Joseph Schumpeter’s Impact on Modern Political Economy Essay

There are many political scientists, theorists, and economists, who have already made considerable contributions to the field of political economy and improved understanding of different political movements and theories. Joseph Alois Schumpeter remains to be one of the most prominent and conservative American economists with Australian roots, who discussed the peculiarities of economic science, analyzed the problems of entrepreneurship, and developed new socio-economic systems in the 20^th century.[¹]

In fact, the role of Joseph Schumpeter in the world of political economy is crucial and cannot be neglected as this economist offered a new vision of the theory of economic development, underlined the role of innovations in entrepreneurship, and created a solid basis for the improvement of the existing economic policies that are still used in the modern-day political economy.

In this paper, the evolution of the thoughts and approaches developed by Schumpeter in the 20^th century will be given to explain how and why Schumpeter identified entrepreneurship as a crucial economic aspect and used innovations as the main contribution to economics. Besides, the comparison of Schumpeter’s ideas with the ideas of another political theorist such as John Keynes should help to understand why Schumpeter chose another way of thinking and focused on new aspects of the political economy.

Joseph Alois Schumpeter was one of the economists, who understood his role and impact on the development of the political economy. He did not try to hide his desire to share his opinions, and he wanted to leave as much material as possible for his followers and supporters. At the same time, he did not intend to write a lot about himself and his life. It is hard to find some primary sources about the life of this economist. Therefore, the investigations of other writers help to read some extracts from the original Schumpeter’s writing. In one of his letters to Steward Morgan, he shared several facts from his early life:

I am an Austrian by birth, born in 1883 in a village called Triesch in what was then a province of the Austro-Hungarian Empire… I was educated in Vienna, and following up an impulse which very early asserted itself, I then traveled about for a few years studying economics from various standpoints and began to give lectures on Economic Theory at the University of Vienna in 1909, in which year I also was appointed to a chair of Economics in Czernowitz… I was called to the University of Graz in 1911, and in 1913-141 acted as what was called an exchange professor at Columbia University…[²]

Such rich experience and the fact that it was his personal desire to connect his life with economics proved that Schumpeter was one of the best examples of how passionate and devoted to the chosen field a person could be. Joseph Schumpeter was involved in numerous discussions about entrepreneurship and its development in terms of capitalism. He tried to explain that it was not enough to use inventions.

It was not important to understand how entrepreneurs’ innovations could influence the world of economics and promote the development of new products and organizational forms. He introduced several important terms, and “creative destruction” [³] was one of the most influential concepts that helped to understand the nature of possible political and economic innovations and their effects on the price movement in the existing market system.

One of the ideas developed by Schumpeter was based on the essence of the economic theory and the necessity to analyze it because the current economic system could not change “capriciously on its initiative” but stayed “connected with the preceding state of affairs.”[⁴] He focused on various economic doctrines that could demonstrate the evolution of different economic approaches. Schumpeter never neglected such an issue as logic in economics. It was his main distinctive feature that attracted the attention of other economists and theorists.

His theory of economic development was based on the recognition of several internal factors such as the needs of individuals, who were involved in different economic operations and process, and the external conditions that could influence the economic process in a variety of ways, e.g. consumption of goods or intentions to try innovative products.[⁵] Schumpeter’s theory was an attempt to combine the ideas of theoretical, historical, and statistical analysis of economic evolution.

On the one hand, his actions and ideas were similar to those of the neoclassical theorists. On the other hand, the idea that economics could be developed, as well as such terms as ‘economic growth’ and development, was new to the representatives of the neoclassical theory, who believed in the power of statistics and the necessity to solve the statistical types of problems.

Schumpeter introduced two levels of economic investigations: one of them was based on the statistical analysis, and another was based on the dynamics that were inherent to capitalism in the 20^th century. The attention to statistic data helped to evaluate the behavior of different economic unities and consider marginal productivity and utility.

