Joseph Schumpeter

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Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist.

Contents 1 Summary 2 Most important work 2.1 The history of economic analysis 2.2 Business cycles 2.3 Schumpeter and Keynesianism 2.4 Schumpeter and capitalism's demise 2.5 Schumpeter and democratic theory 2.6 Schumpeter and entrepreneurship 3 His legacy 4 Notes 5 Major Works 6 References 7 See also 8 External links

[edit] Summary

Born in Triesch (then part of Austria-Hungary, now Třešť in the Czech Republic). He was always a brilliant student and praised by his teachers. He began his career studying Law at the University of Vienna under the great Austrian capital theorist Eugen von Böhm-Bawerk, taking his PhD in 1906. In 1909, after some study trips, he became a professor of economics and government at the University of Czernowitz (a German-language university in Austria, now in Ukraine), in 1911, at the University of Graz, where he remained until World War I. In 1919-1920, he served as the Austrian Minister of Finance, with some success, and in 1920-1924, as President of the private Biederman Bank. That bank collapsed in 1924 and left Schumpeter in bankruptcy. From 1925-1932, he held a chair at the University of Bonn, Germany. Having to leave central Europe because of the rise of the Nazis, he moved to Harvard (where he had already lectured in 1927-1928 and 1930), where he taught from 1932 to 1950. During his Harvard times, he was not generally considered to be a very good classroom teacher, but he acquired a school of loyal followers. His prestige among colleagues was likewise not very high, because his views seemed outdated and not in touch with then-fashionable Keynesianism. This period as a Harvard professor was characterized by very hard work but also by little real recognition of his core ideas.

Although Schumpeter encouraged some young mathematical economists and was even the founding president of the Econometric Society (1933), Schumpeter was not a mathematician but rather an economist and tried instead to integrate sociological understanding into his economic theories. From current thought it has been argued that Schumpeter's ideas on business cycles and economic development could not be captured in the mathematics of his day - they need the language of non-linear dynamical systems to be partially formalized.

[edit] Most important work

[edit] The history of economic analysis

Schumpeter's vast erudition is apparent in his posthumous History of Economic Analysis, although some of his judgments seem quite idiosyncratic and sometimes cavalier. For instance, Schumpeter thought that the greatest 18th century economist was Turgot, not Adam Smith, as many consider. Some of these judgments are partly explained by his opinion that there is one general system of economic analysis, and Léon Walras found it. Other economists are rated by how much of Walras' theory could be read into them. Schumpeter criticized John Maynard Keynes and David Ricardo for the "Ricardian vice." According to Schumpeter, Ricardo and Keynes reasoned in terms of abstract models, where they would freeze all but a few variables. Then they could argue that one caused the other in a simple monotonic fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model.

[edit] Business cycles

Schumpeter's relationships with the ideas of other economists were quite complex in his most important contributions to economic analysis - the theory of business cycles and development. Following neither Walras nor Keynes, Schumpeter starts in The Theory of Economic Development with a treatise of 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 hero of his story, though, is, in fine Austrian fashion, the entrepreneur.

The entrepreneur disturbs this equilibrium and is the cause of economic development, which proceeds in cyclic fashion along several time scales. In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the Russian communist Nikolai Kondratiev's ideas on 50-year cycles, Kondratiev waves.

Schumpeter suggested a model in which the four main cycles, Kondratieff (54 years), Kuznets (18 years), Juglar (9 years) and Kitchin (about 4 years) can be added together to form a composite waveform. A Kondratieff wave could consist of three lower degree Kuznets waves. Each Kuznets wave could, itself, be made up of two Juglar waves. Similarly two (or three) Kitchin waves could form a higher degree Juglar wave. If each of these were in phase, more importantly if the downward arc of each was simultaneous so that the nadir of each was coincident it would explain disastrous slumps and consequent depressions.

[edit] Schumpeter and Keynesianism

So in Schumpeter's theory Walrasian equilibrium is not adequate to capture the key mechanisms of economic development. Schumpeter also thought that the institution enabling the entrepreneur to purchase the resources needed to realize his or her vision was a well-developed capitalist financial system, including a whole range of institutions for granting credit. One could divide economists among (1) those who emphasized "real" analysis and regarded money as merely a "veil" and (2) those who thought monetary institutions are important and money could be a separate driving force. Both Schumpeter and Keynes were among the latter. Nevertheless, Schumpeter, who was a liberal, at least in the classical European sense, rejected Keynesianism.

