Schumpeter, Joseph A.
Schumpeter, Joseph A.
Joseph Alois Schumpeter (1883–1950) was born in Triesch, Moravia, into a middle-class family. His education at the Theresianum in Vienna was, however, aristocratic, as was the influence of his stepfather, a high-ranking officer in the Austro–Hungarian army. His extraordinary mind ranged over many fields—classics, history, law, the history of art, sociology, mathematics, and economics. He mastered several of these scholarly fields, but it was in economics that he made important original contributions.
Schumpeter’s first marriage, to an Englishwoman, took place in 1907; it lasted only a few months and ended ultimately in divorce. His second wife, whom he married in 1925, was an Austrian; she died in childbirth in the same year, and for a long time after her death Schumpeter withdrew from social life. He married again in the United States, in 1937, and was survived for a few years by his widow.
Academic career . Schumpeter spent most of his life as an academic. His first position, in 1909, was in Czernowitz (now in the U.S.S.R.). For him this was a somewhat exotic place, and he had a happy time there—including in his activities a duel with the university librarian over the rights of students to have freer access to books. Czernowitz must have provided an intellectually lively atmosphere, since the Austro-Hungarian monarchy seems to have used it as a sort of glamorous exile for its “young Turks.”
From Czernowitz Schumpeter moved to Graz, in Styria, a provincial capital whose lack of a frontier type of excitement was compensated for by its proximity to Vienna. During his tenure at Graz, Schumpeter visited the United States for the first time, as an exchange professor at Columbia University. After an interlude of political and business activity, he returned, in 1925, to academic life as professor of public finance at the University of Bonn. He remained at Bonn, except for one year in Japan and at Harvard, until 1932. Then, when internal political dissension prevented him from obtaining the chair of economics at Berlin, he went to Harvard. He stayed at Harvard until his death.
Schumpeter was elected president of the American Economic Association shortly before his death. He was also a founding member and president of the Econometric Society: although he himself did not become well qualified either in mathematical economics or in econometrics, he enouraged the development of both.
Nonacademic activities . Schumpeter’s forays into nonacademic life were as many-sided as his academic interests. In 1907 he became a junior partner in a law firm in Cairo. In 1918 he was for a brief time a member of the German socialization commission, and in 1919 he became minister of finance in the government of the new Austrian Republic. Both of these governmental positions were offered him despite the fact that he was not a socialist, because of his intellectual and professional qualifications and possibly because of his friendship, dating back to his student days, with Otto Bauer, the famous Austrian Marxist. Later he became president of a small Austrian bank.
The Cairo law practice was a success. On the other hand, hardly anyone could have solved Austria’s financial problems, given the domestic and international environment; and the same was true of the bank, whose failure was only one of the first in the series of Austrian bank failures that culminated in the collapse of the Creditanstalt. Even before the disintegration of the Austro-Hungarian monarchy, Schumpeter had written “The Crisis of the Tax State” (1918). In this work he anticipated the problems that Austria would face at the end of the war and predicted that political incompetence would vitiate possible solutions to her economic difficulties. The book still has relevance for the making of economic policy: it develops the theme that the state, as guardian of the common interest, is the necessary counterpart of the individual, particularly in a liberal capitalist economy, and it discusses the crucial role of budget and fiscal policy in the well-being of the economy.
Schumpeter’s interest in public policy continued when he was no longer in a policy-making position. Many of his articles for the Östeneichische Volkswirt and the Deutsche Volkswirt as well as some of his lectures at Bonn and Harvard dealt with such urgent current problems as tax policy, depression policies, and the New Deal; he was convinced that the New Deal was slowing down “natural” recovery.
Schumpeter as teacher . Despite all his interest in policy, practical affairs, sociology, and history, Schumpeter’s primary love was economics as a scholarly pursuit, and he was anxious to make good training in economics available to students. While in Germany he became involved in discussions of curricular reform, arguing that the training of economists and lawyers should be strictly separated; otherwise neither group would be adequately trained. His lectures at Bonn, ostensibly on public finance, were actually in large part discussions of Book v of Marshall’s Principles and other theoretical topics. At Harvard he taught one of the first modern courses in pure theory.
His lectures were never dull; often they were brilliant. But what distinguished Schumpeter’s lectures and seminars most was neither their brilliance nor their organization (which occasionally left something to be desired); rather, it was his persistent effort on all occasions, formal or informal, to make it possible for students to work out their own ideas. In nine years of attending his lectures and seminars in Bonn and at Harvard, I remember only two occasions when he talked about his own work and then only at the prodding of his students.
