Joseph Alois Schumpeter was an economist, economic historian, and author born in Austria who died in 1950. People consider him one of the most intelligent people of the 20th century. Schumpeter first came up with entrepreneurship and his ideas about business cycles and how capitalist countries grow. Schumpeter thought that the entrepreneur was the most essential part of capitalism because they were the source of new ideas that keep a capitalist economy going.
Early Years and School
Schumpeter was born in 1883 in Moravia, now in the Czech Republic. His parents were German. Friedrich von Wieser and Eugen von Bohm-Bawerk, two of the founders of the Austrian school of economics, taught him about the subject. The Austrian government made Schumpeter the minister of finance. He was also the head of a private bank and a university professor. He was a chair at the University of Bonn from 1925 to 1932.
Afraid of the rise of the Nazi Party, he went to the US in 1932 to teach at Harvard. His election as head of the American Economic Association in 1947 made him the first foreigner to hold that office.
By the beginning of the 20th century, economics had grown in both the US and the UK, along with general equilibrium models that were static and based on math. Like the continental European method, Schumpeter’s work was sometimes different, more subtle, and less hypothetical. However, some of his ideas came from Walrasian general equilibrium as well.
Important Achievements and Theories
Schumpeter made many vital contributions to political theory and economics. But his 1942 book Capitalism, Socialism, and Democracy, which explains the idea of “creative destruction” as a way for economies to grow, is what he is most famous for.2He is also known for bringing systematic individualism into economics for the first time in German and English.
Destruction with creativity
The most crucial thing Schumpeter wrote was a six-page section in Capitalism, Socialism, and Democracy called “The Process of Creative Destruction.”
In this chapter, Schumpeter gives a new and different view on how economies grow. This was very different from the standard economic belief at the time: markets move toward stability until they lose their profits. Schumpeter said that economic growth is not slow and peaceful but somewhat random, sudden, and sometimes nasty. According to the economist, “creative destruction” means breaking down old ways of doing things to make room for new technologies, goods, ways of making things, and ways of getting them to people.
Companies already in business need to change to a new setting (or fail) quickly. Schumpeter called it a “process of industrial mutation—if I may use that biological term—that constantly revolutionizes the economic structure from within, constantly destroying the old one and constantly creating a new one.” If it sounds a bit like Darwinian evolution, that’s because it is. “This process of creative destruction is what capitalism is all about.”
Business ownership
In many ways, Schumpeter saw capitalism as an ongoing shift that changed how society and the economy worked. In this system, the entrepreneur is the revolutionary who shakes the status quo to bring about significant changes.
Scholars think that Schumpeter was the first person to explain the idea of business, or at least how important it is to the economy. He invented the German word Unternehmergeist, which means “entrepreneur-spirit.” He also said these people ran the business because they controlled new ideas and technology.
Often, entrepreneurs are the ones who drive creative destruction because they come up with new goods, technologies, and ways of making things that cause things to change. Entrepreneurial tinkering and new ideas always upset the status quo and create new balances, leading to better living standards.
Cycles of Business
These ideas fit with Schumpeter’s view that there are business trends.
Schumpeter says that capitalism’s past comprises long and short waves. If new technologies and businesses emerge, they can start a long wave. This idea says that significant steps forward in technology should happen every 50 to 100 years.
If problems don’t happen very often, Schumpeter wrote in his 1911 book The Theory of Economic Development, “It is possible to count off, 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 every single case.”
He said that when an entrepreneur shakes up a current industry, regular workers, businesses, or even whole sectors may lose money quickly. These processes are okay, he said, because they make room for other, more valuable uses of resources.
An Example of the Schumpeter Theory
One of the best examples of Schumpeter’s idea of “creative destruction” is the breaking down of old ways of doing things to make room for new technologies, goods, ways of making things, and ways of getting them to people—companies already in business need to change to a new setting (or fail) quickly.
With the rise of the Internet, making and distributing many goods became useless. It also drastically cut back on many jobs, like those of bank tellers, secretaries, ticket salespeople, and store workers. With the rise of the mobile Internet, producers of written materials like magazines and maps also lost money.
