel laureate had submitted to the journal Keynes edited. "He has indeed produced what I consider a most original and interesting piece of work but then instead of finishing the article he got married in spite of my disapproval of this step." Domesticity tended to douse the fires of inspiration, Schumpeter believed, especially during one's "sacred third decade." Perhaps thinking of his own precocity, Schumpeter always believed that one's best epiphanies come between the ages of twenty and thirty.
As a teacher and a personality, Schumpeter cut a striking figure in Harvard Yard. John Kenneth Galbraith, who arrived in Cambridge at about the same time, remembered him as "a slightly swarthy man of solid frame and a little less than average height. He had an amused and expressive face and an unremitting love for company and conversation. . . . Given the choice between being right and being memorable, Schumpeter never hesitated." He talked constantly, with anyone and everyone. He was forever jotting down thoughts on tiny scraps of paper and stuffing them into his pockets in no apparent order. As his surviving (and chaotic) personal papers show, he cut up incoming letters into small squares to feed his insatiable requirements for more scraps of paper. His student Samuelson recalled him as "a great showman" who spoke without notes to large audiences in an unforgettable Viennese accent. "Clothes were an important part of the show," Samuelson recalled, and Schumpeter required at least an hour to dress himself each morning. The young Mrs. Samuelson, according to her husband, kept careful track of the "cyclic reappearance of the seemingly infinite number of combinations in his wardrobe: the cycle was not simple, and it was far from random."
As a teacher Schumpeter was profligate with his time. He lavished attention mainly on his many Ph.D. students, but spent time also with hundreds of undergraduates, some of whom inevitably were dullards. He gave A's to far too many students, encouraging them beyond their capabilities. He heaped even more attention on the work of colleagues, spending endless hours talking about projects and marking up drafts. Yet he asked no one to reciprocate. His own work remained private until he was ready to publish.
Within the economics department and the university, Schumpeter was never as influential as one might expect, given his worldwide reputation. He was less popular with his own age cohort than with students and young colleagues, perhaps because he was too fond of being the center of attention and of expressing unconventional views. "These pronouncements," one of his young colleagues (Seymour Harris) recalled, "reflected a peculiar trait in Schumpeter: his unwillingness to stand with the majority, whether it be on matters of foreign policy or an appraisal of the merits of a dry martini." Sometimes his perverseness became a serious problem. During the early 1940s, Schumpeter openly denounced what he regarded as the anti-German (as opposed to anti-Nazi) hysteria then abroad in America. He thereby alienated a few of his close friends, some of whom believed that he harbored feelings of anti-Semitism. If he did, they were never much in evidence. During the 1930s, while he was rooming with Taussig, who was himself of Jewish descent, he assisted displaced European scholars, Jewish and non-Jewish alike, in securing jobs in America.
Intellectually, on matters of economics, Schumpeter remained open minded almost to a fault. He saw something useful in nearly all approaches, and in turn was respected by economists across the doctrinal spectrum. One of his warmest admirers was Paul Sweezy, a young Marxist who assisted him in the graduate course on theory. Like many economists, Sweezy found it amazing that in all of Schumpeter's courses he omitted any reference to his own distinguished body of work. Instead, he played the devil's advocate. He had, wrote Sweezy, that "rarest of all qualities in a teacher--he never showed the slightest inclination to judge students or colleagues by the extent to which they agreed with him. Keynesians (regularly in a substantial majority after 1936) and Marxists (often in a minority of one as long as I was in Cambridge) were equally welcome in his circle. He didn't care what we thought as long as we did think."
Methodologically eclectic, Schumpeter nevertheless insisted on three cardinal principles. He regarded economics as a "science" more akin to physics than to the run of social sciences. He held as an article of faith that all good economics must include theory, history, and statistics. And he relentlessly evangelized in favor of econometrics. His own earliest publications took a mathematical approach, and he later helped to organize the Econometric Society and served as its president. Yet, typical of the contradictions within his character, he himself was not a first-rate mathematician like his friend Ragnar Frisch or his pupil Samuelson.
Though outwardly a blithe spirit, Schumpeter in fact was an obsessive worker. He spent evenings, nights, weekends, and vacations reading and writing. He held himself to impossibly high standards, and his self-discipline became almost superhuman. In his diary he graded himself: zero for a bad day, one if he had been unusually productive, and something in between for routine performances. He earned few ones. A similar system was employed for longer units of time: weeks, months, years.