He spent much time with his students outside the classroom. In Bonn he frequently went on walks with them, discoursing, interrupting his walk suddenly to jot down an idea. At Harvard he regularly met his students socially. He also circulated a sheet of paper during each lecture on which six students signed up to see him. He was not the kind of teacher who provided his students with clear-cut answers, to the despair of the less-gifted students. But for others this method had a delayed effect that years later would make them sit up and exclaim, “So this is what Schumpeter meant!”
Because of Schumpeter’s many-sided gifts and the variety of fields to which he contributed, it is difficult to trace his intellectual ancestry. His teachers at the University of Vienna included Friedrich von Wieser, E. von Phillipovich, and E. von Böhm-Bawerk. But among all economists, he had the greatest ésteem for Leon Walras, and he thought very highly of English and American economists, particularly F. Y. Edgeworth and John Bates Clark. The similarity of Schumpeter’s thought to Marx’s has frequently been noted, although Marx’s influence on Schumpeter may have been overestimated because of Schumpeter’s ability to admire and understand Marx even when he disagreed with him.
Schumpeter was more aware than many other theoretical economists, the most notable exception being Marx, that economic reality is only a part of total reality. The division of the economic from the noneconomic was for him purely a matter of scientific convenience. He contributed significantly to the understanding of noneconomic, particularly sociological, phenomena, as in his synthesis, Capitalism, Socialism, and Democracy (1942). If his work lacks the mathematical precision he urged upon others, this was not the result of unclear thinking but of the complexity (one might almost say the messiness) of the problems he tackled.
Any brief characterization of an elaborate and subtle system is necessarily something of a caricature. Bearing this limitation in mind, Schumpeter’s vision of the economic process might be summarized as follows:
There is only one single historical reality, which consists of unique “events.” To understand this reality one must always be aware of its quality of uniqueness. But one must also realize that events are related to each other, not just simultaneously but over time. Simultaneous relationships are the subject of equilibrium theory; intertemporal relationships are the subject of dynamic theory. Both equilibrium theory and dynamic theory are necessary to explain any event at any given moment of time.
Statics and dynamics . The essential difference between statics and dynamics—a dichotomy that Schumpeter distinguished from the dichotomy between stationary and evolutionary—is not fully expressed by stating that dynamics involves time and statics does not. For Schumpeter static, or equilibrium, theory deals with processes of adaptation that are found in reality: he believed he could identify particular periods in history in which the economic system was “in the neighborhood of equilibrium.” His equilibrium, however, has no normative content; it is not in any sense an ideal state of affairs, a golden age.
It follows, therefore, that the dynamics that concerned Schumpeter was not the time sequence of adjustment to some change that had somehow occurred. Rather, he sought to discover what causes the movement away from equilibrium, what is responsible for the destruction of equilibrium. For reasons of scientific convenience, he centered his attention on those disruptions of equilibrium that arise inside the economic system, although he believed that equilibrium can also be disrupted by forces outside the economy, such as wars or natural catastrophes. (While for Marx, and certainly for Lenin, wars arise from the inner contradictions of capitalism, Schumpeter stressed the essentially pacific and constructive nature of capitalism and its evolution.)
Business cycles . The distinction between statics and dynamics is fundamental to Schumpeter’s ideas on the business cycle. It explains not only why a recession, being an adaptive phenomenon, must follow a boom, but also why a boom requires a different explanation from a recession. It shows both why historical data are needed to arrive at an explanation and how such data are fitted into a general framework and thereby become meaningful. It explains in what sense business cycles are essential to progress: business cycles occur because equilibrium is destroyed by innovations, and the economy must adapt to the destruction before there can be any further innovation. Finally, the distinction accounts for the institutional requirements that must be met if an economy is to remain dynamic. The essential institutional arrangements are two: first, scope for the operation of innovators, the Schumpeterian entrepreneurs; and second, the possibility for innovators to break into the circular flow of the economy, this being achieved through the creation of credit. Credit creation permits the entrepreneur to take resources out of the income stream for productive purposes before he has contributed anything to the income stream.
