I set out to become the greatest lover in Vienna, the greatest horseman in Austria, and the greatest economist in the world. Alas, for the illusions of youth: as a horseman, I was never really first-rate.

Joseph A. Schumpeter

Take Away

Joseph A. Schumpeter is considered one of the most influential social scholars of the 20th century. After studying law and political science in Vienna, he taught at the  universities of Vienna and Czernowitz (Ukraine), before briefly serving as Minister of Finance in Austria and as president of the M. L. Biedermann & Co Bank. After bitterly failing in both positions he went back to academics and taught at the universities of Graz, Bonn, New York, and Harvard. For him, the core of modern economics is innovation that leads to creative destruction through the establishment of new production functions. Thus the problem of economics is not an equilibrium but structural change, an imbalance with the innovator in the form of the entrepreneur. Based on his thinking, profits have the function of financing future innovations. His cyclical development theory does not recognize continuous growth and a market equilibrium. Schumpeter’s  main works include: Theory of Economic Development (1911), Business Cycles (1939) or Capitalism, Socialism and Democracy (1942). The Essence of J.A. Schumpeter (1996) is a collection of his most decisive essays.

Early stage

Just about 4 months prior to John Maynard Keynes, his lifelong competitor, Joseph Alois Schumpeter was born on February 8, 1883 in Triesch, a small town in the Austro-Hungarian Empire, about 120 Km east of Prague. After Schumpeter’s father died, his mother married Sigmund v. Keler, a retired KuK Lieutenant General, whose social standing made it possible for the ambitious boy to attend the Theresianum, a still existing elite gymnasium in Vienna and later to enroll at the famed University of Vienna. The very determined and driven Schumpeter earned his doctorate in Jurisprudence at the age of 23 and showed a great interest in economic theory. Eagerly he attended lectures by the great Austrian scholars Carl Menger, Eugen v. Böhm-Bawerk, Eugen v. Philippovich or Friedrich v. Wieser, among several others.

After his studies, he traveled to various countries, devoted himself to the study of economics and worked briefly in a bank in Cairo as an advisor to an Arab princess. In his leisure time he drafted his first monograph Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (1908). This major treatise is an independent but poised analysis of the essential content of the economic theories that had prevailed up to that point. Schumpeter used this work as a habilitation thesis to the Faculty of Law and Politics at the University of Vienna and at the recommendation of v. Wieser and v. Böhm-Bawerk, he was soon appointed lecturer in political economics. In the fall of 1909 he assumed a professorship at the University of Czernowitz (now Chernivtzi, Ukraine) then the easternmost German speaking university of the Austro-Hungarian Empire. During the two years there, he wrote large parts of what is probably his magnum opus, Theorie der wirtschaftlichen Entwicklung (1911), English as The Theory of Economic Development: An Inquiry into Profits, Capital, credit, Interest, and the Business Cycle (1912). In this classic, he delves into the concept of profit and surplus value and  highlights the crucial role of entrepreneurs as the driving force behind free markets. He proclaims that economics is a natural self-regulating mechanism when undisturbed by social and other meddlers. This is thought to take place as outmoded businesses fail and their productive assets are recycled into production, thus permanently revitalizing the capitalist system.

The restless young scholar

However after only about two years, the restless young scholar left Czernowitz for his appointment at the University of Graz (Austria) the youngest full professor in the Habsburg monarchy. Max Weber included Schumpeter’s third book, Epochen der Dogmen- und Methodengeschichte (1914) in his monumental Grundriss der Sozialökonomik. With an interruption as guest professor at Columbia University (New York), which awarded him an honorary doctorate at the age of thirty, Schumpeter stayed off and on in Graz until 1921.