[edit] Schumpeter and capitalism's demise

Schumpeter's most popular book in English is probably Capitalism, Socialism and Democracy. This book opens with a treatment of Karl Marx. On the surface level, this piece seems to support socialism. Schumpeter's reasoning was that an overt defense of capitalism would prompt the book only to be read by those who already supported capitalism. Therefore, he believed that he must masquerade as a supporter of socialism to entice the young socialist to read his work. In the end, he hoped to awaken self-recognition in the reader to the flaws of socialism. ^[1] Schumpeter is sympathetic to Marx's conclusion that capitalism will collapse, although Schumpeter concludes capitalism will be replaced by socialism for non-Marxist reasons. It is in this book that Schumpeter characterized capitalism with the famous phrase "creative destruction", in which the old ways of doing things are endogenously destroyed and replaced by the new.

Schumpeter thinks that the success of capitalism will lead to a form of corporatism and a fostering of values that are hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism will collapse from within as democratic majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure. Schumpeter emphasizes that he is analyzing trends, not engaging in political advocacy. Some contend that John Kenneth Galbraith was influenced in his The New Industrial State by Schumpeter's views on corporations.

In the final analysis, Schumpeter's distrust of corporatism did not negate his belief that free market capitalism is the best economic system.

[edit] Schumpeter and democratic theory

In the same book, Schumpeter expounded a theory of democracy which sought to challenge what he called the 'classical doctrine'. He disputed the idea that democracy was a process by which the electorate identified the common good, and politicians carried this out for them. He argued this was unrealistic, and that people's ignorance and superficiality meant that in fact they were largely manipulated by politicians, who set the agenda. This made a 'rule by the people' concept both unlikely and undesirable. Instead he advocated a minimalist model, much influenced by Max Weber, whereby democracy is the mechanism for competition between leaders, much like a market structure. Although periodical votes from the general public legitimise governments and keep them accountable, the policy programme is very much seen as their own and not that of the people, and the participatory role for individuals is severely limited.

[edit] Schumpeter and entrepreneurship

The concept of entrepreneurship cannot be fully understood without his contributions, being probably the first scholar to develop its theories. He gave two theories, sometimes called Mark I and Mark II. In the first one, the early one, Schumpeter argued that the innovation and technological change of a nation comes from the entrepreneurs, or wild spirits. He came up with the German word Unternehmergeist, meaning entrepreneur-spirit. He believed that these individuals are the ones who make things work in the economy of the country. In Mark II, later in the United States, he pointed out that the ones who really move the innovation and economy are the big companies which have the resources and capital to invest in research and development. Both arguments might be complementary today.

The English literature preferred to use the French word entrepreneurship, but perhaps the German one would be more correct to understand the entrepreneur studies.

[edit] His legacy

For some time after his death, Schumpeter's views were most influential among heterodox economists, especially European, who were interested in industrial organization, evolutionary theory, and economic development, and who tended to be on the other end of the political spectrum of Schumpeter and were often also influenced by Keynes, Karl Marx, and Thorstein Veblen. Robert Heilbroner was one of Schumpeter's most renowned pupils, who wrote extensively about him in "The Worldly Philosophers". Another outstanding student of Schumpeter's was the economist Nicholas Georgescu-Roegen. Today, Schumpeter is a protagonist of the mainstream, not in academic economics ("standard textbook economics"), but in economic policy, management studies, industrial policy, and the entire area of innovation. The concept of entrepreneurship can not be fully understood without his contributions, being probably the first scholar to develop its theories. The European Union's innovation program, and its main development plan, the Lisbon Strategy, are based on Schumpeter.

[edit] Notes

1. ^ Muller, Jerry Z. The Mind and the Market. Anchor Books, New York. 2003.