Schumpeter distinguished three types of business cycles, each of whose length depends on the disturbance that brought it about. He named the cycles for pioneers in business cycle theory. The shortest, the Kitchin cycle, is identified with inventory accumulation and decumulation lasting about three years. The medium cycle, of about 8–11 years, usually referred to as the business cycle, he named for Clément Juglar, and he related it to individual innovations, such as new textile machines, dynamos, electric motors, radios, and refrigerators. The long cycle, named for Kondratieff, is caused by the appearance of major innovations, such as railroads or electrification, which cannot be carried through in one “juglar.” Thus, long-run trends become part of cyclical phenomena and, indeed, can be understood as the result of shorterrun changes.
Schumpeter believed that each cycle consists of four phases. He characterized the recovery and recession phases as adaptive processes, while the upswing and depression phases represent movements away from the neighborhood of equilibrium, caused, respectively, by innovation and by such extrinsic and inessential phenomena as speculation, panics, or poor economic policies. The upswing and recession phases are essential to the capitalist process, but the depression and recovery phases are not. Since the acute social and personal hardships occur in the inessential phases, policy can eliminate them.
Development of Schumpeter’s system . Beginning in 1908, Schumpeter published a series of books in which he progressively developed these economic theories. His first major book was Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (1908), which was probably conceived during his days as a graduate student and written in Cairo. It was a brilliant statement of general equilibrium theory, making clear both what static theory could explain and what it could not. This was followed in 1912 by The Theory of Economic Development, which contained the first important vision of the “Schumpeterian system”— a term he would have abhorred. The book dealt primarily with dynamics—the entrepreneurial function, the role of the banking system, and the creation of credit. Finally, in Business Cycles (1939), he fleshed out the bones of theory with historical material. Moreover, Business Cycles contains numerous partial mathematical models.
Assessment of the system . Schumpeter’s detailed discussion of historical data in the context of his theory has, of course, led to criticism of his interpretation of particular facts. Also, it has been suggested that his emphasis on the innovating entrepreneur tends to limit his theory to the past. Schumpeter himself felt that reality fitted his three-cycle schema better than his theory warranted, since nothing in his theory required or even suggested any particular regularity of timing. He also felt that he had accomplished his task if he had adequately explained capitalism from the eighteenth century to the early twentieth century, and he apparently agreed that in the future trust-dominated capitalism and planned socialism might make his theory obsolete.
Many years later Schumpeter wrote that he was “trying to construct a theoretic model of the process of economic change in time, or perhaps more clearly, to answer the question how the economic system generates the force which incessantly transforms it” (Essays, pp. 158–159). Because of this, and despite his own skepticism about the future relevance of his theory, Schumpeter’s approach retains its usefulness in underdeveloped as well as in developed countries, and in socialist as well as in market economies. In order for there to be economic development, the Schumpeterian problem of when to introduce a change, when to introduce an investment, must be solved. There is nothing automatic about the introduction of new investments, and planners, in both market and socialist economies, must think like Schumpeterian entrepreneurs if their plans are to lead to self-sustaining growth. If a theory is understood to be a collection of formulas that can be applied with a minimum of analysis and thought, then Schumpeter’s theory is indeed obsolete. But if it is understood to be a view of the economy that enables a policy maker to ask pertinent questions and develop appropriate programs of action, then the relevance of Schumpeter’s thought to any changing economy cannot be doubted.
Schumpeter’s contribution to the history of economics, like his contribution to economic theory, developed over many years. The posthumously published History of Economic Analysis (1954) is an elaboration of his much earlier Economic Doctrine and Method (1914). Both are histories of economic theories, which Schumpeter believed develop in the same manner as do theories in the natural sciences. In other words, economic theories, unlike philosophies, are not self-contained and develop over time in a cumulative fashion. The History of Economic Analysis was published from an unfinished manuscript. It is, by any standard, an outstanding intellectual achievement. While it met with detailed criticism (for example, Schumpeter was charged with having been less than fair to the neoclassical economists), it is, of course, impossible to say to what extent these criticisms would have been avoided if Schumpeter had lived to finish the work.
Schumpeter also wrote many articles on monetary theory, relating monetary theory to his general view of development. As early as 1917, when it was not common to do so, he discussed money in relation to national income and economic policy. While he was writing a book on monetary theory, Keynes’s Treatise on Money appeared. Schumpeter admired the Treatise and insisted that all his students read it, but he felt that its substance required a complete rewriting of his own work.
