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Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and a giant in the history of economic thought.

Biography

Born in Třešť (then part of Austria-Hungary, now in the Czech Republic). He was always a brilliant student and praised by his teachers. He began his career studying Law at the University of Vienna under the great Austrian capital theorist Eugen von Böhm-Bawerk, taking his PhD in 1906. In 1909, after some study trips, he became a professor of economics and government at the University of Czernowitz (a German-language university in Austria, now in Ukraine), in 1911, at the University of Graz, where he remained until World War I.

In 1919-1920, he served as the Austrian Minister of Finance and, in 1920-1924, as President of the private Biederman Bank which collapsed in 1924 and left Schumpeter in bankruptcy. From 1925-1932, he held a chair at the University of Bonn, Germany.

Schumpeter had to leave central Europe because of the rise of the Nazis and moved to Harvard ---he had already lectured there in 1927-1928 and 1930 --- where he taught from 1932 to 1950. During his Harvard times he acquired a school of loyal followers: he taught Samuelson, Leontief, Galbraith, Haman, Bergson, among others.

His bad luck was that he was the contemporary of Keynes and, hence, his prestige among colleagues seemed a bit outdated and not in touch with then-fashionable Keynesianism.

Although Schumpeter encouraged some young mathematical economists and introduced mathematical economics ( Schumpeter 1906, 1946 ) at Harvard University; not to mention being even the founding president of the Econometric Society ( Schumpeter 1933), Schumpeter was not a mathematician but rather an economist and tried instead to integrate sociological understanding into his economic theories (Schumpeter 1919 ).

From 1945 to 1950 he was working on his, probably most famous, "History of Economic Analysis" which was published posthumously. He died on January the 8th 1950.

Schumpeter’s work

His major works and influence of macro-economic thinking are reflected by the following excerpt:

“……Adam Smith, make room: Joseph Schumpeter has come to Washington. Capital policy chiefs may not yet be wearing Schumpeter ties, but the Harvard economist's ideas are cited by everyone from former Federal Reserve chief Alan Greenspan to the warring parties in the Microsoft antitrust case……Schumpeter argued that capitalism exists in the state of ferment he dubbed "creative destruction," with spurts of innovation destroying established enterprises and yielding new ones. This view seems far more current than Smith's Newtonian notion of an "invisible hand" generating stability in the marketplace…..” ( Frank Rose 2000 )

The father of “Creative Destruction”

Schumpeter's most popular book in English is probably Capitalism, Socialism, and Democracy. Even after publishing this book in 1942, Schumpeter was overshadowed by John Maynard Keynes, who preached government spending as a way out of the Depression.

However, the tide has changed a lotin economics thinking at the beginning of the 21st century .

The Cambridge economist Joan Robinson found that Schumpeter "…has little love for socialism, and none at all for socialists. His natural sympathy is all with the heroic age of expanding capitalism….." Herself a leading theorist of imperfect competition, Robinson found Schumpeter's analysis of that subject the "most brilliant" part of the book: "…..his argument blows like a gale through the dreary pedantry of static analysis..."

Although Schumpeter had little to say about contrary evidence, especially in his argument about the fadeout of capitalism and its replacement by socialism, "…..The reader is swept along by the freshness, the dash, the impetuosity of Professor Schumpeter's stream of argument..." Whether or not the reader was totally convinced, "...this book is worth the whole parrot-house of contemporary orthodoxies, right, left, or centre…..”( Schumpeter 1934 ).

Another reviewer ( Dutch scolar Lambers ) put it even more succinctly: "….Schumpeter accomplished the feat of moving five layers of thought—the firm, the markets, the institutions, the cultural values, the leaders of society—as one interwoven dynamic process. With incomparable skill he made history go through time as one stream..…”

Schumpeter's core argument in Capitalism, Socialism, and Democracy is reducible to three major tenets:

The essence of capitalism is innovation ("creative destruction") in particular sectors. Certain standard tools of economics, such as static equilibrium and macroeconomic analysis, can therefore disguise reality and mislead scholars and students.
The virtues of capitalism—in particular its steady but gradual pattern of growth—are long-run and hard to see; its defects, such as inequality and apparent monopoly, are short-run and conspicuously visible.
It is dangerous for economists to prescribe "general" recipes, because political and social circumstances are always changing ( Schumpeter 1942 ).

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. This view however did not negate the fact that Schumpeter still believed that free market capitalism was the best economic system.

To that end, Schumpeter predicted that a full-labor economy would tend to lead firms to invest in new technology rather than raise product prices. Schumpeter’s predictions are consistent with the economic developments we have witnessed during the past few years.

Schumpeter lauded "creative destruction"-the term he used to describe how innovative products and processes make older ones obsolete-as the likely result of human progress. Indeed, Schumpeter’s theory is very much applicable to today’s economy.

