The greatest individual stimulus upon Joseph Schumpeter was likely his university professor, Eugen von Böhm-Bawerk, one of the founders of the “Austrian School” and a teacher of economist Ludwig von Mises as well. Through von Böhm-Bawerk, Schumpeter came to an understanding of the work of Carl Menger and of Menger’s idea of marginal utility. Schumpeter adopted many of von Böhm-Bawerk’s criticisms of Karl Marx and Marxism. As an admirer of von Böhm-Bawerk’s character and career, he also sought to emulate his record as an Austrian Finance Minister, a post which von Böhm-Bawerk held for many years.

Schumpeter was further influenced by the so-called “Lausanne School” as it was embodied in the writings of Léon Walras and Vilfredo Pareto. Schumpeter admired their originality and their ability to present complex economic principles in clear, predictable mathematical terms.

Yet Schumpeter was a historical economist. His work is not based on mathematical modeling, and he was critical of economists who develop such models but fail to see economies as dynamic, constantly changing entities. In Schumpeter’s view, economic processes can only be understood as organic happenings in which different forces work with and against one another at a given historical moment. Among the most important of these factors in his estimation were the availability, stability and dispersal of capital, the vital leadership of entrepreneurs, the legal and political structure of the society, and the particular state of industry.

Other influences upon Schumpeter include the American economist Irving Fisher, the German sociologist Max Weber, and the German historical economist Werner Sombart.

Schumpeter considered Fisher to be the greatest American economist. Although Schumpeter was not a mathematical economist, he admired Fisher for his role in the development of the field of econometrics and in the creation of the so-called “Fisher ideal index numbers.” This system is used for calculating changes in the prices of goods.

Schumpeter took the term “creative destruction” from Sombart, who originated it.

View of Monopoly Capitalism

Schumpeter’s view of “monopoly capitalism” is complex. Rather than merely attack or criticize monopolists, Schumpeter saw them as valuable and necessary if momentary players. Their rise, he argued, typically reflects the application of novel technologies that allow them briefly to gain expanded market share and enlarged profit margins. That position permits them to speed the pace of change, as their desire for a dominant position in the market hastens competition and innovation. These developments inevitability lead to dramatic declines in the prices of their products and services. This provides obvious benefits for consumers and society. With that comes the eventual fall of the monopolist’s advantageous position. In the meantime, though, economies are affected by business cycles. Recessions result from bankruptcies caused by loss of outmoded businesses, over-expansion of new industries or mere happenstance. Booms result from spending on new areas of economic activity and the increased efficiency created, as well as from the unreasonable expectations arising from that growth and opportunity. Schumpeter called this process “creative disruption” or “creative destruction.”

As an example of the benefits of a successful monopoly innovator, Schumpeter cited Alcoa: the Aluminum Company of America. In 1890, the company’s aluminum production was just 30 metric tons. Through its development of patented processes for more efficient manufacture, it came to dominate the market, and by 1929 its production had risen to 103,400 tons. But the price it charged for aluminum had declined by 91% in real terms. This made possible the general commercial use of the metal – for everything from airplanes to cookware.

Theory of Waves

Development, Schumpeter believed, would be expressed in shorter and longer “waves.” The shortest wave was that of a normal business cycle, which would typically last approximately forty months. Cycles of capital accumulation would last from seven to eleven years. Waves in the building of infrastructure and underlying development, which were influenced by human migrations and capital spending, could last fifteen to twenty-five years. Longer waves, reflecting patterns of growth and transformation in society, might last forty to sixty years. All of these, Schumpeter suggested, existed within a matrix of technological shifts taking place over an even longer period, changes occurring over as much as seventy years.

Perspective On Entrepreneurs

Schumpeter saw entrepreneurs not only in economic terms but psychological ones. He described them in terms of their capacity for leadership as he recognized that their ability to drive the process of innovation reflected their intellect, energy, charisma, and vision. In this sense, he anticipated the interest in men like Henry Ford and Steve Jobs as personalities and not simply as embodiments of underlying social forces or as the channels by which shifts in technology reach the marketplace.

Economic transformation, Schumpeter believed, required strong entrepreneurs. The successful entrepreneur, according to Schumpeter, was an inherently gifted person. But the entrepreneur was not necessarily one who possessed capital, nor was he usually an inventor. Instead, Schumpeter believed that a capable entrepreneur was a person skilled at introducing new products or services into the marketplace or in finding new avenues for sales and in re-shaping the market by creating demand.

While Schumpeter saw entrepreneurs as superior individuals, he described them as typically unglamorous and egocentric. They are not men who think principally in terms of risk as most business managers do. Further, the successful entrepreneur’s aim is not usually riches but rather a feeling of pride or accomplishment. His leadership skill comes primarily from an unwillingness to accept convention and a capacity for concentrated thought and direction of others.

Nonetheless, in his later writings, Schumpeter argued convincingly that large corporations might in some cases be the best agents for the introduction of new technologies given their greater resources. Schumpeter was accurately predicting the subsequent achievements of companies like RCA, Sony and Apple.