Schumpeter considered from a sociological point of view a variety of phenomena that others had interpreted in mainly economic terms—imperialism, social classes, taxation, socialism, and even the entrepreneur. He attempted to relate economic phenomena to the larger social context. Thus, for example, he rejected the view that economic explanations can adequately account for the phenomenon of imperialism, which is an “atavism” of social structure and of emotional habits of an individual-psychological nature, and he stressed that any explanation of the entrepreneur must include the social and political conditions necessary for him to fulfill his functions.
Schumpeter brought together his sociological and economic analyses primarily in Capitalism, Socialism, and Democracy (1942), a work remarkable for its style as well as for its vision. Essential to his argument is his analysis of Marxian doctrine. Schumpeter did not think that capitalism shows the inherent contradictions that Marx claimed would lead to the immiserization of the masses and to revolution; nor does capitalism per se lead to imperialistic adventures or to wars. But he sympathized with the Marxian idea that the achievements of capitalism, which Marx himself had praised so highly, have their own inherent logic: because capitalism has a historic function to perform, it will come to an end as the function disappears. Socialism is possible, perhaps even inevitable, but what Schumpeter meant by socialism is different from what is commonly understood by the term.
Socialism is defined by Schumpeter as “an institutional pattern in which the control over means of production and over production itself is vested with a central authority—or, as we may say, in which, as a matter of principle, the economic affairs of society belong to the public and not to the private sphere” (1942, p. 167). This is quite consistent with the fact that “some freedom of action must be left, and almost any amount of freedom might be left, to the ’men on the spot,’ say, the managers of the individual industries or plants” (p. 168). It is noteworthy that the definition does not necessarily include ownership of the means of production.
Schumpeter made short shrift of the numerous reasons that have been adduced to prove the approaching collapse of capitalism. He argued that capitalism cannot be even approximately identified with perfect competition and, therefore, to criticize it for monopolistic practices or for temporary recessions misses the point. “Capitalism … is by nature a form or method of economic change and not only never is but never can be stationary” (1942, p. 82), and most criticism overlooks this essential fact.
The Achilles’ heel of capitalism lies elsewhere, namely in its achievements. The very success of capitalism will bring about its doom for two reasons: as societies grow richer, and production and productivity increase spectacularly, the need for further growth and for the specific contribution of the entrepreneur will disappear. Administrators can deal with what will become essentially routine problems, and the desiderata of economic life will shift. At the same time, the successes of capitalism will lead to an increasingly hostile intellectual environment, to a trahison des clercs, in which entrepreneurs will find it increasingly difficult to fulfill their essential function. Schumpeter was also prepared to consider that the process of innovation might itself become more and more routine. He foresaw the eventual triumph of socialism, but he thought its chances for success and indeed its relevance negligible in precisely those situations where most people believed (and still believe) it necessary—to make poor economies grow.
Economically, capitalism has performed miracles, and in another fifty to one hundred years it will have created such a powerful productive machine as to eliminate poverty. (Indeed, Schumpeter’s own projections—in Chapter 5—have already been far surpassed.) Culturally, capitalism has brought about the spread of a rational and pacific view of the world: “Modern mathematico-experimental science developed . . . not only along with the social process usually referred to as the Rise of Capitalism, but also outside … of scholastic thought and in the face of its contemptuous hostility” (1942, p. 124). The same is true of painting and literature.
Schumpeter also discussed the problem of the transition to socialism. The socialism that can work is one that comes “in the fullness of time,” when the problem of poverty has been solved by the preceding creation of a powerful productive economy. Schumpeter believed that he and Marx were basically in agreement on this point:
Evolution was for him [Marx] the parent of socialism. He was much too strongly imbued with a sense of the inherent logic of things social to believe that revolution can replace any part of the work of evolution. . . . The Marxian revolution therefore differs entirely, in nature and in function, from the revolutions both of the bourgeois radical and of the socialist conspirator. It is essentially revolution in the fullness of time. … To say that Marx, stripped of phrases, admits of interpretation in a conservative sense is only saying that he can be taken seriously. (1942, p. 58)
If socialism is built on a powerful productive economy, then the problems of transition will be negligible; if this condition does not obtain, these problems of transition may jeopardize the success of socialism. Schumpeter also considered the rationality of socialist decision making, first discussed by Enrico Barone in 1905, and the human problems involved.
