|Died||8 January 1950 66) (aged|
Taconic, Connecticut, U.S.
|Nationality||Austrian and American|
|Institution|| Harvard University, 1932–50|
University of Bonn, 1925–32
Biedermann Bank, 1921–24
University of Graz, 1912–14
University of Czernowitz, 1909–11
|Alma mater||University of Vienna|
|Eugen Böhm von Bawerk|
| Ferdinand A. Hermens |
|Other notable students|| Nicholas Georgescu-Roegen |
|Influences||Anne-Robert-Jacques Turgot, Karl Marx, Leon Walras, Carl Menger, Gustav von Schmoller, Nikolai Kondratiev, Max Weber, Vilfredo Pareto, Eugen von Böhm-Bawerk, Werner Sombart|
|Contributions|| Business cycles |
Joseph Aloïs Schumpeter (German: [ˈʃʊmpeːtɐ] ; 8 February 1883 – 8 January 1950) was an Austrian political economist. Born in Moravia, he briefly served as Finance Minister of Austria in 1919. In 1932, he became a professor at Harvard University where he remained until the end of his career, eventually obtaining U.S. citizenship.
Political economy is the study of production and trade and their relations with law, custom and government; and with the distribution of national income and wealth. As a discipline, political economy originated in moral philosophy, in the 18th century, to explore the administration of states' wealth, with "political" signifying the Greek word polity and "economy" signifying the Greek word "okonomie". The earliest works of political economy are usually attributed to the British scholars Adam Smith, Thomas Malthus, and David Ricardo, although they were preceded by the work of the French physiocrats, such as François Quesnay (1694–1774) and Anne-Robert-Jacques Turgot (1727–1781).
The Ministry of Finance is the cabinet-level ministry for finance of Austria. Its seat is at the former city palace of Prince Eugene of Savoy in the Austrian capital Vienna. The current Minister is Hartwig Löger.
Harvard University is a private Ivy League research university in Cambridge, Massachusetts, with about 6,700 undergraduate students and about 15,250 postgraduate students. Established in 1636 and named for its first benefactor, clergyman John Harvard, Harvard is the United States' oldest institution of higher learning. Its history, influence, and wealth have made it one of the world's most prestigious universities. The university is often cited as the world's top tertiary institution by most publishers.
One of the most influential economists of the 20th century, Schumpeter popularized the term "creative destruction" in economics.
An economist is a practitioner in the social science discipline of economics.
Creative destruction, sometimes known as Schumpeter's gale, is a concept in economics which since the 1950s has become most readily identified with the Austrian economist Joseph Schumpeter who derived it from the work of Karl Marx and popularized it as a theory of economic innovation and the business cycle.
Economics is the social science that studies the production, distribution, and consumption of goods and services.
Schumpeter claimed that he had set himself three goals in life: to be the greatest economist in the world, to be the best horseman in all of Austria and the greatest lover in all of Vienna. He said he had reached two of his goals, but he never said which two,although he is reported to have said that there were too many fine horsemen in Austria for him to succeed in all his aspirations.
Austria, formal name: the Republic of Austria, is a country in Central Europe comprising nine federated states. Its capital, largest city and one of nine states is Vienna. Austria has an area of 83,879 km2 (32,386 sq mi), a population of nearly nine million people and a nominal GDP of $477 billion. It is bordered by the Czech Republic and Germany to the north, Hungary and Slovakia to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the west. The terrain is landlocked and highly mountainous, lying within the Alps; only 32% of the country is below 500 m (1,640 ft), and its highest point is 3,798 m (12,461 ft). The majority of the population speaks local Bavarian dialects as their native language, and German in its standard form is the country's official language. Other regional languages are Hungarian, Burgenland Croatian, and Slovene.
Vienna is the federal capital, largest city and one of nine states of Austria. Vienna is Austria's primate city, with a population of about 1.9 million, and its cultural, economic, and political centre. It is the 7th-largest city by population within city limits in the European Union. Until the beginning of the 20th century, it was the largest German-speaking city in the world, and before the splitting of the Austro-Hungarian Empire in World War I, the city had 2 million inhabitants. Today, it has the second largest number of German speakers after Berlin. Vienna is host to many major international organizations, including the United Nations and OPEC. The city is located in the eastern part of Austria and is close to the borders of the Czech Republic, Slovakia, and Hungary. These regions work together in a European Centrope border region. Along with nearby Bratislava, Vienna forms a metropolitan region with 3 million inhabitants. In 2001, the city centre was designated a UNESCO World Heritage Site. In July 2017 it was moved to the list of World Heritage in Danger.
