History of Economic Thought
J.A. Schumpeter – life and work
dr Adam Karbowski
Department of Business Economics
[email protected]
Schumpeter’s life span 1883-1918
 J.A. Schumpeter was born in 1883 in Triesch (Moravia) as a son of cloth
manufacturer married to the daughter of a Vienna physician
 10-year-old Schumpeter moved to Vienna (second marriage of his mother)
and entered Theresianum – famous school patronized by the Austrian
aristocracy
 In 1901 Schumpeter entered University of Vienna (law faculty) and studied
economics and statistics as elective courses
 His famous teachers were: E. von Bohm-Bawerk, E. von Philippovich, F.
von Wieser
 In 1906 Schumpeter received doctoral degree in law
Schumpeter’s life span 1883-1918
 In 1906 Schumpeter published his first paper in mathematical economics –
On the Mathematical Method in Economic Theory – discussion on concepts
of famous economists: Cournot, Edgeworth, Gossen, Jevons, Marshall,
Pareto, Walras
I must say that so far I have not heard any objection which appeared sound to
me, none which would have shaken my belief that on this method rests the
future of economic theory as a science
 In 1908 Schumpeter published his first great work – The Essence and
Principal Contents of Economic Theory (626-page book)
Schumpeter’s life span 1883-1918
 In 1909 Schumpeter returned to Vienna (from a stay in England and Egypt)
and obtained a regular professorship at the University of Czernowitz
(Bukowina). Schumpeter wished to return to Vienna as quickly as possible,
however the Vienna faculty resisted the idea of admitting the mathematical
economist to its circle.
 In 1911 (thanks to Bohm-Bawerk’s support) Schumpeter received a chair at
the University of Graz (the faculty disapproved of Schumpeter). Schumpeter
were often going to Vienna and as a visiting professor to New York (Columbia
University).
 In 1914 Schumpeter was awarded the degree of doctor honoris causa by
the Columbia University
 Schumpeter stayed in Graz till 1918
Schumpeter’s works 1908-1918
 1908: The Essence and Principal Contents of Economic Theory –
Schumpeter wanted to acquaint German-speaking economists with
mathematical economics (in a sense of Cournot, Edgeworth and Walras).
 German economic scholars used historical method
Mathematics is necessary because our concepts are quantitative in nature or
that true accuracy, especially in the case of complicated problems, can only
be achieved in mathematical language.
 In the center of the book stands the problem of equilibrium. In Germany not
enough attention has been given to the problem of equilibrium.
Schumpeter’s works 1908-1918
 Schumpeter’s presentation rest on fundamental separation of statics from
dynamics in economics. The mathematical method of pure economics
suffices only for static analysis. Dynamics differ from statics in every respect,
in method as well as substance.
 Key idea of the book is the thorough presentation of static theory of
economic equilibrium developed by L. Walras. Schumpeter makes clear to the
reader the limits of static and comparative-static analysis.
 Schumpeter underlines that static analysis is appropriate to monetary and
distribution theory, however is not proper for the analysis of such a
phenomenon as development.
 The book in general was not well received
 Mathematical economics engaged Schumpeter to the end of his life,
although he did not make any further contribution to it.
Schumpeter’s works 1908-1918
 Theory of Economic Development (1912): not a single reference to
mathematical reasoning
 Kinds of theories of economic development:
1. Theory that explain a concrete historical development process
2. Theory which analyze the development process within the framework
of a given economic order
3. Theory that inquire into the conditions of economic development in any
economic system
4. Theory which inquire into the conditions of balanced development
 Schumpeter seeks to analyze the development process in every
capitalistic social order in which the economic agents consist of
households and entrepreneurs.
Schumpeter’s works 1908-1918
 The essence of economic development lies in the fact that means of
production, which hitherto have been put to certain static uses, are being
deflected from this course and are devoted to new purposes (carrying-through
of new combinations)
 Realization of new combinations is in a need of a kind of intelligence and
energy which are only in a minority of economic agents
 The intrinsic function of the entrepreneur is in carrying out these new
combinations
 There always exists for the economy a static equilibrium state. And always
does it require persons with leadership to direct the economy into new
channels (entrepreneurs get possession over production factors)
Schumpeter’s works 1908-1918
 Theory of development:
1. Economy in a stationary form in which the net national product is entirely
consumed (the stock of productive capital is just being maintained –
investments equal depreciation)
2. Carrying-through of new combinations of resources (innovations):
• Production of new goods
• Introduction of new production methods
• Opening up of a new market
• New source of supply of raw materials
• Establishment of new organization
Entrepreneurs in order to do the above need the purchasing power.
