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A serious scholar – he had almost no recreation other than the occasional game of tennis – Schumpeter was one of the great polymaths of the twentieth century. Between 1905 and 1950, he produced 15 books, six pamphlets, about 100 book reviews, and at least 148 articles, and comments. But it isn’t just the quantity that impresses, it is the quality. The intellectual historian Martin Kessler argues that Schumpeter was, apart from John Maynard Keynes, “the only truly great economist the 20th century has produced.” And business historians like Alfred D. Chandler, Jr., regard Schumpeter as the economist who best understood the rise of big business and the central roles of innovation and entrepreneurship. Unlike many famous scholars, Schumpeter exhibited a lively interest in and respect for well-done work regardless of the disciplinary banner under which it appeared. As his Harvard colleague Seymour Harris once put it, Schumpeter was primarily an economist, but “historians and sociologists can include him as one of their stars” too. He held as an article of faith that all good economics must include theory, history, and statistics. And he relentlessly evangelized in favor of econometrics. Schumpeter helped organize the Econometric Society and served as its president from 1937 to 1941. Although his work encompassed a wide range of subjects, it is his theory of entrepreneurship – a word and phenomenon with which his name will likely forever be linked – that is most relevant to contemporary business practitioners. Schumpeter developed his innovative theories in three main books: The Theory of Economic Development (1911), Business Cycles (1939), and Capitalism, Socialism, and Democracy (1942).
The Theory of Economic Development In the early 20th century, economic thought was dominated by theorists who posited that economic systems were fueled by a “circular flow” of inputs and outputs, and were generally at a state of equilibrium. But Schumpeter found that this traditional economic analysis lacked a workable theory of innovation or finance – i.e. a realistic model of the way saving and investment actually operate in a dynamic economic system. In his 1911 book Die Theorie der Wirstshaftlichen Entwicklung (the English version, The Theory of Economic Development, did not appear until 1934), Schumpeter set forth the first thoroughgoing exposition of a more complex system. In his new model, economic routine is periodically interrupted by entrepreneurial behavior that comes in clusters and disrupts equilibrium. Entrepreneurs, who could effectively function as free agents, unconnected to a single firm, disrupt the circular flow by “carrying out new combinations.” This, he asserts, is the basis of economic development, and embodies the essence of capitalism. In an effort to divine the motivations of entrepreneurs, Schumpeter departed from economics and dipped into the realm of psychology. “The typical entrepreneur is more self-centered than other types, because he relies less than they do on tradition and connection and because his characteristic task consists precisely in breaking up old, and creating new, tradition,” he wrote. An entrepreneur is motivated by “the dream and the will to found a private kingdom.” Other motivations, he wrote, include “the will to conquer,” “the impulse to fight,” and “the joy of creating.” Schumpeter also saw profound sociological implications in the rise of some entrepreneurs and the obsolescence of others. Just as businesses rise and fall, so too do entrepreneurs and their families. Or as he put it in one of his many great metaphors, “the upper strata of [a capitalist] society are like hotels which are indeed always full of people, but people who are forever changing.” Schumpeter also noted that just as intellectual entrepreneurs proposing new theories face opposition, business entrepreneurs seeking to overthrow conventional wisdom encounter resistance from entrenched interests. Those whose positions are threatened by innovation, he wrote, may be expected to fight innovation, even to organize against it by throwing up legal and political impediments. The last vital element in the system Schumpeter delineates in The Theory of Economic Development in what he calls “the swarm-like appearance of entrepreneurs,” which represents the kickoff of a new business cycle under capitalism. He relates his theory of entrepreneurial activity directly to what was for his generation the most difficult analytical problem posed by capitalist economies: the “jerky disturbance” of “the equilibrium position,” as Schumpeter himself calls it – not any gentle ebb and flow, but rather “a disturbance of a different order of magnitude.” It was to the mysteries of such disturbances that Schumpeter would devote his next big book, Business Cycles (1939).
Business Cycles Some 27 years elapsed between the publication of The Theory of Economic Development and the 1939 appearance of Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. During those years Schumpeter experienced multiple personal traumas: living through World War I and its aftermath in Austria, fleeing Germany, and losing his family. By 1939, he had become deeply pessimistic about the state of the world.