Schumpeter was born in Triesch, Habsburg Moravia (now Třešť in the Czech Republic, then part of Austria-Hungary) in 1883 to Catholic German-speaking parents. Both of his grandmothers were Czech.Schumpeter did not acknowledge his Czech ancestry; he considered himself an ethnic German. His father owned a factory, but he died when Joseph was only four years old. In 1893, Joseph and his mother moved to Vienna. Schumpeter was a loyal supporter of Franz Joseph I of Austria.
Třešť is a town in the Vysočina Region of the Czech Republic, which was founded around the turn of the 13th century. It has around 6,000 inhabitants.
Austria-Hungary, often referred to as the Austro-Hungarian Empire or the Dual Monarchy, was a constitutional monarchy in Central and Eastern Europe between 1867 and 1918. It was formed when the Austrian Empire adopted a new constitution; as a result Austria (Cisleithania) and Hungary (Transleithania) were placed on equal footing. It dissolved into several new states at the end of the First World War.
The Czechs or the Czech people, are a West Slavic ethnic group and a nation native to the Czech Republic in Central Europe, who share a common ancestry, culture, history, and Czech language.
After attending school at the Theresianum, Schumpeter began his career studying law at the University of Vienna under the 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. In 1911, he joined the University of Graz, where he remained until World War I.
Theresianum is a private boarding and day school governed by the laws for public schools in Vienna, Austria. It was founded in 1746 by Empress Maria Theresa of Austria.
The University of Vienna is a public university located in Vienna, Austria. It was founded by Duke Rudolph IV in 1365 and is the oldest university in the German-speaking world. With its long and rich history, the University of Vienna has developed into one of the largest universities in Europe, and also one of the most renowned, especially in the Humanities. It is associated with 20 Nobel prize winners and has been the academic home to a large number of scholars of historical as well as of academic importance.
The Austrian School is a heterodox school of economic thought that is based on methodological individualism—the concept that social phenomena result exclusively from the motivations and actions of individuals.
In 1918, Schumpeter was a member of the Socialization Commission established by the Council of the People's Deputies in Germany. In March 1919, he was invited to take office as Minister of Finance in the Republic of German-Austria. He proposed a capital levy as a way to tackle the war debt and opposed the socialization of the Alpine Mountain plant.In 1921, he became president of the private Biedermann Bank. He was also a board member at the Kaufmann Bank. Problems at those banks left Schumpeter in debt. His resignation was a condition of the takeover of the Biedermann Bank in September 1924.
The Council of the People's Deputies was the name given to the government of the November Revolution in Germany from November 1918 until February 1919. The Council de facto took over the function of head of state (Kaiser) and head of government (Chancellor), and issued decretes replacing the legislation of parliament (Reichstag) and Federal Council. The state secretaries stayed in office or were replaced by the Council.
The Republic of German-Austria was a country created following World War I as the initial rump state for areas with a predominantly German-speaking population within what had been the Austro-Hungarian Empire.
From 1925 to 1932, Schumpeter held a chair at the University of Bonn, Germany. He lectured at Harvard in 1927–1928 and 1930. In 1931, he was a visiting professor at The Tokyo College of Commerce. In 1932, Schumpeter moved to the United States, and soon began what would become extensive efforts to help central European economist colleagues displaced by Nazism.Schumpeter also became known for his opposition to Marxism and socialism that he thought would lead to dictatorship, and even criticized President Franklin Roosevelt's New Deal. In 1939, Schumpeter became a US citizen. In the beginning of World War II, the FBI investigated him and his wife (a prominent scholar of Japanese economics) for pro-Nazi leanings, but found no evidence of Nazi sympathies.
At Harvard, Schumpeter was considered a memorable character, erudite and even showy in the classroom. He became known for his heavy teaching load and his personal and painstaking interest in his students. He served as the faculty advisor of the Graduate Economics Club and organized private seminars and discussion groups.Some colleagues thought his views outdated by Keynesianism which was fashionable; others resented his criticisms, particularly of their failure to offer an assistant professorship to Paul Samuelson, but recanted when they thought him likely to accept a position at Yale University. This period of his life was characterized by hard work and comparatively little recognition of his massive 2-volume book Business Cycles. However, the Schumpeters persevered, and in 1942 published what became the most popular of all his works, Capitalism, Socialism and Democracy , reprinted many times and in many languages in the following decades, as well as cited thousands of times.
