Capitalism, Socialism, and Democracy

Joseph Alois SCHUMPETER

1883-1950

 

Renowned as a master of economics, mathematics, statistics, history, and philosophy, Joseph Schumpeter was both a scholar and an active participant in world affairs. At one time or another he was lawyer, banker, and public official, serving a stint as finance minister in Austria. Two books, Economic Development and Capitalism, Socialism, and Democracy, both published before he reached 30, are still highly regarded.

Born in Triesch, Moravia (now the Czech Republic), Joseph Schumpeter started his career practicing law in Vienna in 1907. However, he rapidly gained fame as an economic theorist, and, early in his academic career, was a vagabond scholar, acting as a visiting scholar at half a dozen univerities spread across Europe. In 1932, he accepted a chair in economics at Harvard, where he taught until his death 18 years later.

Schumpeter's writings span the entire economic process: equilibrium, business cycles, and the survival prospects of capitalism. He viewed competition as a process of discovery and as an ordering force. Somewhat paradoxically, he viewed business cycles as vital to economic progress. Cycles occur because equilibrium is destroyed by entrepreneurial innovations, but innovation is an engine for social progress, so this type of destruction is "creative."

In Capitalism, Socialism and Democracy ,Schumpeter theorized that "a static capitalist system, one that does not increase wealth, but merely maintains it, only increases wealth through the "creative destruction" of innovation. Such innovation comes from the entrepreneur, who discovers or invents cheaper production processes, new products or technologies which lower costs or create new markets."

However, Schumpeter understood innovations can easily be copied, and are. Once an innovation proves itself, it is widely adopted by competitors. The static system then grows through mass innovation and increases wealth, but levels off into a static, wealth-maintaining state until another innovation cycle takes place.

Schumpeter distinguished three types of business cycles, naming them for earlier pioneers in business cycle theory. The length of each depends on the disturbance that causes it. The shortest (Kitchin) cycle derives from inventory changes and usually lasts about 3 years. An intermediate (Juglar) cycle depends on relatively minor innovations, such as radar or electronic calculators, and runs its course in 8 to 11 years. The long (Kondratieff) cycle lasts 40 to 60 years and is caused by sweeping innovations such as electrification or jet flight.

Schumpeter's writings failed to attract an active school of disciples. However, the modern Austrian school of thought draws from many of Schumpeter's insights. Modern theories of how a backward economy can shift to a path of dynamic growth also increasingly rely on his insights into capitalism and entrepreneurship.

 

Author: Ralph Byrns

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