A book with grand ambitions, the 1,100-page, two-volume work nonetheless proved a monumental disappointment to Schumpeter’s many admirers and to the author himself. It was thoroughly upstaged by Keynes’s General Theory of Employment, Interest, and Money, which appeared in 1936. Schumpeter did not work well with editors, and was loath to show work-in-progress even to his professional colleagues, let alone to seek editorial advice. As a result, his work was repetitive and undisciplined; his aversion to the editorial may have limited his influence among the larger public. In Business Cycles, Schumpeter again set about to marry multiple disciplines. He tried to turn cyclical economic patterns into predictive scientific wave theories borrowed from physics. The book is also imbued with a remarkable richness of historical detail and understanding. Although the technical explanation of cycles remained problematical, the historical vision that underlay Schumpeter's effort at synthesis was squarely on point: that capitalism – not all economic activity, just capitalism – is fundamentally an unstable, disequilibrating process. Despite its sophistication, Business Cycles sold only about 1,500 copies.
Capitalism, Socialism, and Democracy The failure of Business Cycles may have informed Schumpeter’s next book, Capitalism, Socialism, and Democracy, which was published in 1942. It is as though the author, now deeply pessimistic not only about the indifferent reception of Business Cycles but also about the state of the world, decided to unburden himself on an array of other subjects in addition to economics narrowly construed. Despite the book’s title, it contains little of lasting interest about either socialism or democracy. But it bursts with ideas about capitalism, and as a “performance” – a term Schumpeter liked to apply to others’ works – it may be the best analysis of capitalism ever written. It was here that Schumpeter first coined the oxymoronic phrase “creative destruction,” which quickly took second place only to Adam Smith’s “invisible hand” in the history of a discipline already rich in memorable metaphors. Schumpeter’s core argument in Capitalism, Socialism, and Democracy is reducible to three major tenets: 1. The essence of capitalism is innovation (“creative destruction”) in particular sectors. Certain standard tools of economics, such as static equilibrium and macroeconomic analysis, are useful; but carried too far they can disguise reality and mislead scholars and students. 2. 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, apparent monopoly, and wild gyrations in the business cycle, are short-run, conspicuous, and directly hurtful to important interest groups.
3. It is dangerous for economists to prescribe “general” recipes and nostrums for reform, because political and social circumstances are always changing. In many ways, Business Cycles was a synthesis. Some of the major themes of Capitalism, Socialism, and Democracy represent reworkings of ideas Schumpeter had first presented in articles published long before, while in his twenties (he was 59 in 1942, when the book appeared). Others came directly out of Business Cycles. A capitalist economy, he now wrote, “is not and cannot be stationary. Nor is it merely expanding in a steady manner. Every situation is being upset before it has had time to work itself out. Economic progress, in capitalist society, means turmoil.” The contemporary structure of business, Schumpeter argues, is best understood as having evolved from a long “organizational development.” It reflects a “process of industrial mutation – if I may use that biological term – that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” In sum, the process is one of “creative destruction” – the sweeping out of old products, old enterprises, and old organizational forms by new ones. “It is what capitalism consists in and what every capitalist concern has got to live in.” It may sound relatively mild to the contemporary ear. But with these radical declarations, Schumpeter was, in effect, indicting the entire profession of mainstream economics for failing to acknowledge that continuous innovation is endogenous to capitalism. Pushing his analysis to its limits, Schumpeter further identifies capitalist entrepreneurship with technological progress itself. As a matter of historical record, they were “essentially one and the same thing,” the first being “the propelling force” of the second. These vital statements led Schumpeter to a somewhat more pessimistic conclusion. For he came to believe that capitalism contains the seeds of its own destruction – not for economic reasons but for sociological ones. Capitalism, Socialism, and Democracy delves deeply into sociology to describe the ways in which capitalism undermined the traditional underpinnings of civilized society and created new economic orders, which in turn sets off recurring cycles of creative destruction. Capitalism is so successful economically, he wrote, that it “creates, educates and subsidizes a vested interest in social unrest.” He concludes, in the end, by professing to see not only the decline of capitalism but also the ultimate triumph of socialism. “Can capitalism survive?” he asked. “No. I do not think it can.” When Capitalism, Socialism, and Democracy was first published in 1942, it received a modicum of attention, probably because World War II was dominating not only the news but intellectual and economic life as well. A second edition, which appeared in 1946, attracted wider notice. But the third edition, published in 1950 at a high point in the Cold War, when capitalism and socialism were, in fact, competing furiously for the world’s allegiance, became an international best-seller. It produced thousands of future citations by scholars in sociology, history, economics, and other disciplines. Translated into at least 16 languages, Business Cycles still sells widely in paperback editions.
