Schumpeter, Joseph Alois 1883-1950

BIBLIOGRAPHY

Joseph Alois Schumpeter was born in Triesch, Moravia (now the Czech Republic), on February 8, 1883, an only child of a textile manufacturer. After his father’s premature death his mother married a high-ranking officer in the Austro-Hungarian army. Young Schumpeter enjoyed a typically aristocratic education—strong on the humanities, weak on mathematics and science—at the Theresianum in Vienna.

As a law student at the University of Vienna Schumpeter took courses in economics from Friedrich von Wieser (1851–1926) and participated in Eugen Böhm von Bawerk’s (1851–1914) seminars, joining other budding economists such as Ludwig von Mises (1881–1973) and Austro-Marxists Otto Bauer (1881–1938) and Rudolf Hilferding (1877–1941). He received his doctorate in 1906 and published his first book, Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (1908; still untranslated), a methodological treatise on economic theory. In 1909 he was offered a position as an associate professor in Czernowitz, capital of the southeastern crownland of the Austro-Hungarian Empire (now in Ukraine). In 1911 he was appointed to the chair of political economy at the University of Graz. By the outbreak of World War I he had already established an international reputation as an economist of the first rank: at the age of thirty he was awarded an honorary degree by Columbia University.

After unsuccessful excursions into politics and banking following World War I—he had served as secretary of state for finance for seven months in 1919 in the new republican Austrian government, and in 1921 he assumed directorship of the Biedermann Bank in Vienna—he returned to academia for good in 1925 as professor of public finance at the University of Bonn in Germany.

His sojourn in Bonn was overshadowed by the deaths of his beloved second wife and shortly afterward of his mother, blows from which he never recovered. Schumpeter’s permanent tenure at Harvard University began on September 1, 1932, and he was connected with the university continuously, except for two sabbatical leaves, until his death on January 8, 1950. Schumpeter was a founding member of the Econometric Society, and served as its president from 1937 to 1941. In 1948 he was elected, as the first European, president of the American Economic Association.

Schumpeter was an encyclopedic scholar, equally versed in history, sociology, and economics, with a stupendous knowledge in the history of economic thought. More than any other economist before him, with the possible exception of German social philosopher Karl Marx (1818–1883), Schumpeter highlighted the role of innovation for the performance of market capitalism. By innovation he meant the introduction of new production technologies and new goods, the conquest of a new supply of raw materials, the setting up of new organizations of industries, and the opening up of new markets. For Schumpeter entrepreneurial action conceived as innovation is the central feature of capitalism, and it forms the backdrop to his theories of credit, interest, capital, profit, and the business cycle. In Schumpeter’s scheme the entrepreneur as an agent of innovative change is a revolutionary, overturning tried and tested ways, departing from routine, resisting inertia, and producing novelty by putting extant resources to new uses. The carrying out of new combinations in production is the essence of “creative destruction,” a task accomplished by entrepreneurs.

Such bold and confident ways represent a distinct economic function. It is distinct from that of the inventor, the imitator, the capitalist, the banker, the manager, the landowner, and the worker. The entrepreneur may be any or all of these things, but if so it would be by coincidence rather than by nature of function. Neither is the entrepreneurial function necessarily tied to possession of wealth although it may be helpful, nor do entrepreneurs form a class in a sociological sense. It is not money per se that motivates entrepreneurs but rather the dream to found a private empire and the joy of getting things done against the odds.

The results of the entrepreneurially fueled innovation process being inherently uncertain, it is refractory to reduce them to mere calculation. The knowledge buttressing innovation need not be new, it is usually available knowledge that has not been deployed before at all, or else it is utilized in new ways. According to Schumpeter innovation is above all an act of will, depending on leadership, and should not be confused with scientific (or otherwise) invention. Schumpeter broke with tradition by denying that profit is a return to risk. Schumpeter argued that risk falls on the capitalist, not on the entrepreneur as entrepreneur, the latter as such being bereft of capital.

Schumpeter’s final great work published during his lifetime, Capitalism, Socialism, and Democracy (1942), focused on sociological aspects of capitalism, in particular the institutional structure of capitalist society. The paradoxical message emanating from his most popular book is that capitalism is doomed, not by its economic failure (as Marx averred) but by its success. Writing in the early 1940s, Schumpeter pointed to concrete tendencies within advanced capitalist society that he perceived as depleting its moral capital. He singled out the resentment capitalism breeds among intellectuals. According to Schumpeter capitalism had been disfigured by various historical tendencies to such an extent that it should really be called “socialism.” The transformations included the growth of interventionist governments, the advent of a managerial bureaucracy within both the public and private sectors, and the rise of a professional middle class with a mind-set completely at odds with that of the classic capitalist. These developments had been accelerated by economic depression and war. According to Schumpeter, socialism is merely the acknowledgment that they have taken place.

Among economists Schumpeter has been interpreted (rightly or wrongly) as saying that with the advent of large corporations and their generously funded research and development departments entrepreneurship and innovation would become increasingly routinized. The withering away of entrepreneurship would amount to innovation being reduced to a decision-making process amenable to rational calculation. This is precisely how the Soviet economy and its Eastern European satellites had set up their innovation systems (with disastrous consequences), on the assumption that innovation, being mere routine business, is plannable. Such a rationalistic approach to the innovation process would be incompatible with capitalist institutions.

In recent decades Schumpeter’s ideas on capitalism as “a method of evolutionary change” have instigated a renaissance in research on technological change led by economists, such as Richard N. Nelson and Sidney G. Winter (1982), favoring an evolutionary approach to economics. Indeed Schumpeterian economics is one of the main sources of evolutionary economics.

SEE ALSO Austro-Marxism; Capitalism; Entrepreneurship; Great Depression; Hilferding, Rudolf; Marx, Karl; Mises, Ludwig Edler von; Socialism; Technological Progress, Economic Growth

BIBLIOGRAPHY

Allen, Robert Loring. 1991. Opening Doors: The Life and Work of Joseph Schumpeter. 2 vols. New Brunswick, NJ: Transaction.

Dopfer, Kurt, ed. 2005. The Evolutionary Foundations of Economics. Cambridge, U.K.: Cambridge University Press.

Nelson, Richard R., and Sidney G. Winter. 1982. An Evolutionary Theory of Change. Cambridge, MA: Belknap Press of Harvard University Press.

Schumpeter, Joseph A. 1934. The Theory of Economic Development: An Inquiry into Profits, Credit, Interest, and the Business Cycle. Trans. Redvers Opie. Cambridge, MA: Harvard University. Translation of the second German edition published in 1926.

Schumpeter, Joseph A. 1939. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. 2 vols. New York: McGraw-Hill.

Schumpeter, Joseph A. 1942. Capitalism, Socialism, and Democracy. New York: Harper and Brothers.

Schumpeter, Joseph A. 1954. History of Economic Analysis. Ed. Elizabeth Boody Schumpeter. New York: Oxford University Press.

Stolper, Wolfgang F. 1994. Joseph Alois Schumpeter: The Public Life of a Private Man. Princeton, NJ: Princeton University Press.

Swedberg, Richard. 1991. Joseph A. Schumpeter: His Life and Work. Cambridge, U.K.: Polity Press.

Stephan Boehm