The center of Schumpeter’s theory turned out to be the idea of economic equilibrium that occurred when the price of every new product equaled its cost of production, and no profits could be observed but could arise due to the dynamic changes that could result from innovations. Schumpeter explained that the price of a product could never exceed the cost of a product because such misbalance could attract the attention of other competitors, and Schumpeter believed that the economic system should be based on free competition, private property, and appropriate division of labor.[⁶]

As soon as competitors discovered the profits, they could increase supply that led to the disappearance of profits in a short period. Schumpeter could not understand why the power of the statistic model should prevail over the dynamics in the economic world that could not be neglected anymore. His theory was based on the developed. The development helped to improve the current monetary relations, get rid of repetitions and predictions, and understand that innovation is the key to the success of the majority of economic activities.

Schumpeter offered to pay more attention to the idea of innovation in which it is possible to recognize entrepreneurial profit with time.[⁷] Innovation is a chance to promote economic changes and improve entrepreneurial activities with few or no costs spent. Schumpeter understood that the task of any participant of the economic relations was to gain recognition and achieve good results that could be visible in competition.

According to Schumpeter, innovation should be the introduction to the economic system that could cause the destruction of old principles and routines that entrepreneurs tried to use. The innovative impulse should help to renew the equilibrium and improve the competitive process using creative destruction. The following scheme helped to comprehend the main idea of Schumpeter’s thought of economic development:

Innovation usually depends on several factors and the way of how new information is accepted by consumers. For example, Schumpeter offered to combine such steps as the creation of a new product in the existed economic system, the use of appropriate technologies that could support the production, promote a new organization of the chosen product, and the creation of new markets where people could find the required raw materials and opportunities.

The process of innovation is useless without the identification of the role of an entrepreneur, who can overcome the challenges based on the technological and financial aspects of the work. The entrepreneur is the person, who should identify the needs in the chosen industry and open the possibilities that could lead to profit. Therefore, entrepreneurship plays a very important role in the economic development promoted by Schumpeter.

According to Schumpeter’s theory, the entrepreneur should be defined as an innovator, who could analyze the importance and worth of the dynamic changes that occurred in the system. This theorist paid more attention to several human factors and underlined that “the economic process tends to socialize itself – and also the human soul”[⁸]. Such attitudes to the economic systems and innovative ideas made him a confident believer in the progress that could improve the existing system by capitalist development in the eyes of other theorists and economists.[⁹]

At the same time, Schumpeter did not forget to explain that any entrepreneur should have one goal that was a victory. Therefore, some motives and methods could be irrational and unpredictable regarding the experience and various external factors. An entrepreneur, as a true expert and analyzer, has to find the balance between rational and irrational types of behavior and make the decision that could lead to the achievement of the desired profits. The entrepreneur turns out to be a key figure in the market economy and a kind of agent of creative destruction.[¹⁰]

Such ideas developed by Schumpeter in the middle of the 20^th century could be observed in the activities of modern entrepreneurs. For example, there are many Indian entrepreneurs, who are eager to promote innovation in their industries and try to communicate with their government concerning additional business opportunities that could be used to improve their industries from different aspects.[¹¹]

Government interventions were popular in the 20^th century. Though modern organizations and entrepreneurs try to make independent decisions, many of them are still dependent on the government regardless of the intentions of Schumpeter to underline the power of entrepreneurship in the economic system. In the middle of the 1960s, there was also a tendency to organize new business opportunities in regards to the opportunities developed by the government. If the government was not able to receive the required portion of the money, there was no hope to create new jobs, promote export, and develop other business activities.[¹²]

People were dependent on the government, and the government had to gain control over all financial and business activities. For example, the government could deal with the deficit by printing more money and bringing all money spent one day back as soon as money was given to other business in the home country.[¹³]

In South Korean, the role of the government remains to be crucial as well because it decides whether the organization deserves the right for incentive money or not.[¹⁴] Even if the organizations are eager to use innovations and demonstrate their abilities, they have to get approval from their government first to make a decision then.

