February 8, 2013
"Surely, nothing can be more plain or even more trite common sense than the proposition that innovation...is at the center of practically all the phenomena, difficulties, and problems of economic life in capitalist society." — Joseph A. Schumpeter, “Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process.” 1939.
A year ago today, we published this quote from economist Joseph Schumpeter as the first of what came to be called Teachable Moments. Teachable Moments was inspired by a comment from Mark Twain. “History does not repeat itself, but it sure does rhyme.” We look for the echoes of those rhymes each day. Thank you to all the readers who have written, called and commented on the various pieces we’ve run. I though I would flesh out the story of Mr. Schumpeter as we begin a new year…
Joseph Schumpeter was born on Feb. 8, 1883, in what is now Třešť, Czech Republic. His father was a factory owner, who died when his son was four. Schumpeter moved to Vienna with his mother. He was educated in Vienna, studying law at the University of Vienna, and getting his doctorate in 1906. He taught economics and government at a Ukrainian university and then in Austria. He was appointed Austria’s Minister of Finance at the end of World War I, and left that post to become president of Biedermann Bank in 1920. In 1924, the bank collapsed, and Schumpeter was bankrupted.
Somewhat chastened, he returned to teaching, joining the faculty at the University of Bonn in 1925. He lectured at Harvard University several times, and in 1932 he immigrated to the United States and accepted a faculty position at Harvard, where he stayed until his death in 1950. He became an American citizen in 1939.
When The Economist magazine launched a new business and economics blog in 2009 they named it Schumpeter because: “Joseph Schumpeter was one of the few intellectuals who saw business straight. He regarded business people as unsung heroes: men and women who create new enterprises through the sheer force of their wills and imaginations, and, in so doing, are responsible for the most benign development in human history, the spread of mass affluence.”
During their lifetimes, John Maynard Keynes was the more influential economist, and his theories held sway for decades. But Schumpeter’s emphasis on the roles of innovation and entrepreneurship began pushing aside the abstract static macro-economic models pushed by the Keynesians.
Schumpeter said that “creative destruction” was essential to economic progress. That innovators and entrepreneurs forced economic vitality by constantly seeking ways to compete against the natural movement towards large organizations, monopolies and government regulation to protect them.
Though Schumpeter was an advocate for the democratic nature of entrepreneurship, he was less kind to the prospects of political democracy.
John Kenneth Galbraith wrote in an introduction to Schumpeter’s classic, “Capitalism, Socialism and Democracy,” in 1976: “What makes Schumpeter’s book so brilliant are three things in particular: its novel view of democracy; its heretic analysis of the workings of the capitalist economy; and its provocative argument that capitalism is bound to disappear–not because of its failure, but because of its success.”
We could use a bit more its success right now.