Joseph Schumpeter

Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist.

This process of Creative Destruction is the essential fact about capitalism.
- Joseph Schumpeter

Quotes

• In all cases, not only in the two which we have analyzed, recovery came of itself. There is certainly this much of truth in the talk about the recuperative powers of our industrial system. But this is not all: our analysis leads us to believe that recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another crisis ahead. Particularly, our story provides a presumption against remedial measures which work through money and credit. For the trouble is fundamentally not with money and credit, and policies of this class are particularly apt to keep up, and add to, maladjustment, and to produce additional trouble in the future.
  • "Depressions: Can we learn from past experience?" in Schumpeter, Joseph A.; Chamberlin, Edward; Leontief, Wassily W.; Brown, Douglass V.; Harris, Seymour E.; Mason, Edward S.; Taylor, Overton H., The economics of the recovery program (1934)

• Economists have never allowed their analysis to be influenced by psychologists of their time, but have always framed for themselves such assumptions about psychical processes as they have thought it desirable to make.
  • History of Economic Analysis (1945), p. 27

• The first thing a man will do for his ideals is lie.
  • History of Economic Analysis, p. 43

• This civilization is rapidly passing away, however. Let us rejoice or else lament the fact as much as everyone of us likes; but do not let us shut our eyes to it.
  • "The March into Socialism" (1949)

• Gentlemen, you are worried about the depression[sic]. You should not be. For capitalism, a depression is a good, cold douche.
  • To economics students, recorded by R. L. Heilbroner, The Worldly Philosophers (1953)

The Theory of Economic Development (1934)

According to Schumpeter's preface to the English Edition: "The book was published for the first time, in German, in the fall of 1911. When, after it had been out of print for ten years, I consented, not without some reluctance, to a second edition, I omitted the seventh chapter, rewrote the second and the sixth, and shortened and added here and there. This was in 1926. The third German edition is merely a reprint of the second, from which also the present English version has been made."

Ch. 1 : The Circular Flow of Economic Life as Conditioned by Given Circumstances

• When we inquire about the general forms of economic phenomena, about their uniformities, or about a key to understanding them, we ipso facto indicate that we wish at that moment to consider them as something to be investigated, to be sought for, as the “unknown”; and that we wish to trace them to the relatively “known,” just as any science deals with its object of inquiry.

Ch. 4 : Entrepreneurial Profit

• The innovation is hazardous, impossible for most producers. But if someone establishes a business having regard to this source of supply, and everything goes well, then he can produce a unit of product more cheaply, while at first the existing prices substantially continue to exist. He then makes a profit. Again he has contributed nothing but will and action, has done nothing but recombine existing factors. Again he is an entrepreneur, his profit entrepreneurial profit. And again the latter, and also the entrepreneurial function as such, perish in the vortex of the competition which streams after them. The case of the choice of new trade routes belongs here.

Ch. 6 : The Business Cycle

• Why do entrepreneurs appear, not continuously, that is singly in every appropriately chosen interval, but in clusters? Exclusively because the appearance of one or a few entrepreneurs facilitates the appearance of others, and these the appearance of more, in ever-increasing numbers.

• Only a few people have these qualities of leadership and only a few in such a situation, that is a situation which is not itself already a boom, can succeed in this direction. However, if one or a few have advanced with success many of the difficulties disappear. Others can then follow these pioneers, as they will clearly do under the stimulus of the success now attainable. Their success again makes it easier, through the increasingly complete removal of the obstacles analysed in the second chapter, for more people to follow suit, until finally the innovation becomes familiar and the acceptance of it a matter of free choice.

• Since as we have seen the entrepreneurial qualification is something which, like many other qualities, is distributed in an ethnically homogeneous group according to the law of error, the number of individuals who satisfy progressively diminishing standards in this respect continually increases. Hence, neglecting exceptional cases — of which the existence of a few Europeans in a negro population would be an example — with the progressive lightening of the task continually more people can and will become entrepreneurs, wherefore the successful appearance of an entrepreneur is followed by the appearance not simply of some others, but of ever greater numbers, though progressively less qualified.

• Many things may be copied by the latter; the example as such also acts upon them; and many achievements directly serve other branches too [...].