With all of his manifest brilliance and his pose of unremitting gaiety, Schumpeter remained a deeply wounded man--a refugee adrift in an inhospitable world, a man without a country. The culture of the dual monarchy and the comfortable stimulation of fin de siecle Vienna were now as distant as classical Greece. Edwardian England, where he had also felt at home, was equally remote, part of the dead past. With the disappearance of the world of his youth, he was now "completely qualified," as Samuelson put it, "to play the important sociological role of the alienated stranger."
Among Schumpeter's surviving manuscripts is the fragment of a novel he worked on from time to time. The novel's protagonist is a person of mixed social background whose father dies when he is four, leaving him with a strong mother who is ambitious to make him a gentleman. As he matures, it becomes evident that he is possessed of superlative gifts, yet is deprived by circumstance of a true home. Eventually, as an adult, he finds redemption, or at least consolation, in his work:
And for modern man his work is everything--all that is left. . . . Doing efficient work without aim, without hope. . . .
No family.
No real friends.
No woman in whose womanhood to anchor.
II
Few scholars have ever worked as productively as Schumpeter over so long a time. His first published article appeared in 1905, his last in 1950. His total output comprises 260 items, including fifteen books, two of which exceed one thousand pages. Not many economists, if any, have attracted more interest from scholars in other disciplines. Critical evaluations of his work first appeared in 1907 and have continued in a steady stream. In recent years, a flood of studies about him and his work has been published. By 1990, when a thorough bibliography appeared, the list contained about two thousand items devoted partly or entirely to his work. (In 1991, just after this essay was completed, there appeared two more books of unusual importance: Opening Doors, a remarkably perceptive two-volume biography by Robert Loring Allen, from Transaction Publishers; and Joseph A. Schumpeter: The Economics and Sociology of Capitalism, a collection of Schumpeter's articles with a long biographical introduction by Richard A. Swedberg, published by Princeton University Press.)
Schumpeter was a brilliant, multilingual speaker, comfortable in all major European languages except Russian. Samuelson once estimated that he had addressed a larger number of professional scholars in more countries and on more occasions than had any other economist in history. In 1948 Schumpeter was elected president of the American Economic Association, the first foreign-born scholar to hold that office. In 1949 he was chosen president of the International Economic Association, the highest honor then open to an economist.
Given his acknowledged greatness, it is striking not how extensive Schumpeter's influence on other economists has been, but how limited. There is no Schumpeterian school. His system is so broad and inclusive, so imbued with historical and sociological meditations, that, in economic jargon, it is "difficult to operationalize." Unlike Keynes, Schumpeter seldom addressed public policy issues. He made it a point of honor never to advance a program of economic reform. He insisted that such activity by economists was secondary to purely "scientific" work and likely to damage it. Here he was especially hard on English economists. Often he referred to the "Ricardian Vice" of abstracting complex matters into simple formulae and then leaping into policy debates, brandishing the abstract model as a universal prescription for action. He found Ricardo and Keynes guiltiest of such "sins," Adam Smith and Alfred Marshall a little less so.
His friend Haberler once wrote that no Schumpeterian school of thought developed precisely because Schumpeter's attraction to economics was purely intellectual. He was never a reformer in the mold of Marx, Mill, or Keynes. It took strong partisanship and constant argumentation to sustain a school, and Schumpeter shrank from both. When he left the University of Bonn in 1932 to come to Harvard, he said in a farewell address, "I have never tried to bring about a Schumpeter School. There is none and it ought not to exist. . . . Economics is not a philosophy but a science. Hence there should be no `schools' in our field." Shortly after Schumpeter's death, Samuelson wrote in a eulogy that "he did leave behind him the only kind of school appropriate to a scientific discipline--a generation of economic theorists who caught fire from his teaching."
One final reason for the absence of a school of followers pertains to Schumpeter's unbridled style of presentation. Though a first-class phrasemaker, he was capable of composing sentences containing hundreds of words. His mind was so fertile that one thought led pell-mell to another, sometimes without the intervening discipline of conventional syntax. Here his curious reluctance to submit drafts for critical pruning cost him dearly. Today, in an age of minimalism, reading him is like listening to the music of Richard Wagner. As Virgil Thomson once said, Wagner could not "criticize his own work with the objectivity that the quality of genius in it demanded. As a result, every score is a sea beach full of jewelry and jetsam." The same is true of Schumpeter. Between gems of brilliant writing come extended flights of digression.
