Table of Contents
- Introducing Joseph Schumpeter
- Key Takeaways from Schumpeter's Work
- Early Life and Education
- Notable Accomplishments and Theories
- Creative Destruction
- Entrepreneurship
- Business Cycles
- Example of Schumpeterian Theory
- Schumpeter vs. John Maynard Keynes
- Schumpeter's History of Economic Analysis
- What Schumpeter Believed Would Destroy Capitalism
- Schumpeter's Innovation Theory of Profit
- What Is Schumpeterian Growth
- The Bottom Line
Introducing Joseph Schumpeter
Let me tell you about Joseph Schumpeter, an economist I admire for his insights on entrepreneurship and creative destruction. He explained how innovation pushes economic growth by wiping out outdated practices and technologies.
Joseph Alois Schumpeter lived from 1883 to 1950. He was an Austrian-trained economist, economic historian, and author, considered one of the greatest intellectuals of the 20th century. You should know him for his theories on business cycles, capitalist development, and introducing entrepreneurship. For Schumpeter, the entrepreneur is the heart of capitalism—the innovator who drives the economy forward.
Key Takeaways from Schumpeter's Work
Schumpeter's fame comes from his 1942 book Capitalism, Socialism, and Democracy, his theory of creative destruction, and being the first to reference methodological individualism in economics in German and English.
He held positions as Austria's finance minister, a private bank president, and a professor before the Nazi Party's rise forced him to emigrate.
He coined 'creative destruction' to show how the old constantly gives way to the new.
Schumpeter also brought the concept of entrepreneurship to the forefront.
His ideas were initially eclipsed by John Maynard Keynes, but now they're central to understanding economic evolution.
Early Life and Education
Schumpeter was born in 1883 in Moravia, now part of the Czech Republic, to German parents. He studied under key figures of the Austrian school, like Friedrich von Wieser and Eugen von Bohm-Bawerk.
His career included serving as Austria's finance minister, leading a private bank, and teaching at universities. From 1925 to 1932, he was at the University of Bonn.
The Nazi Party's ascent made him uncomfortable, so he moved to the US in 1932 to teach at Harvard. In 1947, he became the first immigrant president of the American Economic Association.
By the early 20th century, economics in the US and UK focused on static, mathematical equilibrium models. Schumpeter's approach was different—more nuanced, less hypothetical, drawing partly from Walrasian ideas but rooted in continental European traditions.
Notable Accomplishments and Theories
Schumpeter contributed to economic science and political theory, but his standout work is the 1942 book Capitalism, Socialism, and Democracy, where he outlines creative destruction as the path to dynamic growth. He's also credited with early references to methodological individualism.
Creative Destruction
Schumpeter's lasting legacy is a six-page chapter in his book called 'The Process of Creative Destruction.'
Here, he gave a fresh view on economic growth, breaking from the idea that markets gently reach equilibrium until profits vanish. Instead, progress is abrupt, disjointed, and sometimes harsh.
He termed it 'creative destruction'—dismantling old practices for new technologies, products, production methods, and distribution. Companies must adapt fast or fail. It's like industrial mutation, revolutionizing the economy from within, destroying the old to create the new. This is capitalism's essence, as he put it.
Entrepreneurship
Schumpeter saw capitalism as an ongoing revolution that upends social and economic orders. The entrepreneur is the revolutionary figure, creating dynamic change.
He's credited with introducing the economic importance of entrepreneurship. He used 'Unternehmergeist,' meaning entrepreneur-spirit, saying these people control the economy through innovation and tech change.
Entrepreneurs drive creative destruction with new products, tech, or methods, destroying the status quo for better equilibria and higher living standards.
Business Cycles
These ideas connect to Schumpeter's view of business cycles.
Capitalism's history shows long and short waves. Long waves come from new technologies and industries, happening every 50 or 100 years.
In his 1911 book The Theory of Economic Development, he noted you can count six Juglar cycles (8-10 years) in a Kondratieff (50-60 years), and three Kitchin cycles (40 months) in a Juglar.
When entrepreneurs disrupt industries, it can cause temporary losses for workers or sectors. But this is tolerated because it frees resources for more productive uses.
Example of Schumpeterian Theory
The internet exemplifies creative destruction. It dismantled old practices for new tech, products, production, and distribution. Companies had to adapt or fail.
It made many things obsolete, cutting jobs like bank tellers, secretaries, travel agents, and retail workers. Mobile internet hurt print publishers too.
Along with microprocessors, lasers, fiber optics, and satellites, it transformed business conduct.
Schumpeter vs. John Maynard Keynes
Schumpeter had rivalries with thinkers like Keynes, Fisher, Mises, and Hayek. His work was initially overshadowed, especially by Keynes.
Early on, he criticized statistical aggregates in theory—likely aimed at Keynes—favoring individual choice.
Keynes saw a healthy economy in static equilibrium. Schumpeter disagreed, saying equilibrium isn't healthy; innovation drives it.
On government, Keynes thought central banks could ensure prosperity. Schumpeter said intervention causes inflation and destroys the economy.
Schumpeter's History of Economic Analysis
At his death in 1950, Schumpeter was writing History of Economic Analysis, covering economics from ancient Greece to post-WWII.
It included political and philosophical ideas, plus historical events. Though unfinished, it's recognized for its broad scope and original insights on analysis techniques, other sciences, and economics sociology.
What Schumpeter Believed Would Destroy Capitalism
Schumpeter thought capitalism would be destroyed by its own success, creating an intellectual class that attacks private property and freedom needed to sustain it. Yet he supported capitalism ardently.
Schumpeter's Innovation Theory of Profit
He believed profits come from successful innovations. Entrepreneurs introduce policies that cut costs or boost demand, earning rewards for their efforts. Innovation is the key to success and profits.
What Is Schumpeterian Growth
It's growth driven by innovation via creative destruction. Models based on this help understand competition, firm dynamics, and reallocation across firms and sectors.
The Bottom Line
Schumpeter's work got little initial acclaim due to Keynes' popularity, but now he's seen as a top economist. He introduced entrepreneurship's role in economies. Creative destruction is key to how capitalist economies evolve.
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