• The more the process of development becomes familiar and a mere matter of calculation to all concerned, and the weaker the obstacles become in the course of time, the less the “leadership” that will be needed to call forth innovations. Hence the less pronounced will become the swarm-like appearance of entrepreneurs and the milder the cyclical movement.

• The swarm-like appearance of new combinations easily and necessarily explains the fundamental features of periods of boom.

Quotes about Schumpeter

• Schumpeter always argued that capitalism, as an intrinsically amoral economic system driven by the pursuit of profit, dissolvent of all barriers to market calculation, depended critically on pre-capitalist - in essence nobiliary - values and manners to hold it together as social and political order. But this aristocratic 'under-girding', as he put it, was typically reinforced by a secondary structure of support, in bourgeois milieux confident of the moral dignity of their own calling: subjectively closer to portraits by Mann than Flaubert.
  • Perry Anderson, The Origins of Postmodernity (1999), Ch. 4 : After-effects

• The aristocratic and the modern were inextricably combined in Joseph Schumpeter. The paradoxes of this great economist, who also served as minister of finance in the post- World War I government of Austria, are suggested by the fact that at his first teaching post, he challenged the university librarian to a duel to win freer access to books for the students. Perhaps Schumpeter was attracted to the big issues because he himself witnessed drastic changes in society.
  • Samuel Bowles, Richard Edwards, and Frank Roosevelt. Understanding Capitalism: Competition, Command, and Change (3rd ed., 2005)

• Although democratic ideas often yield rather ambiguous answers to the question of inclusion. Schumpeter was an exception. … Schumpeter’s solution, or rather nonsolution, was to allow a demos to draw any line it chooses between itself and other members. … Schumpeter's solution to the problem of composition of the demos is unacceptable, because it effectively erases the distinction between democracy and a nondemocratic order dominated by a collegial elite.
  • Robert A. Dahl, Democracy and Its Critics (1989), Ch. 9 : The Problem of Inclusion

• I can say that General Theory develops, justifies, rationalizes, extends, applies, and shows economists how to use what had by then become the author's standard themes and approaches in a way that Business Cycles, the History of Economic Analysis, and even Capitalism, Socialism, and Democracy do not. Back in 1970, the economist Harry G. Johnson pointed out that all successful founders of schools not only are geniuses with profound insights but also provide a road map that tells their followers and successors what to do to make a successful academic career within the school. Schumpeter did not do that second part.
  • J. Bradford DeLong, "Creative Destruction's Reconstruction: Joseph Schumpeter Revisited", The Chronicle of Higher Education (December 07, 2007)

• Empire was the equivalent of a modern-day sports team... The military aristocracy loved to play, and the people loved to watch.
  Schumpeter hated this. And he thought that it was on the way out—that as people became richer and more prosperous, the burgeois virtues would win, and the drive for empire would die. Schumpeter expected the con to end, and a peaceful, less aristocratic, less imperial, less bloodthirsty twentieth century.
  He was wrong.
  • J. Bradford DeLong, Slouching Towards Utopia: An Economic History of the Twentieth Century (2022)

• Aside from Yugoslavia, experiments with decentralization did not extend to planning innovation, the greatest weakness of the socialist economies. Even where markets were allowed to exert more influence over current production, the state was still responsible for planning the future. And state socialism provided only weak incentives for innovation. The Schumpeterian pressure that forced capitalist firms to innovate or die was not present in the planned economy.
  • Barry Eichengreen, The European Economy since 1945: Coordinated Capitalism and Beyond (2008) Chap. 5: “Eastern Europe and the Planned Economy”, Princeton University Press, p. 154.

• We have far more people selling derivatives, index funds and mutual funds (as we call them) than there is intelligence for the task. I am cautious about prediction; I discovered years ago that my correct predictions are forgotten, the others meticulously remembered. But some things are definite; when you hear it being said that we have entered a new economy of permanent prosperity with prices of financial instruments reflecting that happy fact, you should take cover. This has been the standard justification of speculative excess for several centuries — for a good part of the millennium. My one time Harvard colleague Joseph Schumpeter thought inevitable and even beneficial what he called “creative destruction” — the cyclical process by which the system eliminates the people and institutions which are mentally too vulnerable for useful economic service. Unfortunately the process has larger and less benign effects, including the possibility of painful recession or depression.
  • John Kenneth Galbraith, "The Unfinished Business of the Century" (1999)