Schumpeter’s works 1908-1918
 Entrepreneurs in order to do the above need the purchasing power: it is
made available to them through bank credit. Thus without banker no
economic development is possible in Schumpeterian view.
 Credit is a lever which allows the entrepreneurs to divert the means of
production from previous uses and forcing the economy onto new paths.
 One can become an entrepreneur only by previously becoming a debtor to
a bank.
3. Innovations are decisive impulses to any economic development (their
discontinuous occurrence imparts a shock to a system in stationary form,
initiating a process of adjustment to the new reality leading eventually to a
new state of stationary equilibrium.
Schumpeter’s works 1908-1918
 Development process takes place in waves (the first innovator is followed
by imitators who in boom carry the economy far away from the initial
equilibrium until the wave overturns and the system is led into a recession
and eventually to a new stationary state).
 Business cycles are the paths on which the achievements of technical
progress occurs in a capitalistic economy.
Schumpeter’s works 1908-1918
 Epochs in the History of Doctrines and Methods (1914): covers the
evolution of economics to the status of a science – the discovery of the
circular flow, the classical system, the historical school and the marginal utility
theory
 The book did not receive a lively response – outbreak of war, but also the
fact that the book was not published separately (but as part of a compilation)
Schumpeter’s life and work 1919-1925 –
ill-fated years spent in politics and business
 Two worthy of note works: The Crisis of the Tax State, On the Sociology of
Types of Imperialism
 The Crisis of the Tax State: will the free-market capitalistic economy be in
the position to master the economic situation following the end of the war
without too heavy fiscal burdens for individuals?
 In 1918 Schumpeter left academic position in Graz and in 1919 moved to
Vienna and was appointed finance minister in the Renner Cabinet
(Schumpeter handed in his resignation after 7 months)
 Then, Schumpeter took a position of the Biedermann Bank manager. In
1924 the bank became insolvent (Schumpeter lost personal assets and got
into debt)
 In 1925 Schumpeter got a vacant chair at the University of Bonn
Schumpeter’s life and work 1925-1932
University of Bonn
 Schumpeter was teaching public finance, money and credit theory and
history of economic theory
 He wrote 13 articles addressed to the profession (topics: Edgeworth’s
theory, credit control, von Schmoller’s theory, Cassel’s theory, marginal
productivity concept, instability of capitalism, business cycles, circular flow
and economic development)
 Schumpeter was one of the founders of the first econometric society –
Econometric Society, an International Society for the Advancement of
Economic Theory in its Relation to Statistics and Mathematics (Cleveland,
1930) – famous members: Schumpeter, Fisher, Frisch, Wilson, Zawadzki;
famous journal: Econometrica
Schumpeter’s life and work 1925-1932
University of Bonn
 Schumpeter contributed a classic article in econometrics – The Common
Sense of Econometrics
 Article presents a survey of previous econometric work and sets forth the
significance of the econometric way of thinking for scientific findings and their
practical applications
 In 1932 Schumpeter left Bonn; he decided to move to Harvard
 Farewell speech:
Economics in not a philosophy of the economy nor a display of its essence.
We have to philosophize less in order to grow stronger as economists.
 In the fall semester 1932 Schumpeter started his work at Harvard
Schumpeter’s life and work 1932-1950
Harvard University
 Schumpeter was giving lectures to advanced students (P. Samuelson, R.
Musgrave, W. Stolper among others)
 Three great works are fruits of Harvard time: Business Cycles (1939),
Capitalism, Socialism and Democracy (1942), History of Economic
Analysis (unfinished) as well as 34 articles
 1942: Can the capitalistic system survive? No, in Schumpeterian view, the
march into socialism is inevitable – march into social order in which
ownership of the means of production is in the hands of the state and in which
the decisions concerning the what, how and for whom are made by a public
authority
 Why did Schumpeter think so?
Schumpeter’s life and work 1932-1950
Harvard University
 Why did Schumpeter think so?
1. Capitalism implies not only free consumer choice, freedom of decision
making by entrepreneurs. It implies above all an attitude toward life,
civilization of inequality of family wealth, acceptance of involuntary
employment. Due to Schumpeter this civilization is fading away quickly.
2. The process of destruction of the capitalism is not a consequence of its
deficiencies but of its virtues and successes (increase in prosperity
undermined the social and political position of the entrepreneurial class
and made it superfluous). Entrepreneurs are being replaced by
bureaucrats.
3. Increasing prosperity and rising educational standards produce
intellectuals in whom is manifested the resentiment against the
inequalities.