The source of Joseph Schumpeter's dynamic, change-oriented, and innovation-based economics was the Historical School of economics. Although his writings could be critical of the School, Schumpeter's work on the role of innovation and entrepreneurship can be seen as a continuation of ideas originated by the Historical School, especially the work of Gustav von Schmoller and Werner Sombart.
According to Christopher Freeman (2009), a scholar who devoted much time researching Schumpeter's work: "the central point of his whole life work [is]: that capitalism can only be understood as an evolutionary process of continuous innovation and 'creative destruction'".
Schumpeter's scholarship is apparent in his posthumous History of Economic Analysis,although some of his judgments seem idiosyncratic and sometimes cavalier. For instance, Schumpeter thought that the greatest 18th century economist was Turgot, not Adam Smith, as many consider, and he considered Léon Walras to be the "greatest of all economists", beside whom other economists' theories were "like inadequate attempts to catch some particular aspects of Walrasian truth". 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.
In this book, Joseph Schumpeter recognized the implication of a gold monetary standard compared to a fiat monetary standard. In History of Economic Analysis, Schumpeter stated the following: "An 'automatic' gold currency is part and parcel of a laissez-faire and free-trade economy. It links every nation's money rates and price levels with the money-rates and price levels of all the other nations that are 'on gold.' However, gold is extremely sensitive to government expenditure and even to attitudes or policies that do not involve expenditure directly, for example, to foreign policy, to certain policies of taxation, and, in general, to precisely all those policies that violate the principles of [classical] liberalism. This is the reason why gold is so unpopular now and also why it was so popular in a bourgeois era."
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 Developmentwith 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 is the entrepreneur.
The entrepreneur disturbs this equilibrium and is the prime 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 Nikolai Kondratiev's ideas on 50-year cycles, Kondratiev waves.
Schumpeter suggested a model in which the four main cycles, Kondratiev (54 years), Kuznets (18 years), Juglar (9 years) and Kitchin (about 4 years) can be added together to form a composite waveform. Actually there was considerable professional rivalry between Schumpeter and Kuznets. The wave form suggested here did not include the Kuznets Cycle simply because Schumpeter did not recognize it as a valid cycle.[ clarification needed ] See "business cycle" for further information. A Kondratiev 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. As far as the segmentation of the Kondratiev Wave, Schumpeter never proposed such a fixed model. He saw these cycles varying in time – although in a tight time frame by coincidence – and for each to serve a specific purpose.
|Proposed economic waves|
|Cycle/wave name||Period (years)|
|Kitchin cycle (inventory, e.g. pork cycle)||3–5|
|Juglar cycle (fixed investment)||7–11|
|Kuznets swing (infrastructural investment)||15–25|
|Kondratiev wave (technological basis)||45–60|
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 buy the resources needed to realize his 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.[ citation needed ]
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Schumpeter's most popular book in English is probably Capitalism, Socialism and Democracy . While he agrees with Karl Marx that capitalism will collapse and be replaced by socialism, Schumpeter predicts a different way this will come about. While Marx predicted that capitalism would be overthrown by a violent proletarian revolution, which actually occurred in the least capitalist countries, Schumpeter believed that capitalism would gradually weaken by itself and eventually collapse. Specifically, the success of capitalism would lead to corporatism and to values hostile to capitalism, especially among intellectuals.
"Intellectuals" are a social class in a position to critique societal matters for which they are not directly responsible and to stand up for the interests of other classes. Intellectuals tend to have a negative outlook of capitalism, even while relying on it for prestige, because their professions rely on antagonism toward it. The growing number of people with higher education is a great advantage of capitalism, according to Schumpeter. Yet, unemployment and a lack of fulfilling work will cause intellectual critique, discontent and protests.
Parliaments will increasingly elect social democratic parties, and democratic majorities will vote for restrictions on entrepreneurship. Increasing workers' self-management, industrial democracy and regulatory institutions would evolve non-politically into "liberal capitalism". Thus, the intellectual and social climate needed for thriving entrepreneurship will be replaced by some form of "laborism". This will exacerbate "creative destruction" (a borrowed phrase to denote an endogenous replacement of old ways of doing things by new ways), which will ultimately undermine and destroy the capitalist structure.
Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy.
William Fellner in the book Schumpeter’s Vision: Capitalism, Socialism and Democracy After 40 years, noted that Schumpeter saw any political system in which the power was fully monopolized as fascist.
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. Furthermore, he claimed that even if the common good was possible to find, it would still not make clear the means needed to reach its end, since citizens do not have the requisite knowledge to design government policy.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 periodic votes by the general public legitimize governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role for individuals is usually severely limited.
Schumpeter was probably the first scholar to theorize about entrepreneurship, and the field owed much to his contributions. His fundamental theories are often referred toas Mark I and Mark II. In Mark I, Schumpeter argued that the innovation and technological change of a nation come from the entrepreneurs, or wild spirits. He coined the word Unternehmergeist, German for "entrepreneur-spirit", and asserted that "... the doing of new things or the doing of things that are already being done in a new way" stemmed directly from the efforts of entrepreneurs.
Schumpeter developed Mark II while a professor at Harvard. Many social economists and popular authors of the day argued that large businesses had a negative effect on the standard of living of ordinary people. Contrary to this prevailing opinion, Schumpeter argued that the agents that drive innovation and the economy are large companies which have the capital to invest in research and development of new products and services and to deliver them to customers more cheaply, thus raising their standard of living. In one of his seminal works, Capitalism, Socialism and Democracy, Schumpeter wrote:
As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the door of the large concerns – which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector – and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down.
As of 2017 [update] Mark I and Mark II arguments are considered complementary.
Schumpeter was the most influential thinker to argue that long cycles are caused by innovation, and are an incident of it. His treatise on business cycles developed were based on Kondratiev's ideas which attributed the causes very differently. Schumpeter's treatise brought Kondratiev's ideas to the attention of English-speaking economists. Kondratiev fused important elements that Schumpeter missed. Yet, the Schumpeterian variant of long-cycles hypothesis, stressing the initiating role of innovations, commands the widest attention today.In Schumpeter's view, technological innovation is at the cause of both cyclical instability and economic growth. Fluctuations in innovation cause fluctuation in investment and those cause cycles in economic growth. Schumpeter sees innovations as clustering around certain points in time periods that he refers to as "neighborhoods of equilibrium", when entrepreneurs perceive that risk and returns warrant innovative commitments. These clusters lead to long cycles by generating periods of acceleration in aggregate growth.
The technological view of change needs to demonstrate that changes in the rate of innovation governs changes in the rate of new investments, and that the combined impact of innovation clusters takes the form of fluctuation in aggregate output or employment. The process of technological innovation involves extremely complex relations among a set of key variables: inventions, innovations, diffusion paths and investment activities. The impact of technological innovation on aggregate output is mediated through a succession of relationships that have yet to be explored systematically in the context of long wave. New inventions are typically primitive, their performance is usually poorer than existing technologies and the cost of their production is high. A production technology may not yet exist, as is often the case in major chemical inventions, pharmaceutical inventions. The speed with which inventions are transformed into innovations and diffused depends on actual and expected trajectory of performance improvement and cost reduction.
Schumpeter identified innovation as the critical dimension of economic change.He argued that economic change revolves around innovation, entrepreneurial activities, and market power. He sought to prove that innovation-originated market power can provide better results than the invisible hand and price competition. He argued that technological innovation often creates temporary monopolies, allowing abnormal profits that would soon be competed away by rivals and imitators. These temporary monopolies were necessary to provide the incentive for firms to develop new products and processes.
He was married three times.His first wife was Gladys Ricarde Seaver, an Englishwoman nearly 12 years his senior (married 1907, separated 1913, divorced 1925). His best man at his wedding was his friend and Austrian jurist Hans Kelsen. His second was Anna Reisinger, 20 years his junior and daughter of the concierge of the apartment where he grew up. As a divorced man, he and his bride converted to Lutheranism in order to marry. They married in 1925, but within a year, she died in childbirth. The loss of his wife and newborn son came only weeks after Schumpeter's mother had died. In 1937, Schumpeter married the American economic historian Elizabeth Boody, who helped him popularize his work and edited what became their magnum opus, the posthumously published History of Economic Analysis.
Schumpeter died in his home in Taconic, Connecticut, at the age of 66, on the night of 7 January 1950.