Other significant changes in the business world are the computer, laser, fiber optics, satellite technologies, and the internet.
William James vs. Joseph Schumpeter
Over the years, he was in public life; Schumpeter had a friendly competition with John Maynard Keynes, Irving Fisher, Ludwig von Mises, and Friedrich Hayek, who were all big names in Western economics. At first, the work of some of these other people, especially Keynes, was more important than his. The two had very different ideas, even though they were born a few months apart.
At the beginning of his work, Schumpeter made fun of using statistical averages in economic theory. This was probably a jab at Keynes, as Schumpeter wanted to focus on how people choose and act.
Keynes thought the economy was healthy when it was in a state of steady balance. Schumpeter disagreed with this idea, saying that balance is not suitable for the business and that new ideas are what make it grow. They also had different ideas about when the government should step in. Keynes thought that monetary policies set by central banks could create a stable state of wealth. Schumpeter said that inflation went up when the government got involved, which hurt the business.
One of the best examples of Schumpeter’s idea of “creative destruction” is the breaking down of old ways of doing things to make room for new technologies, goods, ways of making things, and ways of getting them to people—companies already in business need to change to a new setting (or fail) quickly.
With the rise of the Internet, making and distributing many goods became useless. It also drastically cut back on many jobs, like those of bank tellers, secretaries, ticket salespeople, and store workers. With the rise of the mobile Internet, producers of written materials like magazines and maps also lost money.
Other significant changes in the business world are the computer, laser, fiber optics, satellite technologies, and the internet.
How did Joseph Schumpeter come to study economics?
At the time of his death in 1950, Schumpeter was writing The History of Economic Analysis, a new book. Schumpeter tries to write a complete history of economics in the book, from ancient Greece to the present day (after World War II). The book wasn’t just about economics; it also looked at the history of politics and philosophical ideas and tracked essential events.
The History of Economic Analysis was started but never finished. Still, it is now seen as an important work because it covers a lot of ground and looks at critical historical events in new ways. It talks about many essential things, like the history of economics, the techniques of economic analysis, and changes happening simultaneously in other studies.
In what way did Joseph Schumpeter think capitalism would fail?
Schumpeter thought that the success of capitalism would kill it in the end. He thought the way the economy worked would finally create a big intellectual class that would stay alive by fighting the system of private property and freedom it needed to stay alive. Schumpeter thought capitalism would fail, but he was a strong backer.
What does Joseph Schumpeter mean when he talks about innovation and profit?
Schumpeter thought that it was to bring about successful innovations. Schumpeter described innovation as any new policy that lowers the general cost of production or increases the demand for products. The innovation theory of profit says that an entrepreneur’s main job is to develop innovations. Any money a business makes from these efforts is a prize for how well they did. For businesses, creating new ideas is the first step toward success and making money.
What does Schumpeter’s growth mean?
Creative ruin is what drives Schumpeter’s growth, which is economic growth that is based on new ideas. It is now possible to put Schumpeter’s idea of “creative destruction” into practice with formal economic models. Through these growth models, economists can figure out what part competition, company dynamics, and reallocation between firms and sectors play.
In Short
At first, Joseph Schumpeter’s work didn’t get much attention, partly because John Maynard Keynes, who lived simultaneously, was so well-known. That changed over time, and now people think of him as one of the best thinkers of our time. He talked about the idea of an entrepreneur and how they can change the way economies work. His idea of “creative destruction” has become the most crucial way people think about how economies change over time, especially capitalist ones.
Conclusion
- Joseph Alois Schumpeter is best known for his book Capitalism, Socialism, and Democracy, which emerged in 1942. In it, he explains the theory of creative destruction and makes the first German and English references to methodological individualism in economics.
- Before he had to leave Austria because of the rise of the Nazi Party, Schumpeter was minister of finance in the Austrian government, head of a private bank, and a professor.
- The economist coined “creative destruction” to describe how new things always replace old ones.
- Schumpeter also came up with the idea of business.
- In the beginning, John Maynard Keynes’s different ideas trumped Schumpeter’s work. But now, Schumpeter’s ideas are central to current thinking about how economies change.