In some countries, the period after World War II was a crucial point in the history of economics and politics. For example, Sir Harold Macmillan introduced the idea of the mixed economy according to which it was necessary to find out a middle way approach that could unite politics and economics. On the one hand, it was necessary to promote some government interventions into the economy to make sure that people could get payments.

On the other hand, the government should not go too far to deprive people of the opportunities to develop their ideas.[¹⁵] It means that in some countries, the ideas of Schumpeter were working and changed the way of how the relations between politics and economics could be developed. Still, Schumpeter’s theory was not strong enough to make all governments stay away from the business affairs developed by entrepreneurs.

However, such an inability to prove the chosen position does not define Schumpeter as a weak economist. It is just the result of another powerful economist’s work. In comparison to Schumpeter, who preferred the attention to industrial innovations, Maynard Keynes chose a monetary approach in order to explain the essence of business cycles. He focused on the fact that economies got stuck at high levels of unemployment because people were not able to make clear investment decisions.[¹⁶]

In other words, Keynes offered to promote fiscal and monetary policies in order to manage an inadequate demand for goods.[¹⁷] In comparison to Schumpeter, who was obsessed with an idea of innovation for people, Keynes tried to explain the power of government and its abilities to control the unemployment rates. People should be afraid of the fact that there was no support from the government and had to choose the activities that could be supported by the government.

The ideas of Keynesianism were rather popular at the beginning of the 20^th century. People believed that as soon as the investments of the government raise, the economy of the country could be improved as well, and people could use their opportunities. [¹⁸] The Keynes’ theory was based on the idea of stagnation that was caused by high unemployment rates. The integration of economies was a crucial requirement, and Keynes continued developing his approaches on how to save the economy and promote its successful cooperation with politics.

As it has been mentioned before, the thing that differentiated the approaches developed by Schumpeter and Keynes was the possibilities of the government and their interventions. Keynes admitted that “when the government cuts taxes without reducing expenditures, aggregate demand increases because private individuals’ consumption expenditures increase by some proportion of the tax reduction.”[¹⁹] The task was clear, still, Schumpeter had another point of view.

Schumpeter did not want to accept the idea of governmental power over entrepreneurs. He offered a new business cycle theory that influenced the modern-day political economy considerably. What he did was the identification of the role of entrepreneurs as the promoters of economic development. Innovation could create standards that helped people to survive even in the most difficult times. According to Schumpeter, there was no need to address the government and provide public ownership with a chance to produce profits and neglect the necessity to stay dependent on taxes defined by the government.[²⁰]

Schumpeter’s ideas were attractive because people were provided with a hope that they could be free from the requirements and instructions set by the government. The only task organizations and entrepreneurs had to deal with was their readiness for innovations and the abilities to understand the idea of renewed equilibrium.

Besides, the investigations of Andersen show that Schumpeter was ready to explain his position from the very beginning. He was concerned that even small organizations could be able to adapt their working routines according to new situations and innovations and avoid the shortages of creative destruction.[²¹] Such confidence of his was the sign that the theorists did not want to combine his approach with the approaches offered by other theorists at the same time. Schumpeter was eager to promote innovative adaptation to every organization that was ready to accept the changes.

In conclusion, it is necessary to admit that the contributions of Joseph Schumpeter are significant in the field of political economy and the way of how people should understand the essentials of entrepreneurship and the responsibilities of the government. The fact that this economist offered the idea of innovation and economic development during the neoclassicism period served as the best evidence that Schumpeter knew what he was talking about and was ready to teach people on how to achieve the benefits in the chosen activities and neglect the role of the government in business.

Economics and politics are interrelated; still, people should comprehend that an entrepreneur but not a government should be the agent of innovation. It could happen that some misunderstandings or challenges took place because of creative destruction. Still, the entrepreneurs should understand that their main function is to become the required intermediate between the desire to implement innovation and the abilities to complete this task.

The main peculiarity of the Schumpeter’s approach is the required symbolism that exists between historical, political, economic, and even social elements of human life. According to Schumpeter, the development of the capitalist world was possible in the middle of the 20^th century. He explained that economic growth was something to strive for. His readiness to promote innovation was a significant change in the world of economics. His theories and thoughts motivate many people from the field of the modern-day political economy. New combinations and opportunities occur every day, and people are free to make their choices regarding their opportunities and intentions.

