Who is Joseph Schumpeter?

Joseph Alois Schumpeter (1883 - 1950) was an economist and is regarded as one of the 20th century's greatest intellectuals. He is best known for his theories on business cycles and capitalist development and for introducing the concept of entrepreneurship.

Key Takeaways

  • He is best known for his 1942 book Capitalism, Socialism, and Democracy, the theory of creative destruction and for offering 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 Austria in 1883, learning economics from the progenitors of the Austrian school tradition, including Friedrich von Wieser and Eugen von Bohm-Bawerk. Schumpeter served as minister of finance in the Austrian government, the president of a private bank, and a 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.

By the early 20th century, economic science in the United States and Great Britain had developed along static and mathematically oriented general equilibrium models. Schumpeter’s work differed at times, typifying the continental European more nuanced and less hypothetical approach, although some of his theories were drawn from Walrasian general equilibrium as well.

Over his many years in public life, Schumpeter developed informal rivalries with the other great thinkers of the west, including John Maynard Keynes, Irving Fisher, Ludwig von Mises, and Friedrich Hayek. His work initially was overshadowed by some of his contemporaries.

Famous Theories

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.

Creative Destruction

Schumpeter made many contributions to economic science 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 being constantly replaced by the new. Schumpeter offered a new, unique insight into how economies grow, explaining that economic progress is not gradual and peaceful but rather disjointed and sometimes unpleasant.

 “The same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of creative destruction is the essential fact about capitalism,” he said.

Entrepreneurship

Schumpeter is believed to be the first scholar to introduce the world to the concept of entrepreneurship. He came up with the German word Unternehmergeist, meaning entrepreneur-spirit, adding that these individuals controlled the economy because they are responsible for delivering innovation and technological change.

Schumpeter’s arguments sharply deviated from the dominant tradition. He highlighted the fact that markets do not passively tend toward equilibrium until profit margins are wiped out. Instead, entrepreneurial innovation and experimentation constantly destroy the old and introduce new equilibria, making possible higher standards of living.

In many respects, Schumpeter saw 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.

Business Cycles

These theories tie in with Schumpeter’s belief in the presence of business cycles. Whenever an entrepreneur disrupts an existing industry, it is likely that existing workers, businesses or even entire sectors can be temporarily thrown into loss, he said. These cycles are tolerated, he explained, because it allows resources to be freed up for other, more productive uses.

"Barring very few cases in which difficulties arise, it is possible to count off, historically as well as 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 individual case,” wrote Schumpeter in his book The Theory of Economic Development, published in 1911.

Joseph Schumpeter Vs. John Maynard Keynes

Schumpeter was born just a few months before Keynes and, like his contemporary, is considered to be one of the best economists of the 20th century. The pair had radically different views.

Keynes viewed the economy as healthy when in static equilibrium. Schumpeter rejected this theory, claiming that equilibrium is not healthy and that innovation is the driver of the economy. Both had contrasting views on government intervention, too. Keynes believed that a permanent equilibrium of prosperity could be achieved by central bank monetary policies. Schumpeter argued that government intervention increased inflation, destroying the economy.

In his early career, Schumpeter derided the use of statistical aggregates in economic theory, likely a shot at Keynes, in favor of focusing on individual choice and action.

Schumpeter’s work initially received little acclaim, due in part to the popularity of Keynes. That changed over time and he is now viewed as one of the world’s greatest economists.