Conception of the “Ricardian Vice”

Schumpeter was at times highly critical in his remarks on the founding figures of “classical economics.” He was especially disparaging of David Ricardo and of the writers, including Karl Marx, who developed their ideas from him. Thus, Schumpeter is the source for the phrase “Ricardian vice.”

The phrase can be employed in a number of ways. It can refer to Ricardo’s habit of presenting mathematical models which claim to predict economic effects with the assumption that certain of the terms – wages especially – will remain relatively constant in a greatly altered economic environment. Ricardo had put forward such models in explaining his proposals for property taxes to pay off the national debt Great Britain had assumed during the Napoleonic Wars. Ricardo claimed that large tax increases would not have marked effects upon the overall level of wealth, income or economic output. Commenting on Ricardo’s predictions and the equations underlying these, Schumpeter remarked that Ricardo was “piling a heavy load of practical conclusions upon a tenuous groundwork.”

“Ricardian vice” can also be used as a more specific critique of Ricardo’s notion that new taxes on goods and income were unlikely to meaningfully alter the wages among those employed at a subsistence level. Schumpeter saw this sort of analysis as absurd, granted that the individual factors in economic activity work in tandem, that wages reflect market forces and that the aggregate effects of changes in policy can never be predicted with great precision.

This critique of Ricardo has a wide range of implications. Among the most obvious is that static models of budgeting and taxation may have more value for electioneering than policy-making.

This also predicts that adopting approaches to monetary policy based on patterns identified over brief time periods, like the Phillips Curve, will not continue to demonstrate efficacy over periods of longer duration.

On Marx

A posthumous collection of Schumpeter’s essays, Ten Great Economists: From Marx to Keynes, offered his analyses of the most influential economists from Karl Marx up to his own time.

Schumpeter argued that Marx’s economic theories were fundamentally undermined by his failure to grasp marginal utility and his adoption through David Ricardo of the Labor Theory of Value.

But Schumpeter’s critique of Marx extends beyond this. Schumpeter further observes that Marx provided little actual analysis of social class and occupational roles in his theories; rather, in Marx’s writings, the world is baldly split into factory owner and industrial worker. Positions like farmer and artisan are ignored, and the functions of small capitalists who serve as middlemen and speculators are not explored in meaningful detail. Moreover, Marx’s theories about future trends in wages and working conditions were not only erroneous but in some cases logically inconsistent. How, Schumpeter asked, could greater unemployment among the proletariat result even as Marx’s prediction of overproduction of manufactured goods also arose? In all, Schumpeter sees Marx as an inspired creator of catchphrases and a determined and careful student of Ricardo but a shoddy economist, and he judges Marx’s system to be a religion and not a meaningful part of economic science.

Views of Keynes

Schumpeter’s comments on John Maynard Keynes are less caustic and more respectful than his comments on Marx.

As an Austrian, Schumpeter had great appreciation for Keynes’ Economic Consequences of the Peace, a book which presented a damning account of Keynes’ experiences as a staffer at the meetings of the Versailles Peace Conference. Schumpeter further noted his admiration for Keynes’ industriousness, and he respectfully pointed out something that many of the English economists’ adherents do not: Keynes never actually denied that the amount of money in circulation affects price levels. (This idea is known as the “quantity theory of money.”) Moreover, Schumpeter observed that Keynes’ record in British policymaking positions during the early 1920s was actually conservative.

Schumpeter’s criticisms of Keynes are several. First, he believed that the concepts Keynes promoted as responses to economic troubles were made with insufficient regard for their long-term consequences. More particularly, Schumpeter argued that Keynes’ writings made little distinction between savings and investment or towards the question of what the effect of his policy proposals would be upon them. In addition, Schumpeter suggested that Keynes had developed his ideas based on a specifically British set of conditions and problems. As Britain was sluggish and heavily indebted after the First World War, Keynes’ perceptions had been based on a view of an economy that was moribund and unusually lacking in innovation, and Schumpeter argued that this had colored Keynes’ understanding of other nations and economics in general.

Keynes’ research on the British Treasury had shown that the amount of money in circulation in the United Kingdom was relatively stable during the pre-War period despite large fluctuations in the gold supply. However, such monetary stability is a far from typical occurrence. (As an example, as Milton Friedman has pointed out that the amount of money in circulation in the United States declined by a third between 1929 and 1932.) Schumpeter believed that Keynes’ suggestion that policymakers should employ deficit spending and expansion in the size and scope of government as a means of dealing with fluctuations in aggregate demand would produce unintended effects. Deficit spending might soak up capital and scare off potential business investors, discouraging growth and development. Or Keynesian policies might create inflation, indirectly taxing workers, pensioners, and business owners. This critique of Keynes gained a more general appreciation during the stagflation of the 1970s when Keynesian approaches to budgeting and spending produced simultaneous increases in inflation and unemployment. Many economic historians now argue that Schumpeter’s critique of Keynes also explains the failure of Keynesian policies to end the Great Depression.

Judgments of Other Economists

Schumpeter wrote a great deal about the best-known economists who preceded him. Not all of these writings are currently available in English. Among his compositions are works on Carl Menger, Léon Walras, and Eugen von Böhm-Bawerk.

