Joseph A. Schumpeter (1883-1950) was one of the greatest 20th
century economists and one of the best read. He began his
career studying under the great Austrian capital theorist
Eugen von Bohm-Bawerk and ended up teaching at Harvard from
1932 on. He was generally considered not to have been a very
good teacher because he tried to pack too much into each
lecture. Although Schumpeter encouraged some young
mathematical economists, Schumpeter was not a mathematician
and tried to integrate sociological understanding into his
economic theories. From current thought it appears 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.
Schumpeter's vast erudition is apparent in his post-humuous History of Economic Analysis, although some of his
judgments seem quite idiosyncratic. For instance, Schumpeter
thought that the greatest 18th century economist was Turgot,
not Adam Smith. Some of these judgments are partly explained
by his opinion that there is one general system of economic
analysis, and [Leon 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
variables but a couple. Then they could argue that one caused
the other in a simple monotonic fashion.
Voila, one could easily deduce policy conclusions directly
from a highly abstract theoretical model.
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. From the above, the reader might conclude that
Schumpeter followed
Walras and that his analysis shared nothing in common with Keynes.
But this conclusion would be wrong, as illustrated by
Schumpeter's The Theory of Economic Development. Schumpeter starts with a
stationary state, which he thinks is described by Walrasian equilibrium.
Schumpeter describes the stationary state as a "circular flow." 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 Kondratiev's
ideas on 50-year cycles.
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 conservative, rejected
Keynesianism. Some have seen this to be partly due to jealousy -
Schumpeter might have seen that he would be judged by history as the
second-greatest economist of his day, and he knew who would be first.
Schumpeter's most popular book in English is
probably ''Capitalism,
Socialism, and Democracy''. This book opens with a good
treatment of
Marx.
Schumpeter is quite sympathetic to Marx's analysis, although
Schumpeter concludes capitalism will be replaced by socialism for
non-Marxist reasons. It is in this book that Schumpeter's characterizes
capitalism by the phrase "creative destruction," in which 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 corporations and a fostering of values, especially among
intellectuals, of hostility to capitalism. The intellectual and social
climate needed to allow entrepreneurship to thrive will not exist in
advanced capitalism and it will be succeeded by socialism of some form
or another. There will not be a revolution, but merely a trend in
parliaments to elect social democratic parties of one stripe or another.
Schumpeter emphasizes that he is analyzing trends, not engaging in
political advocacy here. Some have thought
[John Kenneth Galbraith]? was
influenced in his
The New Industrial State by Schumpeter's views on
corporations.
Schumpeter's views are most influential today among
heterodox economists, especially European, who are interested in
industrial organization, evolutionary theory, economic development, and
chaotic dynamics. These economists tend to be on the other
end of the political spectrum as Schumpeter and are equally influenced
by Keynes, Karl Marx, and [Thorstein Veblen]?.