Joseph Alois Schumpeter (1883 –1950) was an Austrian-American economist who became known for his theories of capitalist development and business cycles, and for his views on the importance of entrepreneurs and innovation. He published his first papers in the age of 22. He was one of the youngest doctor laureates in Austria, the youngest private docent, the youngest professor in Austria etc. (Schipper, 2000). He is arguably the founder of evolutionary economics.
He taught at Harvard from 1932 to 1950 and was there during the great depression of the 1930s and 1940s. Joseph Schumpeter completed three more books while at Harvard: his didactic Business Cycles (1939), his popular Capitalism, Socialism and Democracy(1942) – in which he famously predicted the downfall of capitalism in the hands of intellectuals – and his encyclopedic, History of Economic Analysis (1954). These three books, and Schumpeter’s “The History of Economic Analysis”, published posthumously in 1954, are regarded as great treasures in the world of economics (Arena & Dangel-Hagnauer, 2002).
Schumpeter predicted the sociopolitical disintegration of capitalism, which, he maintained, would be undermined eventually by its own success because it would create a class of intellectuals who would attack it. In addition, government controls would destroy the entrepreneur and innovation and would lead to a form of socialism. When he was a teacher at Czernowitz, now in the Ukraine, he wrote his Theory of Economic Development in 1911, where he first outlined his famous theory of entrepreneurship. According to this theory, growth occurred usually in spurts because competition and declining profit inspired entrepreneurs to innovate. This developed into a theory of the trade cycle also known as the business cycle, and into a notion of dynamic competition characterized by his phrase “creative destruction”. Schumpeter explains a certain “circular flow” which, excluding any innovations and innovative activities, leads to a stationary state. The stationary state is, according to Schumpeter, described by Walrasian equilibrium. The entrepreneur disturbs this equilibrium and is the cause of economic development, which proceeds in cyclic fashion along several time scales. By connecting the factors of innovations, cycles, and development in his theory, Schumpeter supported the ideas of Russian communist Nikolai Kondratiev’s on 50-year cycles, Kondratieff Waves. Schumpeter distinguished three types of business cycles, naming them for earlier pioneers in business cycle theory (Arena & Dangel-Hagnauer, 2002). The length of each depends on the disturbance that causes it. The shortest (Kitchin) cycle derives from inventory changes and usually lasts about 3 years. An intermediate (Juglar) cycle depends on relatively minor innovations, such as radar or electronic calculators, and runs its course in 8 to 11 years. The long (Kondratieff) cycle lasts 40 to 60 years and is caused by sweeping innovations such as electrification or jet flight (Byrns, 2005). In Schumpeter’s theory, Walrasian equilibrium is not adequate to capture the key mechanisms of economic development. One needs the innovation of an entrepreneur to capture it. A well developed capitalist financial system including a whole range of institutions for granting credit will be the best way to enable the entrepreneur to realize his or her vision.
Schumpeter’s prologue to a section of his 1942 book, Capitalism, Socialism, and Democracy opens with the line, “Can capitalism survive? No. I do not think it can”. In this book, Schumpeter concludes that capitalism will be replaced by socialism for non-Marxist reasons. He characterizes capitalism with the famous phrase “creative destruction”. “Creative destruction” denotes a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one” (Schumpeter, 1942). In other words, creative destruction occurs Creative destruction occurs when innovation makes old ideas and technologies obsolete. He argues that there is a tendency for firms to acquire a degree of monopoly power. Competition no longer takes place through the price mechanism but instead through innovation. Successful innovation may come from new entrants to a market, thus blowing “gales of creative destruction” through the economy. Schumpeter theorized that “a static capitalist system, one that does not increase wealth, but merely maintains it, only increases wealth through the “creative destruction” of innovation. Such innovation comes from the entrepreneur, who discovers or invents cheaper production processes, new products or technologies which lower costs or create new markets” (Arena & Dangel-Hagnauer, 2002). Moreover, in this book, Schumpeter says that the success of capitalism will lead to a form of corporation and a fostering of values, especially among intellectuals, of hostility to capitalism. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism and it will be succeeded by socialism of some form or another (Arena & Dangel-Hagnauer, 2002).
His magnum opus in the area was “The History of Economic Analysis”, that was published posthumously in 1954. In it Schumpeter postulates that all human action has the capacity for moral significance and this holds true in the world of economics; certain economic conditions produce an abundance of goods and services, and moral people attempt to determine whether these arrangements respect the human dignity and God-given rights of those involved. Indeed, if not tempered with the moral reasoning that comes from religion, the workings of the free market are subject to corruption (Arena & Dangel-Hagnauer, 2002).
To conclude, it is best to say that Schumpeter’s legacy is difficult to assess. He was a conservative man with revolutionary concepts in the field of economics. Schumpeter remains unclassifiable in the realm of modern economists.
Bibliography
Byrns (2005). Joseph Alois Schumpeter 1883-1950. Web.
Schipper, C. Burkhard (2000). Joseph A. Schumpeter: Curriculum Vitae. Web.
Arena, Richard and Dangel-Hagnauer, Cecile (2002), The Contribution of Joseph Schumpeter to Economics. Routledge Publishers. London.