View of Democracy and Its Connection To Socialism

Schumpeter’s ideas about society and government were influenced by his brief experiences as a leader of the Austrian government during and after the First World War. His attempts to limit the growth in the post-war state budget and to prevent deficit spending and money-printing that might lead to inflation placed him at odds with professional politicians and interest groups. Perhaps not surprisingly, his period as Finance Minister lasted only a few months.

Schumpeter surely noticed though that the policies implemented afterwards were disastrous. Within three years of his dismissal, Austria’s currency had declined against the U.S. dollar to less than one-fifteen thousandth of its original value. Meantime, the country’s trade was affected by the dislocation arising from its split from Hungary, Czechoslovakia, Romania, and other parts of the old Austro-Hungarian Empire. At the same time, Vienna came under the political control of socialists who dramatically increased taxes and set up an 80,000 man army, which was independent of the national army. These actions were widely supported by the country’s intelligentsia.

Schumpeter expressed his view of the likely evolution of modern liberal societies in his most widely read book, Capitalism, Socialism and Democracy. While he believed that capitalism was the most effective economic system, he thought that socialism might eventually displace it. Possibly influenced not only by what he had observed in Austria and Germany but by the aspects of statism that he saw in the United States during Franklin Roosevelt’s presidency, Schumpeter came to think that the combined effects of vote-buying by democratic politicians and the anti-capitalist sentiments of resentful intellectuals would gradually work together to undermine capitalism and a sound system of credit and finance.

But Schumpeter was not welcoming of a possible triumph of socialism, commenting, “If a doctor predicts that his patient will die presently, this does not mean that he desires it.”

Inflation and Monetary Policy

Schumpeter’s view of inflation was relatively straightforward and in many ways similar to present-day monetarists like the followers of Milton Friedman.

Not all money-printing could or would lead to inflation, he believed. Rather, he said, inflation appears “whenever means of payment [i.e. money supply] grow faster than the availability of goods and services.” In other words, the problem of inflation arises when the amount of money placed in circulation increases faster than the availability of goods and services for purchase.

Where Schumpeter was ahead of others on the subject was in the large emphasis he placed upon inflationary psychology. The leap from what he called “incipient inflation” to “advanced inflation” and from there to “wild inflation,” he said, reflected a change in expectations.

Schumpeter defined “wild inflation” as the state when people will spend money simply to exchange currency for tangible assets.

Schumpeter was pointed in saying that the “wild inflation” observed in post-World War I Austria and Germany resulted from political decision-making that served short-term interests above long-term stability. The problems of post-war inflation, he said, could have been “stopped in a year or two. But they were not stopped because those who counted politically did not want them stopped… Politicians, preoccupied with the problems of the day, farmers and industrialists who were not sorry to get rid of their debts, and other groups who put the sham profits of inflation above their permanent interests, pussy-footed the issue of inflation until it was too late.”

In his final writings, Schumpeter addressed the problem of inflation in the U.S. Price increases had started during the Second World War but accelerated rapidly once wartime price controls were lifted. Schumpeter believed that new wage and price controls would lead to economic distortions and even de facto confiscation of resources, and, as such, he opposed them. He was also critical of the idea of dampening output through increased taxes on capital. Both actions, he thought, would produce a decline in living standards and a dangerous increase in governmental power. Instead, Schumpeter advocated using a coordinated program that would include action by the Federal Reserve to lift interest rates, limitations on intermediary credit institutions involved in creating money for housing and consumer credit, budgetary cutbacks that would tend to produce a government surplus and adoption of policies to increase labor productivity.

Arguments About Imperialism

Schumpeter wrote extensively about the economics behind 19th-century European imperialism. His ideas are developed from his teacher Eugen von Böhm-Bawerk and are a critical response to the reductive views of imperialism presented by Karl Marx and Vladimir Lenin. In his writings about imperialism, Schumpeter presented his analyses of the motives of British politicians like Benjamin Disraeli, William Gladstone, and Joseph Chamberlain.

Schumpeter acknowledged that European nations sought to expand in order to gain markets and resources. But he argued that the motives of the imperialists were manifold, and that it was not the merchant class which was typically most supportive of imperialism. Rather, the political appeal of imperialism, he suggested, more often reflected working-class jingoism, the desire for land among poorer voters interested in emigrating and the competition to appeal to these voters.

Free Trade

Schumpeter regarded the mercantilist emphasis upon the acquisition of gold bullion as a crude and primitive understanding of money and economics. His experiences as an Austrian before and after the First World war made him broadly supportive of the benefits of customs unions and expanded international trade. As a believer in the nation-state, however, he thought that countries needed to be watchful in protecting their own interests when entering into trade arrangements.

Other Sites of Interest

Joseph Schumpeter – Concise Encyclopedia of Economics

ISS – International Joseph A. Schumpeter Society

Schumpeter Blog Archive – The Economist

Journal of Evolutionary Economics

Papers of Joseph Alois Schumpeter – Harvard University Archives, Harvard University