Perceiving his teachers as role models, Schumpeter burnt to hold political office (e.g. Menger served as Crown Prince Rudolf’s teacher, v. Böhm-Bawerk served as finance minister three times, v. Philippovich worked in several state commissions). Thus, by approaching Emperor Charles I in 1916, Schumpeter launched several political initiatives to end WWI, warned passionately against the Customs Union with Germany and directed against the rise of nationalism he vainly campaigned for the endurance of the multinational monarchy. His small brochure Die Krise des Steuerstaates (1918) dealt with the restructuring of state finances in the face of war debts. Shortly after WWI, Schumpeter was appointed to the German Socialization Commission and allied himself with socialists like Karl Kautsky or Rudolf Hilferding. He left the Commission when he was appointed Minister of  Finance of postwar Austria in March 1919.  However, after numerous political fights he was more or less forced to quit after only seven months. His uptight bid for an appointment at the University of Munich at the end of 1919 fell through because of personal and political issues. Only two years later, Schumpeter left Graz and became president of the venerable “Biedermann & Co. Bankaktiengesellschaft” in Vienna. However the economic crisis of 1924, his mismanagement and his lavish lifestyle pushed the bank into insolvency. As a result, in 1925 Schumpeter was fired, lost all his assets and was faced with a considerable mountain of debt. In this personally disastrous situation, Arthur Spiethoff came to his rescue and appointed Schumpeter to chair the department of political science at the University of Bonn in October 1925. His very successful teaching launched this university’s reputation. His students there included Wolfgang F. Stolper and Herbert Zassenhaus among other well-known economists.

Between 1927 and 1932, the restless Schumpeter turned down offers from the universities of Kiel, Freiburg and Prague, applied for a professorship at the prestigious University of Berlin and visited Harvard University a few times. Several devastating personal blows – Schumpeter’s beloved mother died, shortly thereafter his second wife died in childbirth, his financial situation and failed attempt to obtain a chair at Berlin – left Schumpeter deeply depressed. He was never fully to recover from these losses for the rest of his life and decided in 1932 to leave Europe forever. Schumpeter joined Harvard, shook off his thorough education in Austrian Economics and soon began to play a key role in the introduction of mathematical methods to economics and in the founding of the Econometric Society.  In 1939 he published the two-volume work Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, which was followed by his acclaimed and still widely quoted Capitalism, Socialism, and Democracy in 1942. Schumpeter argues that capitalism, with its private, for-profit ownership controls a nation’s industry, will be eventually replaced by socialism, based on the public, state ownership of industry. However, unlike Karl Marx, he does not believe the shift to socialism will come about due to profound economic crises or the increased immiseration of the working class. Rather, it will happen due to overwhelming bureaucratization followed by the elimination of the entrepreneur as economic innovation becomes automatized. It should be mentioned here that only two years later F.A. v. Hayek published his The Road to Serfdom (1944), a devastating criticism of socialism.

During the late 1930s and early 1940s, Schumpeter convened a high powered discussion group, which dealt intensively with the decisive question of rationality in the social sciences. This “Schumpeter Circle” included the economists Gottfried von Haberler, Wassily Leontief or Paul Sweezy, the sociologists Talcott Parsons or Wilbert E. Moore, psychologists like David McGrannahan and among other students, the aspiring W. Glenn Campbell, who built Stanford University’s famous Hoover Institution on War, Revolution and Peace into an internationally leading think tank.

Post-war period

In the years after the WWII Schumpeter worked intensively on completing his third major work from his American period, his History of Economic Analysis (1954), which was published four years after his death by his widow, Elisabeth Boody Schumpeter. In this major work, Schumpeter not only presented a complete presentation of the history of economic dogma since the Greeks. He also offered an explanation of social economics and its differentiation from other social sciences, as well as a reformulation of the theory of the entrepreneur.  In 1948 he was elected president of the prestigious American Economic Association (AEA) and in the summer of 1949 the first president of the newly founded International Economic Association (IEA). He presented his seminal and final address The March into Socialism (1950) as president of AEA on December 31, 1949 just about week before his untimely death. In this dark essay he emphasized that his prophecy is not to be welcomed but to be taken as an observable tendency, the most important component of which was allegedly the waning of the entrepreneurial function – the cornerstone of his own theory. It published from notes posthumously by his widow in early 1950. Today, after 75 years it should seriously be reconsidered.

 At Harvard, Schumpy (as he was called by his fellow countryman G.v.Haberler) not only earned a reputation as a great lecturer, but also as a showman and a snob. According to many of his students and countless contemporaries, the quote at the top of these pages seems to portray Schumpeter’s complex personality quite accurately: simply brilliant, universally talented, incredibly educated and yet exceedingly ambitious, aloof, egocentric and somewhat opaque. 75 years ago, on January 8, 1950 Schumpeter died of a stroke in Taconic, an unincorporated small community in rural Litchfield County (CT), USA.