survive? No. I do not think it can." Thus opens Schumpeter's prologue to a
section of his 1942 book, Capitalism, Socialism and Democracy. One
might think, on the basis of the quote, that Schumpeter was a
Marxist. But the analysis that led Schumpeter to his conclusion
differed totally from
Karl Marx's. Marx believed that
capitalism would be destroyed by its enemies (the proletariat), whom
capitalism had purportedly exploited. Marx relished the prospect.
Schumpeter believed that capitalism would be destroyed by its successes.
Capitalism would spawn, he believed, a large intellectual class that made
its living by attacking the very bourgeois system of private property and
freedom so necessary for the intellectual class's existence. And unlike
Marx, Schumpeter did not relish the destruction of capitalism. He wrote:
"If a doctor predicts that his patient will die presently, this does not
mean that he desires it."
Capitalism, Socialism, and Democracy was much more than a
prognosis of capitalism's future. It was also a sparkling defense of
capitalism on the grounds that capitalism sparked
entrepreneurship. Indeed, Schumpeter was among the first to lay out a
clear concept of entrepreneurship. He distinguished inventions from the
entrepreneur's innovations. Schumpeter pointed out that entrepreneurs
innovate, not just by figuring out how to use inventions, but also by
introducing new means of production, new products, and new forms of
organization. These innovations, he argued, take just as much skill and
daring as does the process of invention.
Innovation by the entrepreneur, argued Schumpeter, led to gales of
"creative destruction" as innovations caused old inventories, ideas,
technologies, skills, and equipment to become obsolete. The question, as
Schumpeter saw it, was not "how capitalism administers existing
structures,... [but] how it creates and destroys them." This creative
destruction, he believed, caused continuous progress and improved
standards of living for everyone.
Schumpeter argued with the prevailing view that "perfect" competition
was the way to maximize economic well-being. Under perfect competition all
firms in an industry produced the same good, sold it for the same price,
and had access to the same technology. Schumpeter saw this kind of
competition as relatively unimportant. He wrote: "[What counts is]
competition from the new commodity, the new technology, the new source of
supply, the new type of organization... competition which... strikes not
at the margins of the profits and the outputs of the existing firms but at
their foundations and their very lives."
Schumpeter argued on this basis that some degree of monopoly was
preferable to perfect competition. Competition from innovations, he
argued, was an "ever-present threat" that "disciplines before it attacks."
He cited the Aluminum Company of America as an example of a monopoly that
continuously innovated in order to retain its monopoly. By 1929, he noted,
the price of its product, adjusted for inflation, had fallen to only 8.8
percent of its level in 1890, and its output had risen from 30 metric tons
Schumpeter never made completely clear whether he believed innovation
was sparked by monopoly per se or, rather, by the prospect of getting a
monopoly as the reward for innovation. Most economists accept the latter
argument and, on that basis, believe that companies should be able to keep
their production processes secret, have their trademarks protected from
infringement, and obtain patents.
Schumpeter was also a giant in the history of economic thought. His
magnum opus in the area was History of Economic Analysis, edited by
his third wife, Elizabeth Boody, and published posthumously in 1954. In it
Schumpeter made some controversial comparisons between economists, arguing
Adam Smith was unoriginal, that
Alfred Marshall was confused, and that
Leon Walras was the greatest economist of all time.
Born in Austria to parents who owned a textile factory, Schumpeter was
very familiar with business when he entered the University of Vienna to
study economics and law. He was one of the more promising students of
Friedrich von Wieser and
Eugen von Böhm-Bawerk, publishing at the age of twenty-eight his
famous Theory of Economic Development. In 1911 Schumpeter took a
professorship in economics at the University of Graz. He served as
minister of finance in 1919. With the rise of Hitler, Schumpeter left
Europe and the University of Bonn, where he was a professor from 1925
until 1932, and emigrated to the United States. In that same year he
accepted a permanent position at Harvard, where he remained until his
retirement in 1949. Schumpeter was president of the American Economic
Association in 1948.
Business Cycles, 2 vols. 1939.
Capitalism, Socialism and Democracy, 5th ed. 1976.
History of Economic Analysis, edited by E. Boody. 1954.
Ten Great Economists. 1951.
The Theory of Economic Development. 1912. Translated by R. Opie,
1934. Reprint. 1961.