According to Schumpeter, socialism can be run on democratic lines. His definition of democracy may not, however, command general assent—an “institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote” (p. 269). What will actually happen will depend on many accidents as well as on the inherent logic of social (including economic) evolution: “.. . there is little reason to believe that. . . socialism will mean the advent of the civilization of which orthodox socialists dream. It is much more likely to present fascist features. That would be a strange answer to Marx’s prayer. But history sometimes indulges in jokes of questionable taste” (p. 375).
It is difficult to present Schumpeter’s thought in a brief form: its complexity is such that the many pages Schumpeter himself devoted to it are entirely necessary. This complexity might have prevented the development of a Schumpeter school, even if he himself had not actively discouraged its formation. Moreover, it is not easy to locate Schumpeter in a history of economic analysis: although he was an Austrian by birth and training, he was not an “Austrian” economist. He belongs to that recent trend in economics that is characterized by an absence of schools of economic thought, though not of good economists. The economists Schumpeter himself trained will never put reality into the straitjacket of any particular theory; they will be able to use any logical theory while remaining conscious of the variety and uniqueness of the real social and economic problems.
Wolfgang F. Stolper
1908 Das Wesen und der Hauptinhalt der theoretischen Nationalokonomie. Leipzig: Duncker…Humblot.
(1912) 1934 The Theory of Economic Development: An Inquiry Into Profits, Capital, Credit, Interest, and the Business Cycle. Harvard Economic Studies, Vol. 46. Cambridge, Mass.: Harvard Univ. Press. → First published as Theorie der wirtschaftlichen Entwicklung.
(1914) 1954 Economic Doctrine and Method: An Historical Sketch. London: Allen … Unwin. → First published as Epochen der Dogmen- und Methodenge-schichte.
(1918) 1954 The Crisis of the Tax State. International Economic Papers 4:5–38. → First published as Die Krise des Steuerstaats.
(1919–1927) 1951 Imperialism and Social Classes. New York: Kelley. → First published as “Zur Soziologie der Imperialismen” (1919) and “Die sozialen Klassen im ethnisch homogenen Milieu” (1927). A paperback edition was published in 1955 by Meridian.
(1942) 1950 Capitalism, Socialism, and Democracy. 3d ed. New York: Harper; London: Allen…Unwin. → A paperback edition was published by Harper in 1962.
(1954) 1964 History of Economic Analysis. Edited by E. B. Schumpeter. New York: Oxford Univ. Press. → Published posthumously.
Aufsätze zur ökonomischen Theorie. Edited by Arthur Spiethoff and Erich Schneider. Tubingen (Germany): Mohr, 1952.
Aufsätze zur Soziologie. Edited by Arthur Spiethoff and Erich Schneider. Tübingen (Germany): Mohr, 1953.
Dogmenhistorische und biographische Aufsätze. Edited by Arthur Spiethoff and Erich Schneider. Tübingen (Germany): Mohr, 1954.
Essays. Edited by Richard V. Clemence. Cambridge, Mass.: Addison-Wesley, 1951. → Contains essays first published between 1909 and 1950.
Ten Great Economists: From Marx to Keynes. New York: Oxford Univ. Press, 1951. → Contains essays first published between 1910 and 1950. A paperback edition was published in 1965.
Haberler, Gottfried 1950 Joseph Alois Schumpeter: 1883–1950. Quarterly Journal of Economics 64:333–372.
Haberler, Gottfried 1951 J. A. Schumpeter, 1883–1950. Pages 24–47 in S. E. Harris (editor), Schumpeter: Social Scientist. Cambridge, Mass.: Harvard Univ. Press.
Harris, Seymour E. (editor) 1951 Schumpeter: Social Scientist. Cambridge, Mass.: Harvard Univ. Press.
Kessler, Martin 1961 The Synthetic Vision of Joseph Schumpeter. Review of Politics 23:334–355.
Schumpeter, Elizabeth B. 1950 BIBLIOGRAPHY of the Writings of Joseph A. Schumpeter. Quarterly Journal of Economics 64:373–384.
Smithies, A. 1951 Memorial: J. A. Schumpeter, 1883–1950. Pages 11–23 in S. E. Harris (editor), Schumpeter: Social Scientist. Cambridge, Mass.: Harvard Univ. Press.
Spiethoff, Arthur 1949 Josef Schumpeter: In Memoriam. Kyklos 3:289–293. → Dated 1949, but published after Schumpeter’s death in 1950.
Wright, David McCord 1950 Schumpeter and Keynes. Weltwirtschaftliches Archiv 65, no. 2:185–196.
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