Think about recent innovations charged with the task of "revolutionizing" an industry or lifestyle. Odds are, it was not too long ago. In celebrating technology, Schumpeter inherently (if not directly) recognized the creative expression of man ( Schumpeter 1942 ).

Schumpeter and entrepreneurship

The concept of entrepreneurship can not be fully understood without his contributions, being probably the first scholar to develop its theories. Schumpeter argued that the innovation and technological change of a nation comes from the entrepreneurs, or wild spirits. He came up with the German word Unternehmergeist, meaning entrepreneur-spirit. He believed that these individuals are the ones who make things work in the economy of the country. Later in the United States, he pointed out that the ones who really move the innovation and economy are the big companies which have the resources and capital to invest in research and development. Both arguments might be complementary today.

Business cycles

In the theory of business cycles, where he was following neither Walras nor Keynes, Schumpeter starts in The Theory of Economic Development 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. And the hero of his story, is, in fine Austrian fashion, the entrepreneur ( Schumpeter 1939 ).

A noticed characteristic of Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process is the author's attempt to turn business cycle patterns into predictive scientific wave theories borrowed from physics.

As Schumpeter wrote, "…..Barring very few cases in which difficulties arise, it is possible to count off, historically as well as statistically, six Juglars [ 8-10-year business cycles] to a Kondratieff [50-60 years] and three Kitchins [ 40 months] to a Juglar—not as an average but in every individual case……" Why this was so, he admitted, "…..is indeed difficult to see….." (Schumpeter 1911, 1993).

Kuznets, who wrote a comments on the book, conceded that "...Schumpeter had written a "monumental treatise" that raised all the right questions and did relate short-term business cycles to long-run economic movements".

Still, Kuznets wrote: "... business cycles are essentially quantitative phenomena. Instead of robust statistical argument, Schumpeter had presented the reader with "an intellectual diary," an account of his own "journey through the realm of business cycles and capitalist evolution, a journal of his encounters there with numerous hypotheses, diverse historical facts, and statistical experiments....."

The history of economic analysis

Schumpeter's vast erudition is apparent in his posthumous History of Economic Analysis, although some of his judgments seem quite idiosyncratic. For instance, Schumpeter thought that the greatest 18th century economist was Turgot, not Adam Smith, as many consider. These judgments are partly explained by his opinion that there is one general system of economic analysis, and Léon 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" (Schumpeter 1946 ). 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.

Much like Adam Smith and his followers, Schumpeter was a supporter of free markets. Whereas Smith was concerned with the effects of supply and demand on product price, Schumpeter looked at things differently. He focused on innovation, rather than price, as the dominant force in the business cycle. To that end, Schumpeter predicted that a full-labor economy would tend to lead firms to invest in new technology rather than raise product prices. Schumpeter’s predictions are consistent with the economic developments we have witnessed during the past few years.

He also argued that the family was the fundamental unit of the capitalist economy-an idea sustained by the Christian notion of subsidiarity. Plus, Schumpeter did unintentionally recognize the dangers of disassociating human morality from economics when he predicted that capitalism would fall due to business and government bureaucracy/corruption that can occur in the free market ( Schumpeter 1954 ).

Schumpeter and Keynesianism

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 liberal, at least in the classical European sense, rejected Keynesianism (Schumpeter 1936 ).

Schumpeter had openly derided the "stagnation thesis" introduced in Keynes's General Theory( Schumpeter 1946 ).This thesis holds that as a country grows richer investment opportunities shrink but the propensity to save increases; therefore savings and investment balance only at high unemployment. "…If valid….," wrote Smithies ( a Schumpeter’s former student ), "…..the long-run Keynesian argument provided an impregnable case for socialism……."

His legacy

In its issue ( in 2000 ) Business Week named Joseph Schumpeter "today’s hottest economist," citing his prescient analysis of the role of technology in the free economy. The article is useful because revisiting Schumpeterian thought presents the opportunity to review how a moral framework is so often required for a free-market system to serve the needs of mankind efficiently and humanely.

Two former treasury officials: secretary Lawrence Summers and his ex-deputy Bradford DeLong, observed that "…the economy of the future is likely to be 'Schumpeterian,'…. with creative destruction the norm and innovation the main driver of wealth. ….”

Products based on ideas - music, software, pharmaceuticals - require an enormous investment to develop but very little to keep making. And they're often subject to network effects, which reward those that achieve critical mass.

Together, these factors - high cost to create, minimal cost to produce, and a winner-take-all environment - tend to generate natural monopolies, at least until the next innovation comes along. How regulators should respond is debatable, but clearly the rules that governed manufacturing economies don't apply.

The concept of entrepreneurship can not be fully understood without his contributions, being probably the first scholar to develop its theories. And finally, The European Union's innovation program, and its main development plan, the Lisbon Strategy, are based on Schumpeter’s theories and ideas.