His immensely long Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process (1939) is a case in point. This book, which he worked on throughout the thirties, contains a staggering amount of data and interpretation. Intended as a magnum opus, it went far beyond the subject of its title to engage the huge agenda implied in its subtitle. In the end, it became a curious mixture of wisdom and folly.
The folly has to do with Schumpeter's attempt to fit the facts of economic history into pseudo-scientific wave theories developed by other scholars: "six Juglars [ten-year cycles] to a Kondratieff [sixty-year cycles] and three Kitchins [forty-month cycles] to a Juglar." Why such patterns would appear, he admits, is "difficult to see." Indeed it is. As a historical proposition it approaches nonsense, partaking, as Samuelson unkindly remarked, of "Pythagorean moonshine."
The wisdom in Business Cycles comes in Schumpeter's discussion of innovation as the core of the capitalist process. He goes so far as to define capitalism as a system in which innovation is the engine of all movement, all growth: "Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capitalist propulsion." The barriers to innovation, he makes clear, were often psychological. "It was not enough to produce satisfactory soap, it was also necessary to induce people to wash." He goes on to say that the spread of innovation, and its clustering in some industries and in some periods of time, determines the behavior of the business cycle. This is a bottom-up, microeconomic interpretation of the cycle, as opposed to the Keynesian top-down analysis, which accords transcendent importance to money and other macroeconomic forces. Whereas Keynes emphasized monetary and fiscal policies, Schumpeter focused on leading industrial sectors: textiles in the eighteenth century, railroads in the nineteenth, electricity in the twentieth. Here the reader is treated to some uncommonly fine examples of the Schumpeterian way with words:
Stabilized capitalism is a contradiction in terms.
History is a record of "effects" the vast majority of which nobody intended to produce.
Cycles are not, like tonsils, separable things that might be treated by themselves, but are, like the beat of the heart, of the essence of the organism that displays them.
Entrepreneurs were not necessarily strangled [the inventor of a loom for weaving ribbon having been strangled by order of the Danzig municipal authority in 1579] but they were not infrequently in danger of their lives.
Schumpeter took great pains to show that from the medieval period to the present time, innovation has remained difficult for incumbent producers to accept. This has been true for not only technological but also organizational innovations, such as the rise of giant corporations. He saw real dangers in the antagonism of Americans toward big business, especially because it seemed rooted in their historic antipathy toward monopoly. Thus it was hatred based on false analogy, traceable to colonial times and opposition to royal absolutism and prerogative.
Writing in the thirties, Schumpeter lamented the rise of the New Deal and what it implied for the survival of capitalism. In his view, the American government was simply unable to cope, given the separation of powers, the absence of a real civil service, and the public's antistatism. He contrasted the American system unfavorably with that of Britain, whose constitutional monarchy and career civil service he especially admired. In Depression America, Schumpeter complained:
The tact, the reserve, the savoir-faire which are second nature to a seasoned bureaucracy were alike absent. Enthusiastic individuals and groups developed their own policies and tried to push them with Congress and the public, scornfully refusing counsels of self-denial and patience.
Here we see not only prophetic insights, but personal alienation as well. As a cultured legatee of the dual monarchy, Schumpeter felt marooned in the midst of the New Dealers' ignorance and arrogance. Yet he also deplored the intellectual flabbiness of his fellow conservatives: "When I see those who espouse my cause, I begin to wonder about the validity of my position."
In 1939, reviewers found it difficult to cope with Business Cycles, or even to characterize it. Two critics did notice an implicit distaste for macroeconomic theorizing, referring to Schumpeter's "rather despised `aggregative theories,' " and his "vigorous stand against `the curse of aggregative thinking.' " Today, with our own retrospective of half a century, it is apparent that precisely here lies the difference between Keynesian and Schumpeterian ways of looking at things, both for economic analysis and the workings of public policy. It is a profound difference and a hint for our own time of why some scholars believe the Age of Schumpeter may now be displacing the Age of Keynes as a means of understanding contemporary reality.