For some time after his death, Schumpeter's views were most influential among various 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 from Schumpeter and were also often 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 . In the journal Monthly Review John Bellamy Foster wrote of that journal's founder Paul Sweezy, one of the leading Marxist economists in the United States and a graduate assistant of Schumpeter's at Harvard, that Schumpeter "played a formative role in his development as a thinker".Other outstanding students of Schumpeter's include the economists Nicholas Georgescu-Roegen and Hyman Minsky and John Kenneth Galbraith and former chairman of the Federal Reserve, Alan Greenspan. Future Nobel Laureate Robert Solow was his student at Harvard, and he expanded on Schumpeter's theory.
Today, Schumpeter has a following outside standard textbook economics, in areas such as economic policy, management studies, industrial policy, and the study of innovation. Schumpeter was probably the first scholar to develop theories about entrepreneurship. For instance, the European Union's innovation program, and its main development plan, the Lisbon Strategy, are influenced by Schumpeter. The International Joseph A. Schumpeter Society awards the Schumpeter Prize.
The Schumpeter School of Business and Economics opened in October 2008 at the University of Wuppertal. According to University President Professor Lambert T. Koch, "Schumpeter will not only be the name of the Faculty of Management and Economics, but this is also a research and teaching programme related to Joseph A. Schumpeter."
On 17 September 2009, The Economist inaugurated a column on business and management named "Schumpeter."The publication has a history of naming columns after significant figures or symbols in the covered field, including naming its British affairs column after former editor Walter Bagehot and its European affairs column after Charlemagne. The initial Schumpeter column praised him as a "champion of innovation and entrepreneurship" whose writing showed an understanding of the benefits and dangers of business that proved to be far ahead of its time.
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The business cycle, also known as the economic cycle or trade cycle, is the downward and upward movement of gross domestic product (GDP) around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth and periods of relative stagnation or decline.
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Nikolai Dmitriyevich Kondratiev was a Russian economist, who was a proponent of the New Economic Policy (NEP), which promoted small private, free market enterprises in the Soviet Union. He is best known for proposing the theory that Western capitalist economies have long term cycles of boom followed by depression. These business cycles are now called "Kondratiev waves".
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Innovation economics is a growing economic theory that emphasizes entrepreneurship and innovation. In his 1942 book Capitalism, Socialism and Democracy, economist Joseph Schumpeter introduced the notion of an innovation economy. He argued that evolving institutions, entrepreneurs and technological changes were at the heart of economic growth. However, it is only in recent years that "innovation economy," grounded in Schumpeter's ideas, has become a mainstream concept".
Capitalism, Socialism and Democracy is a book on economics by Joseph Schumpeter, arguably the most famous, debated and important books by Schumpeter, and one of the most famous, debated and important books on social theory, social sciences and economics, in which he deals with capitalism, socialism and creative destruction. First published in 1942, it is largely unmathematical compared with neoclassical works, focusing on unexpected, rapid spurts of entrepreneur-driven growth instead of static models.
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Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "classical" theories and produced a general theory that described the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting to explain unemployment and recessions, he noticed the tendency for people and businesses to hoard cash and avoid investment during a recession. He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle.
Dr Redvers Opie (1900-1984) was a British economist. Educated at Durham University, he taught at Oxford University where he eventually became the Bursar of Magdalen College. He later went on to do a PhD at Harvard University, where he became a member of the teaching staff. On the recommendation of John Maynard Keynes, he became the United Kingdom Treasury representative in Washington, D.C., as Counsellor and economic adviser at the British Embassy, 1939–46, and was one of the five members of the UK delegation to the Bretton Woods Conference, which gave birth to the International Monetary Fund and the World Bank.
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Demand-side economics is a macroeconomic theory which argues that economic growth is most effectively created by high demand for products and services. According to demand-side economics, output is determined by effective demand. High consumer spending leads to business expansion, resulting in greater employment opportunities. Higher levels of employment create a multiplier effect that further stimulates aggregate demand, leading to greater economic growth.
Indeed, Silicon Valley may be one of the few places where businesses are still aware of the ideas of Josephine Schumpeter, an economist from Austria who wrote about business cycles during the first half of the last century. He said the lifeblood of capitalism was 'creative destruction.' Companies rising and falling would unleash innovation and in the end make the economy stronger.
I've watched the process [creative destruction] at work through my entire career,
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