Schumpeter’s life and work 1932-1950
Harvard University
 Why did Schumpeter think so?
4. The mentioned achievements of capitalism have a destructive effect on
the family and undermine this social unit which is so significant for this
system
5. Inflationary processes are conducive to the destruction of capitalism
Schumpeter, on the basis of contemporary data, expected gradual transition
to socialism
Schumpeter versus Marx
For Marx the destruction of capitalism was a desirable end (normative
economics). Schumpeter never discussed its desirability or non-desirability
(positive economics).
Schumpeter’s ideas
1. Statics-Dynamics dichotomy gave rise to evolutionary economics
Equilibrium economics assumes that under given circumstances everyone
gets along as well as he can. Evolutionary economics tries to solve the
problem: how does an economy make a transition from one level to a
different one?
2. Role of entrepreneurship
• The Walrasian entrepreneur adapts promptly to the changed parameters
of the economic system – thus he contributes to the equilibration of the
system
• The Schumpeterian manager is Schumpeter’s version of W-entrepreneur
• The Schumpeterian entrepreneur disturbs the equilibrium by using
resources to change parameters of the economic system. The financing of
the project is motivated by the banker’s share in the expected profit.
Schumpeter’s ideas
3. Business cycles’ analytical categories:
• Process type (static versus dynamic)
• Evolution (pure economic development – those changes in the
appearance of economy that develop out of the economy itself)
• Disturbance (development as a disturbance of the static equilibrium of the
economy)
• Equilibration (disturbance causes a reaction in the static masses, a
movement towards a new equilibrium)
• Reorganization (convergence to the static state that brings reorganization
of the value and price system and a general liquidation)
Creative destruction
Schumpeter’s ideas
3. Business cycles’ patterns:
• The state of routinized equilibrium (the system will not change on its own
initiative)
• Entrepreneurial innovation (innovation by means of a new firm financed by
the bank credit)
• Innovation-induced disequilibrium (from the viewpoint of agents with
routinized behavior, innovator challenges the routines)
• Adaptation to new conditions (competitive struggle, many old firms are
annihilated – creative destruction)
• Renewed equilibrium which forms basis for another disturbing innovation
Schumpeter’s ideas
More on S-entrepreneurs
1. Motivations:
• „industrial and commercial success is the nearest approach (modern man
has) to found a private kingdom or a dynasty”
• the will to conquer
• the joy of creating
• the joy of getting things done
2. Characteristics:
• Man of action who is:
i. Not the capitalist
ii. Not the bearer of the economic risk
iii. Not the manager of a firm
iv. Not the member of a profession
v. Not the inventor
Schumpeter’s ideas
More on S-entrepreneurs
3. Actions:
Repayment of loan
Banker
Initial loan
Active
S-entrepreneur
Innovation
based firm
Retired
S-entrepreneur
Routinized
production
Money for spending
Profit
Schumpeter’s ideas
Schumpeterian innovation types:
1. Product innovation (a new type of product or variant of product)
2. Process innovation (a change of the production routine for an existing
product)
3. Organizational innovation (a change in the routines underlying firm
behavior that usually involves a change of market structure)
4. Market innovation (a product that has been used routinely by one group of
consumers is introduced into the consumption routines of a different
consumer group)
5. Input innovation (a new raw material or a new intermediate good)
Schumpeter’s ideas
Schumpeter’s evolution
‘Early Schumpeter’ – Mark I model: S-entrepreneurs transcend the
circumstances of the routinized circular flow, then conditions improve for
immediate followers (swarm of followers). Old firms do not innovate
because they are bound by routines that became fixed (only new firms can
make innovation jumps)
‘Late Schumpeter’ – Mark II model: behavior of incumbent firms is led by
routines, however, the incumbent firms use part of their resources to
insure themselves against being driven out of business by innovative
activities (large firms have enough resources and abilities – R&D and
marketing departments – to perform innovative activity); the model of
competition in oligopolistic industries
Schumpeter’s ideas
‘Late Schumpeter’ – Mark II model: large firms have enough resources and
abilities – R&D and marketing departments – to perform innovative
activity); the famous Schumpeterian hypothesis:
The monopolist firm will generate a larger supply of innovations because
there are advantages which, though not strictly unattainable on the
competitive level of enterprise, are as a matter of fact secured only on the
monopoly level.
S-entrepreneur internalized by large, monopolistic firms?
Schumpeter’s ideas
Today we have International Joseph A. Schumpeter Society
http://www.iss-evec.de/information.htm