Yet Schumpeter was never in the same league with Keynes as a political strategist. While Keynes ardently wanted to shape public policy, Schumpeter remained fastidiously above the fray. Perhaps it was all for the best. As an advocate, Schumpeter was completely undisciplined. Compared with Keynes's General Theory (1936), which, as Schumpeter himself noted, concedes nothing to the opposition and contains nothing not directly supportive of its argument, Schumpeter's Business Cycles is a mishmash. At three times the length of Keynes's book, it manages to say perhaps a fourth as much. It never addresses the issue of employment or of national economies as aggregates, which were the two breakthroughs of the Keynesian analysis. As a magnum opus, it was a tragic failure.
Three years after Business Cycles, Schumpeter made a spectacular recovery with Capitalism, Socialism and Democracy. The best known of all his works, it has been translated into fifteen languages, has gone through numerous reprintings, and still sells well. Although Schumpeter liked to disparage it as a mere potboiler in comparison with his earlier books, it is in fact one of the best analyses of capitalism ever written, and perhaps the best. As the Cambridge economist Joan Robinson wrote in her review, Schumpeter's argument "blows like a gale through the dreary pedantry of static analysis." Whether or not the reader was totally convinced, "this book is worth the whole parrot-house of contemporary orthodoxies, right, left, or centre." Today, two generations after its appearance, it retains its seminal quality.
The detached, ironic, pessimistic tone of the book seems to owe something to the harsh reception of Business Cycles three years before. It is as if the author, disillusioned by the failure of his huge effort to explain business cycles, decided to say exactly what he thought on a wide range of subjects, of which economics was only one. Hence the unusual breadth and reach of the book, reflected in its sales and also in citations by scholars from many disciplines.
Besides its superb chapters on Marx, the book's analysis of competition makes it especially useful in understanding the economic world of our own time. Schumpeter begins by contrasting the theoretical universe of the classical economists, beginning with Adam Smith, with the reality of modern industrial enterprise. He turns his searchlight on neoclassical hypotheses about monopoly and perfect competition, and he finds both deficient as dominant analytical tools for the study of market behavior.
In economic theory, "perfect competition" is an abstract state of affairs in which infinite numbers of buyers and sellers confront each other in a stable marketplace. Each has perfect information, all transactions are costless and frictionless, and all decisions are completely rational. Schumpeter recognized that this perfect competition model remained essential for some theoretical exercises, but he contrasted it with actual conditions in modern business. Much of industry was in fact characterized by constantly evolving oligopoly and, for purposes of theory, was not nearly as amenable to precise mathematical modeling as were situations of pure monopoly and perfect competition. With oligopoly, "there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoves, an indefinite state of warfare between firms."
The industrial structure we see before us is the climax of an "organizational development," the capstone of a series of long evolutionary steps from crafts to factories to oligopolies. Fundamentally, it is a "process of industrial mutation--if I may use that biological term--that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."
Here Schumpeter introduces his oxymoronic metaphor of "creative destruction"--the sweeping out of old products, old enterprises, and old organizational forms by new ones. It is one of the most memorable images in all of economics, perhaps second only to Adam Smith's "invisible hand." He could hardly have been more emphatic about its importance: "This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in."
Analytically, this implies that a proper economic evaluation of capitalism must contain a large dose of history. It must proceed longitudinally, with an extended time frame:
Every piece of business strategy [a term now commonplace in corporate circles but invented here by Schumpeter] acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull. . . . The usual theorist's paper and the usual government commission's report practically never try to see that behavior, on the one hand, as a result of a piece of past history and, on the other hand, as an attempt to deal with a situation that is sure to change presently--as an attempt by those firms to keep on their feet, on ground that is slipping away from under them. In other words, the problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them. As long as this is not recognized, the investigator does a meaningless job.
Another implication of thinking historically, Schumpeter adds, is greater analytical emphasis on marketing and product quality. In turn, the traditional theorist's obsession with price should diminish: "In capitalist reality as distinguished from its textbook picture, it is not [price] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)."
