Who is Joseph Schumpeter?
Joseph Alois Schumpeter (1883 – 1950) was an economist and is considered one of the 20e the greatest intellectuals of the century. He is best known for his theories on economic cycles and capitalist development and for having introduced the concept of entrepreneurship.
Key points to remember
- He is best known for his 1942 book Capitalism, socialism and democracy, the theory of creative destruction and for having offered the first German and English references to methodological individualism in economics.
- Schumpeter’s work was initially overshadowed by the contrasting theories of his contemporary, John Maynard Keynes.
Understanding Joseph Schumpeter
Schumpeter was born in what is now the Czech Republic in 1883, learning the economics of the ancestors of the Austrian school tradition, including Friedrich von Wieser and Eugen von Bohm-Bawerk. Schumpeter was Minister of Finance in the Austrian government, president of a private bank and professor before being forced to leave his home country due to the rise of the Nazis.
In 1932 he moved to the United States to teach at Harvard. Fifteen years later, in 1947, he became the first immigrant to be elected president of the American Economic Association.
At the beginning of the 20th century, economics in the United States and in Great Britain had developed according to static and mathematically oriented general equilibrium models. Schumpeter’s work sometimes differed, characterizing the more nuanced and less hypothetical European continental approach, although some of his theories are also drawn from the general Walrasian equilibrium.
During his many years in public life, Schumpeter developed informal rivalries with the other great thinkers of the West, notably John Maynard Keynes, Irving Fisher, Ludwig von Mises and Friedrich Hayek. His work was first overshadowed by some of his contemporaries.
Schumpeter is best known for his 1942 book Capitalism, socialism and democracy as well as the theory of dynamic economic growth known as creative destruction. He is also credited with the first German and English references to methodological individualism in economics.
Schumpeter made many contributions to economics and political theory, but by far his most enduring legacy came from a six-page chapter in Capitalism, socialism and democracy entitled “The process of creative destruction”.
The economist coined the term creative destruction to describe how the old is constantly being replaced by the new. Schumpeter offered a unique new insight into economic growth, explaining that economic progress is not gradual and peaceful but rather disjointed and sometimes unpleasant.
“The same process of industrial change – if I can use this biological term – which is constantly revolutionizing the economic structure of the interior, constantly destroying the old, constantly creating a new one. This process of creative destruction is the essential fact of capitalism, ”he said.
Schumpeter would be the first researcher to present the concept of entrepreneurship to the world. He came up with the German word Unternehmergeist, which signifies the entrepreneurial spirit, adding that these individuals controlled the economy because they are responsible for innovation and technological change.
Schumpeter’s arguments deviated strongly from the dominant tradition. He stressed that markets do not tend to passively break even until profit margins are cleared. Instead, entrepreneurial innovation and experimentation are constantly destroying old ones and introducing new balances, making higher standards of living possible.
In many ways, Schumpeter viewed capitalism as a method of evolution within the social and economic hierarchy. The entrepreneur becomes the revolutionary, upsetting the established order to create dynamic change.
These theories are related to Schumpeter’s belief in the presence of economic cycles. Whenever an entrepreneur disrupts an existing industry, it is likely that existing workers, businesses or even entire sectors may be temporarily lost, he said. These cycles are tolerated, he said, because they free up resources for other more productive uses.
“Except in very few cases where difficulties arise, it is possible to count, historically and statistically, six Juglars [8-10-year business cycles] to a Kondratieff [50-60 years] and three Kitchins [40 months] to a Juglar – not as an average but in each individual case, “wrote Schumpeter in his book The theory of economic development, published in 1911.
Joseph Schumpeter Vs. John Maynard Keynes
Schumpeter was born a few months before Keynes and, like his contemporary, is considered one of the best economists of the 20th century. The pair had radically different views.
Keynes considered the economy to be healthy when it was in static equilibrium. Schumpeter rejected this theory, saying that balance is not healthy and that innovation is the engine of the economy. The two also had divergent views on the government’s intervention. Keynes believed that a permanent balance of prosperity could be achieved by the monetary policies of the central banks. Schumpeter argued that government intervention has increased inflation, destroying the economy.
Early in his career, Schumpeter ridiculed the use of statistical aggregates in economic theory, probably a blow to Keynes, in favor of focusing on individual choice and action.
Schumpeter’s work initially received little praise, in part because of Keynes’ popularity. This has changed over time and he is now considered one of the greatest economists in the world.