A Creature of Paradox
SEGAL, HARVEY H.
A Creature of Paradox Opening Doors: The Life and Work of Joseph Schumpeter By Robert Loring Allen Transaction. Volume I: Europe 324 pp. $39.95. Volume II: America 340 pp. $39.95. Set,...
...Since Schumpeter was a creature of paradox, it is not surprising that he disdained his own best and most accessible book, Capitalism, Socialism and Democracy (1942...
...A sketchy version appeared in his Die Theorie der wirtschaftlichen Entwicklung (The Theory of Economic Development), first published in 1911 during his stint in the German-speaking University of Czernowitz, where he was a worldly Viennese patrician suffering the indignities of life among Slavs and Jews in the easternmost reaches of the Austro-Hungarian empire...
...Schumpeter's History of Economic Analysis (published four years after he died in 1950) has also become a classic...
...But to vote against him because he was smarter than they are...
...As a consequence, the average cost of overland shipping fell by more than 90 per cent, from nearly $23 to about $2 for moving a ton one mile, an advance that spurred interregional trade and greatly accelerated settlement to the west of what had been a formidable Appalachian mountain barrier...
...The second reference is probably to advisers at the time in the U.S...
...Moreover, Schumpeter was guilty of circular reasoning, especially in his astonishingly naïve statistical effort to identify "neighborhoods of equilibrium...
...Rather, he charges that Smith et al...
...Even on its own terms, however, Business Cycles is deeply flawed...
...After the breakup of the dual monarchy and the establishment of the Austrian republic, Schumpeter, though a conservative, was appointed finance minister in Karl Renner's Social Democratic government...
...The thrust of his argument is this: Because major innovations are typically financed by supernormal profits and an expansion of credit, there is high prosperity when they catch fire and stimulate demand for the products of long established industries...
...After the canals were devastated by railroad competition—in what Schumpeter calls "creative destruction" —the cost of transport service dropped to fractions of a cent per ton mile...
...The most celebrated essay deals with the future of capitalism, which Schumpeter saw as the victim of its own stunning success...
...When a network of canals largely replaced horse-drawn wagons for long distance haulage in the United States of the 1820s and '30s, there was a drastic reduction in amount of labor required to move freight...
...Austria was then plagued by inflation, and while Schumpeter clearly knew how to stop it, his opposition to an Anschluss with Germany pitted him against Minister of the Exterior Otto Bauer, the creative Austro-Marxist who had been his friend and fellow student at the University of Vienna...
...His young second wife, the great love of his life, bled to death giving birth to a son who also died...
...Keynes wanted to displace fiscal orthodoxies that inhibited a struggle against unemployment...
...Reviewed by Harvey H. Segal Author, "Corporate Makeover: The Reshaping of the American Economy" Joseph Alois Schumpeter (18831950) was the last in the line of great economists who combined analytical virtuosity with an understanding of the wider socio-political landscape...
...actually, his problem was methodological...
...Leon Walras—whose general equilibrium theory was incomplete and analytically unmanageable, albeit certainly important—is hailed as the greatest economist, while Adam Smith, David Ricardo and Keynes are downgraded...
...But neither has anyone else succeeded in doing this...
...Surely the great English contributions to theory have outlived the problems that prompted them...
...Further, the ironic truth is that Adam Smith, whom Schumpeter studiously underrates, laid the foundations for the theory of economic innovation...
...Earlier he had failed egregiously in both government and business...
...An economic innovation is a technological or organizational change that alters an established relationship between resource use and production—between inputs of labor and capital and outputs of goods or services...
...As the ghostly clone of the tidily deterministic 19th-century physics, neoclassical economics is simply incapable of grappling with evolutionary change...
...When, in 1940, Harvard's Economics Department failed to match MIT's offer to Paul Samuelson, his most famous student, a bitter Schumpeter lashed out against his colleagues...
...I could understand it if they voted against him because he was a Jew," he declared...
...Validation of the theory required proof of a historical linkage between observed business cycles and the clustering of innovations in a number of industries...
...The results appeared in his Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, a two-volume work published in 1939, and failed utterly to impress either the profession or the general public...
...It is the work of apolymath who is wholly idiosyncratic in his grading of "the troops...
...Unable to win Cabinet support for his anti-inflation policies, he was eventually forced out of the government...
...In November 1942, he wondered in his diary whether "with the successful Allied landing in Africa and the defeat of Rommel, the fate of Germany and Hitlerism is sealed...
...The principal reason was the preoccupation at the time with the revolution in economic thinking occasioned by John Maynard Keynes' General Theory of Employment, Interest and Money (1936...
...The economic imparts of major technological innovations are profound...
...Schumpeter gloomily predicted a "march into socialism"—a prophecy not all that far off the mark considering that his "socialism" embraced the burgeoning of both private and public bureaucracy, high taxation and heavy-handed government regulation...