• [E]conomics is all around us, and we should cultivate the experience of it in many ways besides formal study. ...Joseph A. Schumpeter is reputed to have made the purist claim that the best way to economics is to study history and mathematics. Even the non-purist would have to agree that these two subjects contribute greatly to economic education, as would many other diverse subjects, such as sociology, psychology, geography, agriculture, urban studies, the law, engineering, public health, transportation, computer programming, and the closely related field of business and public administration. ...The American Economic Association... catalogues its members according to thirty-six... areas of specialization, but... there must be thousands of different enthusiasms and points of view. And the best way to serve all of these is to study economics directly.
  • Martin Gerhard Giesbrecht, The Evolution of Economic Society: An Introduction to Economics (1972) Ch. 11, On Further Study, p. 329.

• The developed economies are currently experiencing profound changes. A technological revolution is creating entirely new sectors, based on biotechnology, microprocessors, and telecommunications, whose prod­ucts are transforming business practices across the economy. A wave of managerial innovations has seen companies around the world adopt new forms of supplier-client relations, just-in-time inventory systems, quality control and team production. Economic activity is shifting from the industrial sector into the service sector. Capitalism seems to be in the midst of one of those 'cycles of creative destruction' that Schumpeter (1950) identified.
  • Peter A. Hall and David Soskice. "An introduction to varieties of capitalism." in Varieties of capitalism: The institutional foundations of comparative advantage (2001)

• That an economist of Professor Schumpeter's standing should thus have fallen into a trap which the ambiguity of the term "datum" sets to the unwary can hardly be explained as a simple error. It suggests rather that there is something fundamentally wrong with an approach which habitually disregards an essential part of the phenomena with which we have to deal: the unavoidable imperfection of man's knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired. Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people's knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain.
  • Friedrich Hayek, "The Use of Knowledge in Society" (1945)

• Speaking about great conversationalists among economists reminds me that you may wonder why I have not yet said more about Schumpeter—certainly the most brilliant talker among economists I have known with the sole exception of Keynes, with whom he had many other things in common, not least a puckish itch pour épater le bourgeois and a certain pretence to omniscience and a tendency to bluff which went far beyond their astounding knowledge. So far as Schumpeter is concerned, the fact is that during the few post-war years he lived at Vienna he had scarcely any contact with the economists and saw little even of those who had been his contemporaries in the Böhm-Bawerk seminar. Of course his two pre-war books and his essay on money were familiar to all of us. But we hardly saw him and some of his pronouncements on current affairs had earned him a reputation as an enfant terrible among economists.
  • Friedrich Hayek, "The Economics of the 1920s as Seen from Vienna" (1963), published in The Fortunes of Liberalism (1992)

• Schumpeter’s attempt to prove his assertion to the layman characteristically begins by assuming that ‘means of production are present in given and, for the moment, unalterable quantities’. He does not explain to whom these quantities are ‘given’, that is, known, nor how much about their various attributes and potentialities anybody knows.
  • Friedrich Hayek, "Two Pages of Fiction: The Impossibility of Socialist Calculation", Economic Affairs (1982)

• It was probably the influence of Schumpeter’s teaching more than the direct influence of Oskar Lange that has given rise to the growth of an extensive literature of mathematical studies of ‘resource allocation processes’. As far as I can see they deal as irresponsibly with sets of fictitious ‘data’ which are in no way connected with what the acting individuals can learn as any of Lange's.
  • Friedrich Hayek, "Two Pages of Fiction: The Impossibility of Socialist Calculation", Economic Affairs (1982)

• Schumpeter was the most romantic of economists, and capitalism to his eyes had all the glamor and excitement of a knightly jousting tourney.
  • Robert Heilbroner, The Worldly Philosophers, Chapter XI, p. 303

• For Schumpeter, capitalism itself could not possibly make for conquest and war: its spirit was rational, calculating, and therefore averse to risk-taking on the scale implicit in warmaking and in other heroic antics. Interesting as they were as a counterpoint to the various Marxist theories of imperialism, Schumpeter's views evinced less awareness of the knottiness of the problem he was dealing with than those of Adam Ferguson and Tocqueville that have just been recalled. To go back even further: Cardinal de Retz, with his insistence that the passions are not to be counted out in situations where interest-motivated behavior is considered to be the rule, appears to have had the better part of the argument than either Keynes or Schumpeter.
  • Albert O. Hirschman, The Passions and the interests (1977)

