RESEARCH & IDEAS
Rediscovering Schumpeter: The
Power of Capitalism
Q&A with: Thomas McCraw
Published: May 7, 2007
Author:
Sean Silverthorne
Economist Joseph Schumpeter was perhaps
the most powerful thinker ever on innovation,
entrepreneurship, and capitalism. He was also
one of the most unusual personalities of the
20th century, as Harvard Business School
professor emeritus Thomas K. McCraw shows
in a new biography. Read our interview and
book excerpt. Key concepts include:
• Schumpeter's
ideas
on
capitalism,
entrepreneurship, and innovation still have
great
resonance
to
students
and
businesspeople today.
If capitalism was the most influential single
economic and social force of the 20th century
(and continuing today), there is no better guide
to understanding its power and complexity than
famed economist Joseph Schumpeter, says
Harvard Business School's Thomas K.
McCraw. “I think Schumpeter is the most
penetrating analyst of capitalism who ever
lived. He saw things other people didn't see.”
McCraw, a past winner of the Pulitzer Prize
for History, has written a new biography,
Prophet of Innovation: Joseph Schumpeter and
Creative Destruction, which weaves together
threads of social, business, and economic
histories to illuminate Schumpeter's life and
work. A central theme details how
Schumpeter's insights help us understand how
the forces of capitalism, innovation, and
entrepreneurship continue to transform the
world today.
Making the story even more compelling is
Schumpeter's
charismatic
personality.
Something of a dandy, Schumpeter (1883-1950)
was a hit with women, adored by students, and
both made and lost a fortune in a matter of
years. He also once initiated a sword fight with
a librarian—and won.
McCraw, the Isidor Straus Professor of
Business History Emeritus, discusses his
research and thoughts on Schumpeter's legacy
in this e-mail interview.
Sean Silverthorne: What attracted you to
research and write about Schumpeter? And
why the title Prophet of Innovation?
Thomas McCraw: I first encountered
Schumpeter many years ago, as an
undergraduate, and I've enjoyed reading his
works ever since. But the main reason I wrote
this book is the tremendous resonance his ideas
have had with my HBS students and with
businesspeople.
I think Schumpeter is the most penetrating
analyst of capitalism who ever lived. He saw
things other people didn't see, partly because he
lived in 7 different countries. He also served
briefly as Austria's finance minister and worked
for 3 years as an investment banker, where he
made a fortune that he promptly lost in a stock
market crash. So he wasn't a typical academic,
even though he spent most of his career as a
professor, including almost 20 years at Harvard.
As for my title, here's the quotation that
inspired it: "Without innovations, no
entrepreneurs;
without
entrepreneurial
achievement, no capitalist returns and no
capitalist propulsion." Schumpeter wrote this
sentence during the Great Depression of the
1930s. Many, many smart people of that time
believed that technology had reached its limits
and capitalism had passed its peak. Schumpeter
believed the exact opposite, and of course he
was right.
Q: Schumpeter introduced the term
“creative destruction” and championed the
role of the entrepreneur in both start-ups
and in established companies. What can
business leaders take away from his
development of these ideas?
A: The main takeaway is the absolute
relentlessness of creative destruction and
entrepreneurship. In a free economy, they never
stop—never. Schumpeter wrote that all firms
must try, all the time, "to keep on their feet, on
ground that is slipping away from under them."
So, no serious businessperson can ever
completely relax. Someone, somewhere, is
always trying to think of a way to do the job
better, at every point along the value chain.
Whatever has been built is going to be
destroyed by a better product or a better method
or a better organization or a better strategy.
COPYRIGHT 2007 PRESIDENT AND FELLOWS OF HARVARD COLLEGE
Schumpeter believed the
exact opposite, and of
course he was right.
This is an extremely hard lesson to accept,
particularly by successful people. But business
is a Darwinian process, and Schumpeter often
likened it to evolution. The creative destruction
can occur within a large innovative company
(Toyota, GE, Microsoft), but it's much more
likely to happen with start-ups, particularly
since they now have so much access to venture
capital. Schumpeter, by the way, was one of the
first economists to use that term. He wrote an
article in 1943 in which he speaks of "venture
capital."
Q: Capitalism, Socialism and Democracy
is perhaps Schumpeter's best-known work.
What makes it so rich and provocative even
half a century later?
A: Chapter 7, "The Process of Creative
Destruction," is only 6 pages long, but it
perfectly captures the essence of capitalism.
The 2 chapters preceding and the 2 following it
flesh out the argument. So in the space of a little
more than 40 pages, we have probably the
richest material ever written on the broad
subject of capitalism. The rest of the book is
full of provocative ideas on politics, economics,
and society, from ancient times to the present.