...Schumpeter went down another blind alley with his theory of business cycles...
...And he wentontoask, "Should this world really be ruled by English ideas and Russian Jews and chipmunks...
...Having abandoned the static neoclassical model with its implicit assumptions of unaltering consumer tastes, perfect competition, a passively adaptive monetary system, and fixed technology, he was unable to formulate its dynamic counterpart...
...Now living in America, he was especially unhappy with the interventionist policies of Franklin D. Roosevelt's Administration...
...fell into the "Ricardian vice" of shaping economic theories with an eye to solving contemporary problems: Smith sought to counter the mercantilist opponents of free trade...
...Although he helped some prominent Jewish scholars relocate in this country, he also defended quota restrictions on the appointment of Jews to academic posts, sometimes on the racist ground that they are so inherently talented as to have an unfair advantage over gentiles...
...Schumpeter's handsome consolation prize was a license to establish a new financial institution—named the Biedermann Bank, after the family that provided the capital—and he soon became its president...
...He dismissed it as a "potboiler" that was tossed off in a few weekends between bouts of serious scientific work, but the essays in that once popular volume are masterpieces of erudition, sophistication and social imagination...
...but the boom is followed by a bust once the credit expansion can no longer be sustained and the innovators' profits are eroded by competition...
...Because the economic effects of major innovations such as electrification, automobiles or synthetic chemicals clearly exceed the duration of most historically documented business cycles, Schumpeter postulated a triplet of cycles: long swings of from 25 to 50 years—the socalled Kondratyev waves—with intermediate and short-term fluctuations superimposed...
...This is not merely a reflection of Schumpeter'santipathytoward"English ideas...
...Then tragedy struck...
...With the Biedermann collapse, Schumpeter—ever adept at tapping into a network of influential academic friends— got a professorship at Bonn in 1925...
...Schumpeter was not a Nazi, but he shared the anti-Semitism endemic to the German-speaking, Catholic hierarchy of the dual monarchy...
...Keynes' triumph was an especially bitter pill for Schumpeter, who made litde secret of his desire to be known as "the world's greatest economist...
...In fact, he and his doting third wife, a Harvard economist too, opposed those policies with sufficient vigor to attract the attention of the FBI...
...Because the system is "rationalist and unheroic," he argued, the bourgeois order in general and the entrepreneur in particular are vulnerable to irrational attack...
...Like Adam Smith, John Stuart Mill and Karl Marx, he not only made a fundamental contribution to economic theory—the analysis of the vital role of innovation and entrepreneurship in the process of economic development—but applied his insights to the larger problems of how and why social institutions evolve...
...In Europe, academic interest in Schumpeter is currently being revived by a society devoted to his life and work...
...Treasury and the last is surely to Eleanor Roosevelt's buck teeth...
...Set, $69.95...
...As a fundamental economic concept, innovation did not spring full blown from the head of the28-year-old Schumpeter...
...Ricardo assailed a squirearchy that caused bread prices—and hence wages and rents—to be higher, and profits lower, than they should have been...
...Schumpeter never recovered from this blow, and it accentuated—or perhaps precipitated—what Allen characterizes as manic-depressive mood swings...
...the first economist of top rank to see and teach systematically how economic theory may be turned into historical analysis and how historical narrative may be turned into histoire raisonnée...
...They begin, appropriately, with Marx, whom the respectful Schumpeter characterizes as "a genius and a prophet...
...What Schumpeter never explains is why policy relevance has to be at war with economic "science...
...Yet his imaginative insights should be reaching a larger audience, and it is unfortunate that Allen, a former student, does little to make that possible...
...Schumpeter was no stranger to disappointment and sorrow...
...Accordingly, Schumpeter devoted much of his time to that task after migrating from Germany to Harvard in 1932...
...It's an ingenious schema, but one for which there is no convincing empirical support...
...What began as a dazzling initial insight was greatly expanded and constantly refined by the implacably ambitious Schumpeter, though not with the soundest of judgment...
...Schumpeter attributed his failure to inadequate mathematical skills...
...But the bank went under in the mid-1920s because of speculations he was involved in, and it was years before he was able to satisfy his creditors...
...His handling of his master's salientideas is pedestrian, and the number of repetitive passages —especially the numbing accounts of Schumpeter's morbid obsession with the deaths of his second wife and son— raises doubt about whether an editor ever really read the manuscript...
...Much of Robert Loring Allen's detailed biography centers around Schumpeter's frustrated attempts to progress from the idea of innovation to a fully "scientific" theory of economic change...
...In addition to his personal sorrow, Schumpeter, fearing the destruction of German culture, was greatly disturbed by World War II...
...He also aspired—both to the amusement and consternation of his Harvard students—to being the world's greatest lover...
Vol. 74 • March 1991 • No. 4