Schumpeter argues that the very nature of giant, capital-intensive enterprise requires strategic behavior not contemplated by orthodox economic theory except to the extent that the theory holds such behavior to be monopolistic. The practical problem arises when American public policy becomes directed against big business per se. "Rational as distinguished from vindictive regulation by public authority turns out to be an extremely delicate problem which not every government agency, particularly when in full cry against big business, can be trusted to solve." Doubts about the competence of regulators "crowd upon us particularly when we see the legal mind at work." As a matter of historical record, long-standing cases of monopoly, or even of price rigidities, are almost unknown. Yet, "economists, government agents, journalists and politicians in this country obviously love the word [monopoly] because it has come to be a term of opprobrium which is sure to rouse the public's hostility against any interest so labeled."
For Schumpeter, this was an ominous misconception. To him it seemed plain that big business, far from exploiting the common man, had raised the general standard of living to unprecedented levels. Organizational innovation, not monopoly status, was responsible for the great success of industrial giants. They should be prized, not denounced. Above all, they should be understood for what they are and how they evolved. Although some monopoly gains to individuals might accompany this evolutionary process, the advantage is temporary. Under capitalism, the idea of a permanent monopoly is laughable, especially in manufacturing. Whatever fleeting gains accrue are best understood as "entrepreneurial profits which are the prizes offered by capitalist society to the successful innovator." Conversely, the economic sectors closest in fact to the theoretical model of perfect competition would perform more efficiently "if controlled, each of them, by a dozen good brains."
Somewhat rashly, Schumpeter credited capitalism with all gains made during the industrial revolution. Stretching his argument to the limit, he rejected any distinction between capitalist enterprise and technological progress. Instead, the two "were essentially one and the same thing," in the sense that "the former was the propelling force of the latter."
Even so, Schumpeter argues, capitalism contains the seeds of its own destruction, not for economic but for sociological reasons. Capitalism is so materially productive that it creates and supports a class of intellectuals who reject the bourgeois values essential to the operation of the economic system. (Here, in this book published in 1942, and also in an essay written fifteen years before that, was Schumpeter's flat prediction of the rise of what later came to be called the New Class.) Productive though capitalism is, it doesn't inspire much idealism. "The stock exchange is a poor substitute for the Holy Grail." Similarly, those who excel at making money usually lack charismatic appeal. "A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose--both in the drawing room and on the platform." Overall, while the philosophical case for capitalism is strong, it is inordinately subtle. It lies beyond the intellectual capacity of the majority of observers, including most economists. "Why, practically every nonsense that has ever been said about capitalism has been championed by some professed economist." Most important, the case for capitalism "must rest on long-run considerations." In the short run, it is impossible for most people, even intellectuals, to put "[excess] profits and inefficiencies" out of their minds and focus instead on long-range trends.
Reading Schumpeter on capitalism is a lot like reading George Kennan on foreign policy. Like Kennan's argument, Schumpeter's is a cry from the heart of a sensitive elitist who has observed at firsthand one twentieth-century catastrophe after another; and who has just witnessed in America--the best hope of a capitalist commonwealth--what seem to his aristocratic eyes to be the incipient death throes of civilized society.
For Schumpeter, the tragedy of contemporary America had not come sooner because, in the nineteenth century, "the scheme of values that arose from the national task of developing the economic possibilities of the country drew nearly all the brains into business and impressed the businessman's attitudes upon the soul of the nation." Now, in 1942, after more than a decade of economic depression, a sea change had occurred, accompanied by radical new political departures. The New Deal, in Schumpeter's view, was hostile to (and worse, ignorant of ) the motivating ethos of capitalism. He made no secret of his feeling that any soak-the-rich scheme, however justified in the short run by sins of the rich and needs of the poor, must in the end destroy those very bourgeois values undergirding the entire capitalist structure.
Given that Schumpeter was writing in the late 1930s and early 1940s, as World War II and the rise of powerful socialist and fascist states dominated intellectual discourse, it is little wonder that he would give vent to his inherent pessimism. He now foresaw not only the decline of capitalism, but also the eventual triumph of socialism, which he detested. He believed socialism might work because, unlike capitalism, it inspires people to noble ends, to something larger than themselves. In this it resembles the pre-secular world of the Middle Ages. "Socialism aims at higher goals than full bellies, exactly as Christianity means more than the somewhat hedonistic values of heaven and hell." Socialism implies "a new cultural world," one worth the sacrifice of some economic efficiency. For the truly committed, "socialist bread may well taste sweeter to them than capitalist bread simply because it is socialist bread, and it would do so even if they found mice in it."