References
ISBN links support NWE through referral fees

Groenewegen, Peter, 2003. Classics and Moderns in Economics: Essays on Nineteenth And Twentieth Century Economic Thought: Vol. 2. Routledge. Chpt. 22, pp 203+.
Harris, S. E. (ed.), 1951. Schumpeter: Social Scientist. Harvard University Press.
Muller, Jerry Z., 2002. The Mind and the Market: Capitalism in Western Thought. Anchor Books.
Robbins, L. C., 1955, "Schumpeter's History of Economic Analysis," Quarterly Journal of Economics 69: 1-22.
Schumpeter, Joseph A. (1908) ,"Das Wesen und der Hauptinhalt der theoretischen Nationaloekonomie." Second Edition, Duncker & Humblot, Berlin 1970
Schumpeter, Joseph A. (1911), "Theorie der Wirtschaftlichen Entwicklung. Eine Untersuchung ueber Unternehmergewinn, Kaptial, Kredit, Zins und den Konjunkturzyklus" Eight Edition, Duncker & Humblot, Berlin 1993 (The Theory of Economic Development: An inquiry into profits, capital, credit, interest and the business cycle)
Schumpeter, Joseph A. (1942) "Capitalism, Socialism and Democracy" Harper & Row, New York 1975
Schumpeter, Joseph A., The History of Economic Analysis, published posthumously in 1954.
Schumpeter, Joseph A., "Über die matematische Methode der theoretischen Ökonomie", 1906, ZfVSV. *Schumpeter, Joseph A., The Nature and Essence of Theoretical Economics, 1908.
Schumpeter, Joseph A., "On the Concept of Social Value" , 1909, QJE
Schumpeter, Joseph A., "Marie Esprit Leon Walras ", 1910, ZfVSV.
Schumpeter, Joseph A., The Theory of Economic Development: An inquiry into profits, capital, credit, interest and the business cycle , 1911.
Schumpeter, Joseph A., Vergangenkeit und Zukunft der Sozialwissenschaft, 1915.
Schumpeter, Joseph A., "The Sociology of Imperialism", 1919, Archiv für Sozialwissenschaft und Sozialpolitik
Schumpeter, Joseph A., "Max Weber's Work", Der östereichische Volkswirt 1920
Schumpeter, Joseph A., "Carl Menger", 1921, ZfVS.
Schumpeter, Joseph A., "The Explanation of the Business Cycle", 1927, Economica
Schumpeter, Joseph A., "The Instability of Capitalism", 1928, EJ
Schumpeter, Joseph A., "Mitchell's Business Cycles", 1930, QJE
Schumpeter, Joseph A., "The Present World Depression: A tentative diagnosis", 1931, AER. *Schumpeter, Joseph A., "The Common Sense of Econometrics", 1933, Econometrica
Schumpeter, Joseph A., "Depressions: Can we learn from past experience?", 1934, in Economics of the Recovery Program
Schumpeter, Joseph A., "Review of Robinson's Economics of Imperfect Competition", 1934, JPE
Schumpeter, Joseph A., "The Analysis of Economic Change", 1935, REStat.
Schumpeter, Joseph A., "Review of Keynes's General Theory", 1936, JASA
Schumpeter, Joseph A., Business Cycles: A theoretical, historical and statistical analysis of the Capitalist process, 1939.
Schumpeter, Joseph A., "Alfred Marshall's Principles: A semi-centennial appraisal", 1941, AER.
Schumpeter, Joseph A., Capitalism, Socialism and Democracy, 1942.
Schumpeter, Joseph A., "John Maynard Keynes ", 1946, AER.
Schumpeter, Joseph A., Rudimentary Mathematics for Economists and Statisticians, with W.L.Crum, 1946.
Schumpeter, Joseph A., "Theoretical Problems of Economic Growth", 1947, JEH
Schumpeter, Joseph A., "Vilfredo Pareto", 1949, QJE.
Schumpeter, Joseph A., "Economic Theory and Entrepreneurial History", 1949, Change and the Entrepreneur
Schumpeter, Joseph A., "The Historical Approach to the Analysis of Business Cycles", 1949, NBER Conference on Business Cycle Research.
*Schumpeter, Joseph A., Ten Great Economists: From Marx to Keynes, 1951.
Schumpeter, Joseph A., Imperialism and Social Classes, 1951 (reprints of 1919, 1927)
Schumpeter, Joseph A., History of Economic Analysis, 1954.
Schumpeter, Joseph A., Economics and Sociology of Capitalism, 1991.

External links

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−	'''Joseph Alois Schumpeter''' ([[February 8]], [[1883]] – [[January 8]], [[1950]]) was an [[economist]] from [[Austria]] and a giant in the [[history of economic thought]].	+	'''Joseph Alois Schumpeter''' (February 8, [[1883]] – January 8, [[1950]]) was an [[economist]] from [[Austria]] and a giant in the [[history of economic thought]].