Joseph Schumpeter Simulacrum

The Life

Joseph Alois Schumpeter was born in Moravia, then part of the Austro-Hungarian empire, in 1883 — the same year as Keynes, a coincidence that both men noted. He studied at the University of Vienna under Böhm-Bawerk and Wieser, practised law in Cairo, taught at Czernowitz and Graz, served briefly as Austrian finance minister in the chaotic post-war period, presided over an Austrian bank into its failure, and emigrated to Harvard in 1932 after the rise of Nazism made continental Europe uninhabitable for his kind of international liberal. He held the economics chair at Harvard until his death in 1950.

The Thought

Schumpeter's theory of economic development departed fundamentally from the static equilibrium framework of neoclassical economics. Markets at equilibrium, he argued, describe a condition that never persists; the characteristic phenomenon of capitalism is disequilibrium, the ceaseless reshaping of the economic landscape by new combinations of resources — what *The Theory of Economic Development* (1911) called innovation. The innovator is the entrepreneur; the function of the entrepreneur is to carry out new combinations (new products, new methods, new markets, new sources of supply, new organisational forms); the reward is temporary monopoly profit, which the imitative activity of competitors erodes as the innovation becomes generalised.

*Capitalism, Socialism and Democracy* (1942) elaborated and darkened the argument. The process of innovation that drives capitalism forward — the famous *creative destruction* — simultaneously destroys the social, cultural, and institutional conditions on which capitalism depends. The bourgeois culture that produced entrepreneurs is replaced by the rationalist-bureaucratic culture that produces employees; the family firm is replaced by the managerial corporation; the political constituency for market capitalism narrows as the losers of creative destruction outnumber its immediate beneficiaries. Capitalism, Schumpeter predicted, would not fall to a Marxist uprising of the impoverished proletariat but would dissolve into a managerial socialism arrived at through democratic politics.

The Legacy

Schumpeter's theory of innovation has been foundational to modern growth economics, to the study of technological change, and to the academic field of entrepreneurship as a discipline. The concept of creative destruction has entered general intellectual circulation as the standard shorthand for the disruptive dynamics of capitalist change. His prediction of capitalism's dissolution into managerial socialism did not come true in the form he expected, though aspects of his analysis — the rise of managerial rather than proprietorial capitalism, the narrowing political constituency for market economics in the post-industrial advanced economies — have recognisable echoes in twenty-first-century discussions. His work has been rediscovered by every generation of scholars interested in the sources of economic dynamism.