Capitalism, Socialism and Democracy was not Schumpeter's last book. During the 1940s he labored over an immense treatise on the history of economic thought from Plato to the present. For this task he closeted himself in the Kress Library, the rare book room at the Harvard Business School that contains the world's finest collection of pre-1850 writings on economics. Here in this "scholar's Paradise" (as he and his wife called it), far from the excitement of World War II, deliberately insulated from the political and policy disputes that drew so many of his colleagues to wartime Washington, he plowed through a huge corpus of economic writings, analyzing each in its turn.
At the time of his death in 1950, the book remained unfinished. Its fugitive pieces lay scattered, partly in typescript, partly in his own handwriting. His wife undertook the labor of assembling the manuscript from scores of separate pieces that she found in her husband's Harvard office, their Cambridge home, and their summer house in Taconic, Connecticut. The resulting text, published in 1954 under the title History of Economic Analysis, is so monumental that it invites comparison with Dr. Johnson's Dictionary as a work of vast scholarship that came from a single intellect. The 1,260-page text is closely printed and runs to nearly one million words. Some fifteen hundred writers are discussed.
At the start of the book, Schumpeter insists, as he did on other occasions, that the proper study of economics requires three elements: theory, statistics, and history. Here, in his last testament, he expresses a preference for the third. "If, starting my work in economics afresh, I were told that I could study only one of the three but could have my choice, it would be economic history." He also makes a special point, as he had done forty years earlier in his first book, to warn against premature policy applications. He complains that economists from Adam Smith onward have "indulged their strong propensity to dabble in politics, to peddle political recipes, to offer themselves as philosophers of economic life," without always acknowledging or even being aware of their own value judgments.
Economists' habitual argument in favor of free trade, for example, expresses much more than an autonomous economic principle. It carries with it a whole congeries of other doctrines and policies without which it makes no sense either as an ideology or a freestanding element of statecraft. It implies anti-colonialism, national self-determination, consumer sovereignty, and political individualism.
Although free trade was the economic signature of Victorian England, Schumpeter was struck at how the great English economists of that period exhibited a "complete lack of imagination" in their overall vision. "Those writers lived at the threshold of the most spectacular economic developments ever witnessed. Vast possibilities matured into realities under their very eyes. Nevertheless, they saw nothing but cramped economies, struggling with ever-decreasing success for their daily bread." At bottom, "they were all stagnationists." Even Mill, the most perceptive of them, "had no idea what the capitalist engine of production was going to achieve."
Schumpeter goes on to say, in one of the most vivid passages in History of Economic Analysis, that the Victorians simply lacked style:
The business and professional classes lived, as a rule, uninspired lives in ugly homes that dishonored the elements of past styles they combined; bought ugly furniture of similar type and nondescript pictures; supported a theatrical and a musical tradition of which the glories were inherited from the past; and read a literature that was largely commonplace in all varieties except the professionally scientific one.
History of Economic Analysis ends with a long but incomplete evaluation of John Maynard Keynes. The "stagnationism" Schumpeter detected in Mill and others culminated, he believed, with the career of Keynes, whose intuition of an England in decline shaped his overall "vision" as an economist. This, Schumpeter argued, had crucial consequences for the direction of economic thought, given Keynes's dominant influence on the next generation of theorists. Conceding at once that Keynes was the greatest English economist since Ricardo, Schumpeter criticized him for sharing Ricardo's propensity to apply theory directly to policy, "the habit of piling a heavy load of practical conclusions upon a tenuous groundwork." Keynes, the consummate student of money, misconstrued the nature of capitalist industry. He "assumed not only that methods of production remain unchanged but also that the amount of industrial equipment does not vary. This restricts his analysis to very short periods of time (3-10 months). Moreover, since technological change is the essence of the capitalist process and the source of most of its problems, this assumption excludes the salient features of capitalist reality."
Even worse, Keynes's focus on a high "propensity to consume" as a way to end the Great Depression overthrew the classical orthodoxy that saving was an unalloyed virtue. In the Keynesian system, saving might be "really a vice that was the cause not of capital formation but of unemployment and capital destruction." In the most ironic of twists, this line of reasoning "attracted many people who had for other reasons renounced allegiance to the values of capitalist society, and thus made Keynesian doctrine--not quite logically--the banner of economic radicalism."