Schumpeter wrote some parts of the book in
the form of satire. In his long analysis of
socialism, for example, he seems to be arguing
that it is a superior system. But this whole
section is really an elaborate shell game. As
Jonathan Swift, the greatest satirist writing in
the English language put it, "Satire is a sort of
glass wherein beholders do generally discover
everybody's face but their own." Some readers
actually came away from Schumpeter's book
believing that he was a socialist. In fact, he was
one of the most ardent defenders of capitalism
of his time. But he was very subtle about it,
trying above all to force his readers to think for
themselves.
Q: You compare reading his books with
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listening to Beethoven's symphonies. What
powers did Schumpeter command as a
writer?
A: I made this comparison for 2 reasons.
First, Beethoven's music is not always easy to
understand—in contrast, for example, to
Mozart's. (Mozart is the most widely recorded
of all classical composers, and Beethoven
second.) You have to be patient with
Beethoven, and listen very carefully, sometimes
over and over, to get the full message.
Another reason for the comparison is that
Beethoven's music is grandiose and extremely
romantic, and the same can be said of
Schumpeter's writing—very unusual for an
economist. But because capitalism is much
more than just an economic system, Schumpeter
made himself more than an economist. He was
the most erudite economic scholar of his time,
and perhaps of all times.
Q: Today, what would Schumpeter tell us
about the evolution of capitalism in the 21st
century?
A: Several economists, including Larry
Summers and Brad DeLong, have said that the
21st century is going to be "the century of
Schumpeter," and I agree. The reason is that
innovation and entrepreneurship are flowering
all over the world in unprecedented
fashion—not only in the well-publicized cases
of China and India, but everywhere except
those areas that foolishly continue to reject
capitalism.
The word "globalization" is accurate
enough, but if anything it understates the case,
in part because of the information revolution
wrought by the Internet. This situation makes
management harder and more challenging than
it's ever been before. As a historian, I don't say
that lightly.
Q: Schumpeter was a fascinating
personality—a
womanizer,
incredible
intellect, great teacher. And how many
prominent economists have provoked a
sword fight with a librarian? But at the same
time, as your biography illustrates,
Schumpeter could sink into self-doubt. What
are your personal feelings toward the man?
Did your impressions of him change while
writing the book?
A: One of the joys of writing this book was
dealing with Schumpeter's personal life. I knew
it was going to be interesting, but not nearly so
much as it turned out to be. His student Paul
Samuelson, the first American to win the Nobel
Prize in Economics, once said that Schumpeter
was great as both a scholar and a personality,
but that his comparative advantage may have
been greater as a personality. I don't quite agree,
but there's no denying his personal appeal,
especially to women and to scholars and
students of both sexes.
The duel you mention, by the way, was over
students' access to books. Schumpeter had
given out heavy assignments, the librarian had
refused to allow the students to check out the
assigned books, and when Schumpeter threw a
tantrum (he was only 26, and had just started
teaching), the librarian challenged him to a
duel. Schumpeter won the duel by cutting a
small slice out of the librarian's shoulder. The
two men later became good friends, and the
students got access to the books.
Like many geniuses, Schumpeter held
himself to impossibly high standards, and he
constantly brooded that he wasn't living up to
them. There was extraordinary tension between
his devotion to rationality ("I have given my life
to reason," he once wrote in his diary), and the
overwhelming power of his emotions. He was
an intellectual prodigy, and, like many former
boy wonders, was surprised to find that he
could not work during his 40s and 50s at the
furious pace he had set during his 20s. Even so,
he did some of his very best work in middle
age. Capitalism, Socialism and Democracy, for
example, appeared when he was 59.
There's no denying his
personal appeal, especially
to women and to scholars
and students of both sexes.
Then, too, he suffered some dreadful
personal tragedies, such as the death of his
23-year-old wife in childbirth, and of his
newborn son 4 hours later. This was the pivotal
event of his life. In the months and years that
followed, he drew on the great depth of his
character—which went much deeper than he
had realized—and redoubled his effort to work
out the full complexity of capitalism as an
economic, cultural, and social system.
As for my personal feelings about him, I
think Schumpeter is one of those historical
figures that anyone would love to have dinner
with, as many people have said of Benjamin
Franklin. He was just so witty, knowledgeable,
and downright interesting that you couldn't
come away without feeling enriched. Weaving
together the fascinating story of his life with an
interpretation of his great body of work made
the writing of my book not only a challenge, but
also a tremendous pleasure.