Creative Destruction and Entrepreneurship Of course, Schumpeter turned out to be incorrect. Several decades after his death, it was capitalism that ultimately triumphed over socialism – not the other way around. But the lasting value of Schumpeter’s work lies not in his accuracy as a prognosticator, but in his brilliant analysis of how entrepreneurs work, and in his ability to change the way economists, students, and practitioners write and think about entrepreneurship and technological change. Schumpeter’s work began to find a wider audience during the 1960s and 1970s, and a still broader one in the last two decades of the 20th century. In the years after his death, scholars began to analyze not only the process of creation, but also the destruction that was its inevitable concomitant. They wondered about the human costs of economic “progress,” and started to rethink the nature of human existence under capitalism. They turned their thoughts to the inescapable tradeoffs between economic values on the one hand and social ones on the other.
In the 1980s and 1990s, the demise of command economies in eastern and central Europe and the remarkable economic performance of China and other Asian countries raised perplexing questions about the relationship between capitalism on the one hand and democracy on the other. At the same time, in many business schools, perhaps most notably Harvard and Babson, entrepreneurial studies took off. Masses of students began to express interest in the subject and to demand curricula. The total number of business schools with offerings in entrepreneurially-oriented courses soared from six in 1967 to 370 by 1993. At the Harvard Business School, where in the late 1940s Schumpeter had helped to set up the Research Center in Entrepreneurial History, enrollment in elective courses offered by the newly organized Entrepreneurial Management Unit reached more than 1,100 in 1996. In 1999, the School's administration introduced a new course entitled “The Entrepreneurial Manager” into the required curriculum. Meanwhile, in the United States, and to a lesser extent in Western Europe, the phenomenal run-up of securities markets throughout the 1990s piqued sharp new interest in the entrepreneurs who became dot-com millionaires and billionaires. In this new setting, Schumpeter’s work on entrepreneurship acquired a compelling new interest. Scholars from many disciplines began to find in his writings either answers to their own questions or valuable maps and guidebooks for new avenues of research. During the 1990s, the number of academic citations to Schumpeter’s works actually overtook those to Keynes’s, a phenomenon that would have seemed inconceivable a generation earlier. In the end, the fundamental reason for the ongoing relevance of Schumpeter to the study of business and social science comes down to his passionate insistence on the indivisibility of intellectual inquiry, together with the sheer fertility and power of his mind. Has there ever been a more penetrating analyst of capitalism in all its dimensions than Joseph Schumpeter? No, I do not think there has.
Thomas McCraw, the Isidor Straus professor of business history at Harvard Business School, is editor of the Business History Review. Last spring, the Pulitzer Prize winner was the entrepreneurship scholar-in-residence at NYU Stern’s Berkley Center for Entrepreneurial Studies. |
anagement
journals and New Economy magazines are filled with an unending
stream of thinking and writing about entrepreneurship. But amid
the proliferation of management gurus, there’s one theorist
whose voice pierces through the clutter: Joseph Schumpeter. More
than a half-century ago, the Moravia-born economist coined the
enduring term “creative destruction” as a great metaphor
for capitalism. But his understanding of the dynamics of capitalism
and the role of entrepreneurs are just as salient and incisive
today as they were when he first made them.
orn
in 1883, Schumpeter was educated at the Univer-sity of Vienna, where
he received degrees in law and political economy. From 1909 until
1911, he taught at the University of Czernowitz, where he wrote The
Theory of Economic Development, the 657-page foundation stone of his
theory of entrepreneurship. He taught at universities in Austria,
Germany, and Japan, worked as a lawyer in Egypt, briefly ran Austria’s
finance ministry in 1919, and served – unsuccessfully –
as president of Vienna’s private Biederman Bank from 1921 until
1924. Meanwhile, he found time to indulge in a plethora of romantic
liaisons, of which he liked to boast. (He would marry three times.)
Schumpeter came to Harvard permanently in 1932, and became an American
citizen. He died in 1950.