True, Keynes's General Theory represented an authentic breakthrough, a triumph of both analysis and relevance to contemporary problems. But Schumpeter, who was always interested in the sociology of knowledge, insisted that Keynes's achievement was specific to a particular time and place, that his theory was not a "general" one at all. "As in the case of Ricardo, it was the intellectual performance spiced by the--real or putative--relevance to burning questions of the time which achieved what, in our field, neither could have achieved by itself." Thus, Schumpeter ends his huge work with a measured but harshly critical evaluation of Keynes, his own great rival.
III
In the contrast between Schumpeter and Keynes, one can see both the problems and the virtues of different styles of economic analysis. One can also see how the utility of the analysis depends on time and circumstance. For Schumpeter, the personal engine driving Keynes's own dauntless energy was his determination to influence public policy and, specifically, to protect the interests of Great Britain. Although Britain had lost her industrial primacy, the City of London remained the financial center of the world. From this circumstance derived Keynes's emphasis on monetary factors and, beyond that, his characteristic focus on aggregates rather than on sectoral analysis. Keynes, writing during the 1930s, seemed to promote any policy that might increase the propensity to consume.
Yet once the Great Depression was over, such a policy--often advocated by American Keynesians more than Keynes himself--tended to discourage savings and justify huge fiscal deficits. Equally important, it promoted a generalized policy activism at the aggregate level, thereby shifting attention from individual sectors or industries. Thus, there developed an affinity between Keynesianism and the path of economic policy in America and Britain during the postwar period, and a parallel consistency between Schumpeterian tenets and the industry-specific policies followed by Japan and West Germany.
Keynes's famous witticism, "In the long run we are all dead," epitomized his preoccupation with the short run. "No wonder Schumpeter protested," commented Arthur Smithies, a student of Schumpeter's and himself one of the leading experts on postwar fiscal policy. "Even if short-run policies were based on some notion of the common good rather than on the flow of the political tides, they would be anti-capitalistic in his view. . . . Short-run inequity is the price that must be paid by the masses for the rising living standards that capitalism can achieve." Keynesianism in general encouraged the view that governments can and usually do see the path toward the common good and are capable of acting on it. "Schumpeter must have felt all this to be exceedingly naive," wrote Smithies, and one of Schumpeter's great contributions was to show that effective state action was far more difficult, far more tortuous, than the Keynesians ever dreamed.
Schumpeter criticized Keynes not only on general grounds of assuming too much capability in the public sector, but also for focusing on aggregate management rather than on more mundane but less politically tractable problems of particular industries. For all his brilliance and patriotism, wrote Schumpeter, Keynes refused to "bend the full force of his mind to the individual problems of coal, textiles, steel, shipbuilding, and instead supported resolution of England's difficulties through `monetary management.' " This kind of comment nicely foreshadows the industrial policy debates in the United States during the 1980s. And, again, it suggests the parallel between the Keynesian system and American policy versus the Schumpeterian system and Japanese policy.
Beginning in the 1930s, Schumpeter was widely read in Japan. As Haberler once wrote, his teaching and writing "had a profound influence on Japanese economists among whom he has many devoted disciples. Most of his books are translated into Japanese; he was mourned there at the time of his death and even the daily newspapers published full length obituaries." Arthur Smithies agreed. Japan is "the country that has probably extended [Schumpeter] more esteem and admiration than any other." Smithies attributed this to Japan's determination to develop its economy and the obvious pertinence of Schumpeter's work to that task. It was all a matter of timing, of relevance to the country's stage of development. "His acclaim in Japan leads one to reflect on what might have happened in Europe had he written Economic Development at the same time as Marshall wrote his Principles rather than twenty years after."
Haberler and Smithies may have overstated their case, and certainly any direct influence of ideas on policy is notoriously hard to trace. Yet it remains true that the Schumpeterian paradigm is a useful way to look theoretically at the way the postwar Japanese economy has evolved. If one did choose to infer the ideas behind policies followed by bureaucrats in elite Japanese economic ministries, those ideas reflect Schumpeterian tenets more than Keynesian or Smithian ones.