• We are far from understanding how to achieve adaptively efficient economies because allocative efficiency and adaptive efficiency may not always be consistent. Allocatively efficient rules would make today's firms and decisions secure - but frequently at the expense of the creative destruction process that Schumpeter had in mind.
  • Douglass C. North, Institutions, institutional change and economic performance (1990) Ch. 9 : Organizations, learning, and institutional change

• Schumpeter’s approach has an important implication for political behavior. If the constellation of economic interests regularly changes because of innovation and entry, politicians face a fundamentally different world than those in a natural state: open access orders cannot manipulate interests in the same way as natural states do. Too much behavior and formation of interests take place beyond the state’s control. Politicians in both natural states and open access orders want to create rents. Rent-creation at once rewards their supporters and binds their constituents to support them. Because, however, open access orders enable any citizen to form an organization for a wide variety of purposes, rents created by either the political process or economic innovation attract competitors in the form of new organizations. In Schumpeterian terms, political entrepreneurs put together new organizations to compete for the rents and, in so doing, reduce existing rents and struggle to create new ones. As a result, creative destruction reigns in open access politics just as it does in open access economies. Much of the creation of new interests is beyond the control of the state. The creation of new interests and the generation of new sources of rents occur continuously in open access orders.
  • Douglass C. North, John Joseph Wallis, and Barry R. Weingast, Violence and Social Orders (2009), Ch. 1 : The Conceptual Framework

• Specifically, it discusses the possibilities for finding a viable alternative to neoclassical economic growth theory, in the form of some combination of Keynesian macroeconomics and evolutionary growth modeling. In this framework, economies are considered as complex adaptive systems which can generate dissipative structures, depending on the underlying knowledge dynamics and the energy throughput. This macroeconomic framework, which integrates short-run Keynesian elements with long-run Schumpeterian thinking, has to be considered as extremely powerful, both intellectually, as it allows for a much more comprehensive understanding of growth processes, as well as politically, as it offers a meaningful alternative to mainstream approaches which failed to predict the current economic and financial crisis and cannot offer meaningful answers how to get out of the crisis.
  • Andreas Pyka and Maria da Graça Derengowski Fonseca, "Introduction" in Catching Up, Spillovers and Innovation Networks in a Schumpeterian Perspective (2011)

• Schumpeter was uncharacteristically naive in awarding Lange and Lerner victory over Ludwig von Mises on the issue of whether rational economic calculation would be possible under socialism. Of course Mises was wrong in his sweeping rejection. But Schumpeter of all people should have understood the importance of uncertainty, stochastic error, and dynamic innovation in all social life. And this might have been expected to lead him to award the victory to Hayek for his insistence on the difficulty of pooling information when command and bureaucracy limit the workings of the market. Had Schumpeter lived another third of a century he would also have realized what Oskar Lange had to learn the hard way, that few socialist societies will play the Barone-Lerner-Lange game of simulated decentralized market pricing.
  • Paul Samuelson, "1983: Marx, Keynes and Schumpeter",Eastern Economic Journal, Vol. 9, No. 3 (Jul. - Sep., 1983)

• My Harvard teacher Joseph Schumpeter’s 1939 two-volume treatise is almost a parody of eclecticism: It described short cycles under the Kitchin-Crum terminology; then the good old business cycle of allegedly eight to ten years’ periodicity was labeled Juglar cycles; and of course there were also the long waves of Kondratieff and the Sunday newspaper supplements. But that was not the whole of it. In between Juglars and Kondratieffs came Kuznets’s intermediate cycles in construction and immigration, with an alleged approximate periodicity of 18 to 20 years. The tortured epicycles of pre-Copernicus Ptolemaic astronomy had nothing on Schumpeter.
  • Paul Samuelson, "Summing Up On Business Cycles: Opening Address" in Jeffrey C. Fuhrer, ‎Scott Schuh (eds), Beyond Shocks: What Causes Business Cycles? (1998)