Today, people face several complications in modern economics. There is a necessity to improve various economic interactions and use knowledge and experience to comprehend what kind of interventions are the most appropriate. Schumpeter offered innovation and entrepreneurship as the main solutions to the capitalistic world of the 20^th century. Nowadays, people have different problems, still, the idea remains to be the same – people have to try innovations to understand if they are ready to change something using their powers and overcome financial, economic, and political crises they have to live in.

Bibliography

Alperovitz, Gar, and Thomas M. Hanna. “Socialism, American-Style.” New York Times, 2015. Web.

Andersen, Esben, Sloth. Joseph A. Schumpeter: A Theory of Social and Economic Evolution. New York: Palgrave Macmillan, 2011.

Hagemann, Harald. “Capitalist Development, Innovations, Business Cycles and Unemployment: Joseph Alois Schumpeter and Emil Hans Lederer.”Journal of Evolutionary Economics 25, no. 1 (2015): 117-131.

Michaelides, Panayotis G., and John G. Milios. “Joseph Schumpeter and the German Historical School.” Cambridge Journal of Economics 33, no. 3 (2009): 495-516.

Oatley, Thomas. International Political Economy. New York: Routledge, 2012.

Schumpeter, Joseph A. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. New Brunswick: Transaction Publishers, 1934.

Schumpeter, Joseph, A. Capitalism, Socialism and Democracy. New York: Harper & Brothers, 2008.

Swedberg, Richard. Joseph A. Schumpeter: His Life and Work. Hoboken: John Wiley & Sons, 2013.

Footnotes

1. Gar Alperovitz and Thomas M. Hanna, “Socialism, American-Style,” New York Times: New York, 2015. Web.
2. Richard Swedberg, Joseph A. Schumpeter: His Life and Work, Hoboken: p.1896.
3. Joseph A. Schumpeter, Capitalism, Socialism and Democracy, New York: p.82.
4. Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, New Brunswick: p.9.
5. Joseph Schumpeter, The Theory of Economic Development, New Brunswick: p.17.
6. Joseph Schumpeter, The Theory of Economic Development, New Brunswick: p.25.
7. Jossph Schumpeter, The Theory of Economic Development, New Brunswick: p.72.
8. Joseph Schumpeter, Capitalism, Socialism, and Democracy, New York: p.219.
9. Panayotis G. Michaelides and John G. Milios, “Joseph Schumpeter and the German historical school,” Cambridge Journal of Economics 33, no. 3, 2009: p.501.
10. Harald Hagemann, “Capitalist Development, Innovations, Business Cycles, and Unemployment: Joseph Alois Schumpeter and Emil Hans Lederer,” Journal of Evolutionary Economics 25, no. 1, 2015: p.128.
11. W. Seay, “The Origins of Political Economy” ECON101/ INTL102, Virginia Commonwealth University, 2015.
12. W. Seay, “The Origins of Political Economy” ECON101/ INTL102, Virginia Commonwealth University, 2015.
13. W. Seay, “The Origins of Political Economy” ECON101/ INTL102, Virginia Commonwealth University, 2015.
14. W. Seay, “The Origins of Political Economy” ECON101/ INTL102, Virginia Commonwealth University, 2015.
15. W. Seay, “The Origins of Political Economy” ECON101/ INTL102, Virginia Commonwealth University, 2015.
16. Thomas Oatley, International Political Economy, New York: p.253.
17. Thomas Oatley, International Political Economy, New York: p.253.
18. Thomas Oatley, International Political Economy, New York: p.252.
19. Thomas Oatley, International Political Economy, New York: p.253.
20. Gar Alperovitz and Thomas M. Hanna, “Socialism, American-Style,” New York Times: New York, 2015. Web.
21. Esben Sloth Andersen, Joseph A. Schumpeter: A Theory of Social and Economic Evolution, New York: p.74.