[edit] Major Works

• "Über die matematische Methode der theoretischen Ökonomie", 1906, ZfVSV.
• "Das Rentenprinzip in der Verteilungslehre", 1907, Schmollers Jahrbuch
• Wesen und Hauptinhalt der theoretischen Nationalökonomie (transl. The Nature and Essence of Theoretical Economics), 1908.
• "On the Concept of Social Value", 1909, QJE
• Wie studiert man Sozialwissenschaft, 1910 (transl. by J.Z. Muller, "How to Study Social Science", Society, 2003)
• "Marie Esprit Leon Walras", 1910, ZfVSV.
• "Über das Wesen der Wirtschaftskrisen", 1910, ZfVSV
• Theorie der wirtschaftlichen Entwicklung (transl. The Theory of Economic Development: An inquiry into profits, capital, credit, interest and the business cycle) , 1911.
• Economic Doctrine and Method: An historical sketch, 1914.
• "Das wissenschaftliche Lebenswerk Eugen von Böhm-Bawerks", 1914, ZfVSV.
• Vergangenkeit und Zukunft der Sozialwissenschaft, 1915.
• The Crisis of the Tax State, 1918.
• "The Sociology of Imperialism", 1919, Archiv für Sozialwissenschaft und Sozialpolitik
• "Max Weber's Work", 1920, Der österreichische Volkswirt
• "Carl Menger", 1921, ZfVS.
• "The Explanation of the Business Cycle", 1927, Economica
• "Social Classes in an Ethnically Homogeneous Environment", 1927, Archiv für Sozialwissenschaft und Sozialpolitik.
• "The Instability of Capitalism", 1928, EJ
• Das deutsche Finanzproblem, 1928.
• "Mitchell's Business Cycles", 1930, QJE
• "The Present World Depression: A tentative diagnosis", 1931, AER.
• "The Common Sense of Econometrics", 1933, Econometrica
• "Depressions: Can we learn from past experience?", 1934, in Economics of the Recovery Program
• "The Nature and Necessity of a Price System", 1934, Economic Reconstruction.
• "Review of Robinson's Economics of Imperfect Competition", 1934, JPE
• "The Analysis of Economic Change", 1935, REStat.
• "Professor Taussig on Wages and Capital", 1936, Explorations in Economics.
• "Review of Keynes's General Theory", 1936, JASA
• Business Cycles: A theoretical, historical and statistical analysis of the Capitalist process, 1939.
• "The Influence of Protective Tariffs on the Industrial Development of the United States", 1940, Proceedings of AAPS
• "Alfred Marshall's Principles: A semi-centennial appraisal", 1941, AER.
• "Frank William Taussig", 1941, QJE.
• Capitalism, Socialism and Democracy, 1942.
• "Capitalism in the Postwar World", 1943, Postwar Economic Problems.
• "John Maynard Keynes", 1946, AER.
• "The Future of Private Enterprise in the Face of Modern Socialistic Tendencies", 1946, Comment sauvegarder l'entreprise privée
• Rudimentary Mathematics for Economists and Statisticians, with W.L.Crum, 1946.
• "Capitalism", 1946, Encyclopaedia Britannica.
• "The Decade of the Twenties", 1946, AER
• "The Creative Response in Economic History", 1947, JEH
• "Theoretical Problems of Economic Growth", 1947, JEH
• "Irving Fisher's Econometrics", 1948, Econometrica.
• "There is Still Time to Stop Inflation", 1948, Nation's Business.
• "Science and Ideology", 1949, AER.
• "Vilfredo Pareto", 1949, QJE.
• "Economic Theory and Entrepreneurial History", 1949, Change and the Entrepreneur
• "The Communist Manifesto in Sociology and Economics", 1949, JPE
• "English Economists and the State-Managed Economy", 1949, JPE
• "The Historical Approach to the Analysis of Business Cycles", 1949, NBER Conference on Business Cycle Research.
• "Wesley Clair Mitchell", 1950, QJE.
• "March into Socialism", 1950, AER.
• Ten Great Economists: From Marx to Keynes, 1951.
• Imperialism and Social Classes, 1951 (reprints of 1919, 1927)
• Essays on Economic Topics, 1951.
• "Review of the Troops", 1951, QJE.
• History of Economic Analysis, (published posthumously, ed. Elisabeth Boody Schumpeter), 1954.
• "American Institutions and Economic Progress", 1983, Zeitschrift fur die gesamte Staatswissenschaft
• "The Meaning of Rationality in the Social Sciences", 1984, Zeitschrift fur die gesamte Staatswissenschaft
• "Money and Currency", 1991, Social Research.
• Economics and Sociology of Capitalism, 1991.

[edit] References

• Groenewegen, Peter, 2003. Classics and Moderns in Economics: Essays on Nineteenth And Twentieth Century Economic Thought: Vol. 2. Routledge. Chpt. 22, pp 203+.
• Harris, S. E. (ed.), 1951. Schumpeter: Social Scientist. Harvard University Press.
• Muller, Jerry Z., 2002. The Mind and the Market: Capitalism in Western Thought. Anchor Books.
• Robbins, L. C., 1955, "Schumpeter's History of Economic Analysis," Quarterly Journal of Economics 69: 1-22.

[edit] See also

• Austrian School of economics
• List of Austrians
• List of Austrian scientists
• Social innovation
• Creative destruction
• Innovation

[edit] External links

• http://www.humanities.mq.edu.au/Ockham/y6410.html
• http://cepa.newschool.edu/het/profiles/schump.htm
• http://www.cpm.ehime-u.ac.jp/akamachomepage/akamac_e-text_links/Schumpeter.html
• http://www.geocities.com/bcschipper/schumpeter.html
• http://innovationzen.com/blog/2006/07/29/innovation-management-theory-part-1/
• http://www.peterdrucker.at/en/texts/proph_01.html
• Biography of Schumpeter by Swedberg and Andersen pdf file
• A Leftist Criticism of Joseph Schumpter's work "On the Concept of Social Value" (1908)
• http://www.iss-evec.de/