Prologue: Who He Was and
What He Did
by Thomas McCraw
Questions about capitalism—what it is, how
and why it has worked well in some places and
not others—are among the most important that
people and governments have faced. This has
been true for about three hundred years, and
seldom more so than in the present and the
recent past. Recall the turbulent transition from
the last decade of the twentieth century to the
COPYRIGHT 2007 PRESIDENT AND FELLOWS OF HARVARD COLLEGE
initial one of the twenty-first: the sudden
collapse of communism, for seventy years a
serious challenger to capitalism; the riotous
prosperity of the 1990s, when entrepreneurs
became folk heroes; the ensuing epidemic of
corporate
scandals,
which
bankrupted
shareholders and employees and disgraced
capitalism itself; then the scourge of
international terrorism, portending warfare
without end; and finally the spectacular
economic gains in many parts of the
world—most notably China, which combined a
new capitalist economic system with an old
communist political regime.
How can one understand these issues? Why,
after seven decades of struggle, did capitalism
triumph over communism? Are exorbitant
executive pay schemes and continual
accounting frauds corruptions of capitalism or
its natural state? When people ask about
terrorists “Why do they hate us so much?” what
part does capitalism play in the definition of
“us”? How long can China and other countries
sustain their economic progress without
granting more political liberties to their people?
Some of the clearest guides to these kinds of
questions come from Schumpeter, who assessed
capitalism as an expression of innovation,
human drama, and sheer havoc—all going on at
once. He told of capitalism in the way most
people experience it: as consumer desires
aroused by endless advertising; as forcible jolts
up and down the social pecking order; as goals
reached, shattered, altered, then reached once
more as people try, try again. For capitalism,
and for Schumpeter personally, nothing was
ever stable. Uproar was their only music.
Like nearly everyone who has thought
deeply about capitalism, Schumpeter came
away with mixed feelings. He regarded himself
as a conservative and planned to write a book
on the meaning of conservatism. But, as he told
his fellow economist John Kenneth Galbraith,
“I am pretty sure that no conservative I have
ever met would recognize himself in the picture
I am going to draw.” Schumpeter abhorred
some of the banalities of business culture and
revered the artistic attainments of the Old
World. He knew that creative destruction
fosters economic growth but also that it
undercuts cherished human values. He saw that
poverty brings misery but also that prosperity
cannot assure piece of mind. 6
A steep rise in living standards would seem
to be a prize of supreme value for any society.
Yet capitalism has a dreadful reputation for
robbing the poor to profit the rich, and it has
never achieved what most people regard as a
fair distribution of its bounties. In some
countries it still represents a curse to be resisted
and overcome. Even its fortunate beneficiaries
in rich countries often have a guilty feeling that
capitalism is an unworthy pursuit—something
to be accepted but not celebrated. As
Schumpeter himself put it, “The stock exchange
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is a poor substitute for the Holy Grail.”7
He applied his immense energy to analyzing
and explaining capitalist innovation not only for
other experts but sometimes for the
nonspecialist. From the compelling story of his
life and work, a reader can grasp the basic
mechanism of the capitalist engine about as
well as from a whole shelf of textbooks. The
subject is momentous, and its full social
mechanism quite intricate. But its economic
essence is not very complicated. As Schumpeter
himself wrote in 1946, at the beginning of his
long article on capitalism for the Encyclopaedia
Britannica, “A society is called capitalist if it
entrusts its economic process to the guidance of
the private businessman. This may be said to
imply, first, private ownership of nonpersonal
means of production … second, production for
private account, i.e., production by private
initiative for private profit.” He went on to say
that a third element is “so essential to the
functioning of the capitalist system” that it must
be added to the other two.8
This third element is the creation of credit.
The core ethos of capitalism looks constantly
ahead and relies on credit and launching new
ventures. From the Latin root credo—“I
believe”—credit represents a wager on a better
future. The entrepreneurs and consumers who
make these bets often care little about the past
and have scant patience with the present. They
undertake innovative projects and make
expensive purchases (houses, for example) that
require far greater resources than those lying at
COPYRIGHT 2007 PRESIDENT AND FELLOWS OF HARVARD COLLEGE
hand. In the absence of credit, both consumers
and entrepreneurs would suffer endless
frustrations.
Reprinted by permission of Harvard
University Press from Prophet of Innovation:
Joseph Schumpeter and Creative Destruction
by Thomas K. McCraw. Copyright 2007 by the
President and Fellows of Harvard College. All
rights reserved.
6. Schumpeter to Galbraith, October 28,
1948, in Hedtke and Swedberg, eds; Briefe, p.
366.
7. Schumpeter, Capitalism, Socialism and
Democracy, p. 137.
8.
Schumpeter,
“Capitalism,”
Encyclopaedia
Britannica
(New
York:
Encyclopaedia Britannica, 1946), VI, p. 801.
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