Joseph Schumpeter

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

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

Contents

QuotesEdit

  • 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.
    • Joseph Schumpeter, History of Economic Analysis, 1945. p. 27
  • Chentlemen, you are vorried 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)Edit

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 CircumstancesEdit

  • 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 ProfitEdit

  • 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 CycleEdit

  • 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. This is how it is in practice, the testimony of which we merely interpret. In industries in which there is still competition and a large number of independent people we see first of all the single appearance of an innovation — overwhelmingly in businesses created ad hoc — and then we see how the existing businesses grasp it with varying rapidity and completeness, first a few, then continually more. We have already come across this phenomenon in connection with the process of eliminating entrepreneurial profit. Here it comes into consideration again, though from another standpoint.
  • Reality also discloses that every normal boom starts in one or a few branches of industry (railway building, electrical, and chemical industries, and so forth), and that it derives its character from the innovations in the industry where it begins. But the pioneers remove the obstacles for the others not only in the branch of production in which they first appear, but, owing to the nature of these obstacles, ipso facto in other branches too. Many things may be copied by the latter; the example as such also acts upon them; and many achievements directly serve other branches too, as for example the opening up of a foreign market, quite apart from the circumstances of secondary importance which soon appear — rising prices and so on. Hence the first leaders are effective beyond their immediate sphere of action and so the group of entrepreneurs increases still further and the economic system is drawn more rapidly and more completely than would otherwise be the case into the process of technological and commercial reorganisation which constitutes the meaning of periods of boom.
  • 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. And clearly this consequence of our interpretation is also strikingly confirmed by reality. The progressive trustification of economic life acts in the same direction, even though to-day a great combine with its sales and its financial requirements is still so dependent upon the market situation, which is to a considerable extent determined competitively, that the universally advantageous postponement of its innovations, and especially of construction, to periods of depression — as exemplified in the policy of American railways — is only possible sporadically. In so far as it operates, however, this element also confirms our interpretation.
  • The swarm-like appearance of new combinations easily and necessarily explains the fundamental features of periods of boom. It explains why increasing capital investment is the very first symptom of the coming boom, why industries producing means of production are the first to show supernormal stimulation, above all why the consumption of iron increases. It explains the appearance of new purchasing power in bulk, thereby the characteristic rise in prices during booms, which obviously no reference to increased need or increased costs alone can explain. Further, it explains the decline of unemployment and the rise of wages, the rise in the interest rate, the increase in freight, the increasing strain on bank balances and bank reserves, and so forth, and, as we have said, the release of secondary waves — the spread of prosperity over the whole economic system.

Capitalism, Socialism and Democracy (1942)Edit

Quotes about SchumpeterEdit

  • 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
  • Contemporary democracy, properly understood, was thus a richer affair than the thin models of it proposed by Schumpeter or Popper, as a mere choice between competing elites for office. It was to be conceived, not in a spirit of minimalism, but one of positively minded realism.
  • The last chapter modeled technological progress as an increase in the number of types of products, N. In this chapter, we allow for improvements in the quality or productivity of each type. This approach has come to be known as the Schumpeterian approach to endogenous growth. We can think of increases in N as basic innovations that amount to dramatically new kinds of goods or methods of production. In contrast, increases in the quality of the existing products involve a continuing series of improvements and refinements of goods and techniques.
    • Robert J. Barro, Xavier Sala-i-Martin, Economic growth 2nd ed. (2004), Ch. 7 : Technological Change: Schumpeterian Models of Quality Ladders
  • 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)
  • 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.
    • Quote in The European Economy since 1945: Coordinated Capitalism and Beyond by Barry Eichengreen, Chap. 5: “Eastern Europe and the Planned Economy”, Princeton University Press, 2008, 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.
  • 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.
  • 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.
  • 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.
  • 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
  • Madison or Sieyes would have agreed that the role of representatives is to determine for the people, and sometimes against the people, what is good for them. But here comes the crucial break with the classical tradition: Kelsen, Schumpeter, Bobbio, Dahl, and Downs all agree that nobody and no body can represent the will of all the people. In sharp contradistinction to the classical view, these theorists maintain that political parties represent distinct interests. The theory of democracy based on the assumption of the common good is just incoherent.
    • Adam Przeworski, Democracy and the Limits of Self-Government (2010), Ch. 2 : Self-Government of the People
  • 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)
  • 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.
  • It is also erroneous to believe that a political position founded on economic superiority is "essentially unwarlike," as Joseph Schumpeter says in his Zur Soziologie der Imperialismen. Essentially unwarlike is the terminology based on the essence of liberal ideology. An imperialism based on pure economic power will naturally attempt to sustain a worldwide condition which enables it to apply and manage, unmolested, its economic means, e.g., terminating credit, embargoing raw materials, destroying the currencies of others, and so on. Every attempt of a people to withdraw itself from the effects of such "peaceful" methods is considered by this imperialism as extra-economic power.
  • Schumpeter argued that the economy was characterized by a process of cre ative 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)

Robert Solow, "Heavy Thinker" (2007)Edit

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