Schumpeter's affinity with what many Japanese refer to as their own national "way of thinking" has many facets. His extraordinary tolerance of different economic theories is reflected in the Japanese willingness to use any theory that works. Schumpeter's ability to hold apparently conflicting thoughts in his mind parallels the distinctive religious pluralism in Japan, where Buddhist, Shintoist, Confucian, and Christian doctrines are not only tolerated, as they are in the United States, but are often followed simultaneously by the same persons, with no necessary sense of inconsistency.
Then, too, Schumpeter's attitude toward big business is echoed in the Japanese way of thinking about that subject. Perhaps because large-scale commercial enterprise, such as the Mitsui zaibatsu (which dates from the middle seventeenth century), preceded industrialization, Japanese culture has seldom looked with much fear on big companies. In addition, the Japanese state has always been powerful and has never, like the American federal government during the 1880-1910 period, seemed in danger of being dwarfed by the power of giant corporations. Most important of all, since the Meiji Restoration of 1868, economic development in Japan has been the highest public priority. Large and efficient companies, therefore, have usually been regarded not as evil monopolies but as national treasures. There is even a Japanese phrase, yuryo gaisha (literally "good company") that has no counterpart in English, much as the American word antitrust is not easily translatable into Japanese.
Schumpeter made it clear that the preservation of capitalism required powerful political adjustments and careful management by elite bureaucracies. When big business replaces small-and medium-sized firms, a nation's politics changes: "The very foundation of private property and free contracting wears away in a nation in which its most vital, most concrete, most meaningful types disappear from the moral horizon of the people." In Japan, the bureaucracy has seen to it that these elements (notably the agricultural, wholesale, and retail sectors) are protected and thus continue to vote conservatively. This has kept the conservative party in power, and in turn has enabled the system to keep producing at a high rate of expansion in the big-business, export-oriented sector. Schumpeter's ideas about interposing protective strata between the political state and the business system are embodied in a honeycomb of formal and informal institutions in Japan, much more so than in the United States.
Schumpeter, like Marx before him, may well have exaggerated the general dominance of the large corporation, in the sense that both he and Marx believed it would make small business and its personnel (owners, managers, workers) obsolete. This is because neither Marx nor Schum peter fully understood the principle of industry segmentation. Most industries never become big business, and most people in most countries never have worked for large firms. This is not a matter of estimate or judgment, but of statistical fact. Small companies were and still are a prime source of employment and also of innovation, even if they are created by entrepreneurs for the purpose of being bought up later by large corporations. In Japan, the situation is further complicated by the presence of multiple layers of contracting companies, many of which are exploited by the giants but continue to be sources of innovation.
To the extent that small- and medium-sized companies remain healthy, the Schumpeterian forecast of a collapse of capitalism because of the loss of bourgeois support itself collapses. In Japan a good deal of official attention is paid to this issue, not by attacking giants but by assisting smaller companies, which usually are not in direct competition with the giants anyway, at least in product markets. When direct competition does appear, as in the retail sector, public policy favors the mom-and-pop shopkeepers.
Given his fondness for paradox, Schumpeter would have relished the spectacle of a powerful Marxist influence in Japanese academic circles. This influence has persisted alongside the concurrent hegemony of the Liberal Democratic party, the conservative coalition that has remained in power since the late 1940s. What would have surprised Schumpeter, as Samuelson once remarked, is the remarkable success of the Japanese mixed economy, with its "characteristic amalgam of capitalism and bureaucracy."
Schumpeter often pointed out that the virtues of capitalism are apparent only in the long run, but that taking the long view is extraordinarily difficult. It has now become a commonplace that Americans characteristically take the short-run view, Japanese the long. This difference in perspective has obvious consequences for the making of policy in the two countries. The typical American view is the snapshot, while the Japanese way of thinking prefers an extended series of images--the cinema, not the snapshot. In specific industrial situations, this long-run evolutionary view assumes that protectionism is a good idea in some circumstances and free trade is a bad idea. It assumes that a short-term monopoly position rewards and therefore encourages innovation, and thus is not something to which public policy must direct hostile attention. At bottom, the Japanese view, like the Schumpeterian, is grounded in a vision of capitalism as a dynamic process, a roiling ferment of constant and relentless innovation. And since, in international competition, the Japanese have been using long-term strategies based on these very assumptions to defeat their American competitors, the Age of Schumpeter may in fact have been upon us for some time now.
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