• Now, at the turn of the millennia, when total-factor-productivity has remarkably soared in America and abroad, both fools and sages sing Schumpeter‘s praise. That would have amused and pleased this worldly scholar who in some dark hours of the night used to despair in his German-shorthand diaries of justly deserved praises passing him by. So Keynes was wrong: in the long run not all of us are dead.
  • Paul Samuelson, "Reflections on the Schumpeter I knew well" (2005)

• In my view—and that of most contemporary economists, I believe—Schumpeter’s most original and most lastingly significant book was Theory of Economic Development, which appeared in 1911 (and was translated into English in 1934). It was at the University of Czernowitz, not far from the beginning of his career as an economist, that he worked out his conception of the entrepreneur,the maker of “new combinations,” as the driving force and characteristic figure of the fits-and-starts evolution of the capitalist economy. He was explicit that, while technological innovation was in the long run the most important function of the entrepreneur, organizational innovation in governance, finance, and management was comparable in significance. […] I think that this is Schumpeter’s main legacy to economics: the role of technological and organizational innovation in driving and shaping the growth trajectory of capitalist economies. Whole subfields of economics now pursue the subject of the care, feeding, and consequences of innovation, using qualitative and quantitative, historical and mathematical methods.
  • Robert Solow, "Heavy Thinker", New Republic (May 21, 2007)

• Schumpeter argued that the economy was characterized by a process of creative destruction. An innovator could, through a new product or lower costs of pro duction, establish a dominant position in a market. But eventually, that dominant position would be destroyed, as another new product or process was invented.
  He worried that the giant corporations he saw being formed during his lifetime would stifle innovation and end this process of creative destruction. His fears, so far, have been unfounded; indeed, many of the largest firms, like IBM, have not been able to manage the innovative process in a way that keeps up with upstart rivals.
  • Joseph E. Stiglitz and Carl E. Walsh, Economics (4th ed) (2006) Ch. 20 : Technological Change

• Schumpeter emphasizes a “demand-side” explanation for such clustering of innovation. One might also consider a complemen tary “supply-side” explanation: since innovators are, in many cases, working with the same components, it is not surprising to see simultaneous innovation, with several innovators coming up with essentially the same invention at almost the same time. There are many well-known examples, including the electric light, the airplane, the automobile, and the telephone.
  • Hal R. Varian, Part I. "Competition and market power", in The Economics of Information Technology: An Introduction (2004) by Hal R.Varian, Joseph Farrell and Carl Shapiro

• The term ‘kinship’ correctly suggests the existence not only of contemporary relatives but also of ancestors. Indeed, the recent discussion of dynamic capability was prefigured historically, with a variety of terminology, in a number of sources. Perhaps the most directly relevant example among these earlier contributions is Schumpeter’s discussion of the ‘routinization of innovation’ (Schumpeter 1950). Schumpeter’s argument presented, however, an issue that remains central in contemporary discussion of dynamic capability—the possibly problematic character of the claim that there is such a thing as ‘learned competence’ for doingnew things.
  • Sidney G. Winter, "Dynamic Capability as a Source of Change" in Alexander Ebner, Nikolaus Beck, eds. The Institutions of the Market: Organizations, Social Systems, and Governance (2008)

• The writings of Joseph Schumpeter contributed an essential part of the broad conceptual framework that now embraces the discussion of dynamic capabilities.
  • Sidney G. Winter, "Dynamic Capability as a Source of Change" in Alexander Ebner, Nikolaus Beck, eds. The Institutions of the Market: Organizations, Social Systems, and Governance (2008)

• Maybe we expect too much from democracy. The economist Joseph Schumpeter, one of the great modern thinkers to address the question, certainly thought so. Eighteenth-century optimists believed that there was such a thing as the common good, that people could determine it for themselves, and that they would then elect representatives to carry out their will. This “classical theory of democracy,” as Schumpeter argued in 1942, was more a quasi-religious expression of hope than an actual description of how democracies worked. There is no such thing as the common good, he delighted in pointing out. And even if there were, ordinary citizens, including the more educated among them, would be too irrational in their desires and too easily fooled to know what it might be. In theory democratic citizens raise and decide issues. In practice, “the issues that shape their fate are normally decided for them.”
  • Alan Wolfe, "Democracy Without Accountability" in Does American democracy still work? (2006)