------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (November 2007)

Thomas K. McCraw, _Prophet of Innovation: Joseph Schumpeter and 
Creative Destruction_. Cambridge, MA: Harvard University Press, 2007. 
xi + 719 pp. $35 (hardcover), ISBN: 978-0-674-02523-3.

Reviewed for EH.NET by Richard N. Langlois, Department of Economics, 
University of Connecticut.


At the beginning of his long-awaited new biography of Joseph 
Schumpeter, Thomas McCraw describes the Vienna of Schumpeter's birth 
as a "techno-romantic" civilization. It is a characterization, he 
says, that "applies as aptly to the man as to the country." One might 
add that it also applies aptly to McCraw's approach to Schumpeter. 
Unlike the several earlier Schumpeter biographies -- notably those of 
Robert Loring Allen (1991), Richard Swedberg (1991), and Wolfgang 
Stolper (1994) -- _Prophet of Innovation_ is intended not primarily 
for academics but for the educated general reader. As such, the book 
falls into the biography subcategory of popular scientific writing, a 
genre that is almost inherently techno-romantic, painting in a 
romantic light not only its human subject but also its subject's 
"technology" -- his or her theories, discoveries, and scientific 
breakthroughs. McCraw is at his best in conveying Schumpeter the man, 
providing an engaging and beautifully written portrait of this 
larger-than-life and often tragic figure. McCraw also works hard at 
weaving Schumpeter's economics into the life story and at making the 
ideas supply their share of the drama. The result deepens our 
understanding of a fascinating and complex man and of the difficult 
times in which he lived, even if it does not necessarily sharpen our 
understanding of his economics or add much that is new to his 
biography.

It is testimony to the growing prominence of Schumpeter that he 
should attract as a biographer someone who is a distinguished 
business historian, an emeritus professor at Harvard Business School, 
and a winner of the Pulitzer Prize (for _Prophets of Regulation_ 
(1984)). Like Schumpeter himself, McCraw sees Keynes as the relevant 
benchmark. Both Schumpeter and Keynes were born in 1883, and their 
careers comprehended more-or-less exactly the first half of the 
twentieth century. They were both products -- and perhaps embodiments 
-- of their backgrounds and training. Both were brilliant and quick 
witted, aristocratic each in his own way. And both died relatively 
young. For most of the second half of the twentieth century, of 
course, Keynes was the most famous name in economics, whereas 
Schumpeter was an obscurity remembered principally by a handful of 
students of technological change. By the 1990s, however, the tables 
had begun to turn. Keynesian economics was in decline and 
"Schumpeterian" economics on the ascendant. As Art Diamond (2006) has 
recently shown, citations to Schumpeter began to exceed citations to 
Keynes by the mid-1990s.

Schumpeter would probably have been astounded, although no doubt 
pleased, by these developments. As McCraw tells us, Schumpeter was 
well aware that he was founding no school, even musing at one point 
about his own lack of "leaderliness." Whereas the founders of schools 
typically promote the careers of those who carry their message, 
Schumpeter famously promoted smart people irrespective of their 
views, including the Marxist Paul Sweezy and technicians like Paul 
Samuelson and Wassily Leontief. Indeed, one of the most puzzling of 
Schumpeter's professional characteristics was his view that the 
economics profession ought to become more "scientific" and 
mathematical: for although he accurately anticipated what was in fact 
about to happen to economics -- and one wonders whether he would have 
thought that today's profession has gone too far -- the narrow 
technical style of economics he was pushing was strikingly at 
variance with his own approach. McCraw is not alone in arguing that 
one of Schumpeter's major contributions was to have produced broad 
social theory that combined economics with sociology and history.

In the end, however, the mid-century dominance of Keynes and the 
late-century rise of Schumpeter arguably have more to do with the fit 
of ideas to external events than with the skills and inclinations of 
the economists themselves in cultivating a following. The more firmly 
we find ourselves within the twenty-first century, the more we are 
coming to see the middle of the twentieth -- surely 1914 to 1945 and 
maybe 1914 to 1989 -- as a dark and (we may hope) aberrant time. Not 
surprisingly, economic historians have understood better than most 
that the long nineteenth century was the first era of globalization. 
Trade barriers declined, transportation and communications costs 
fell, and productivity and output increased. This was the era of 
empires: the British, the Ottoman, and the Habsburg in which 
Schumpeter was born. In the case of the Habsburgs, running a 
multi-ethnic empire required a careful balance of underlying national 
and ethnic tensions; and the result of that balancing was a 
relatively open, liberal, and intellectually vibrant society. 
Schumpeter was surely shaped by turn-of-the century Vienna, just as 
Keynes was no doubt the product of England and Bloomsbury. But it was 
the period after 1914 -- war, hyperinflation, depression, 
protectionism, nationalism, totalitarianism, more war -- that 
sharpened the intellectual contrast between the two men.

The contrast appears most clearly on the level of _vision_, a term 
Schumpeter popularized in his _History of Economic Analysis_. Keynes 
was fundamentally an economic pessimist in the manner of the 
nineteenth-century classical economists. His vision of the long run 
was that the marginal return to capital was in secular decline as 
capitalism used up all its investment opportunities; but his famous 
understanding of the short run was that clever intervention guided by 
smart people could keep the system afloat. Schumpeter's vision was 
precisely the reverse. Schumpeter believed that capitalism's 
potential was unbounded: an unending dynamic process of change -- 
creative destruction -- driven by entrepreneurship and leading to an 
ever-higher standard of life. For him, the best course was always to 
maintain good (i. e., pro entrepreneurial) policies and institutions 
and to sit tight through the destruction phases of creative 
destruction despite the inevitable political temptations to 
tinkering. It is not difficult, says McCraw, "to identify a 
Schumpeterian program -- at whatever level of analysis one chooses: 
the individual entrepreneur, the business firm, the industry, or even 
the country. At all levels, Schumpeter's litmus test is whether the 
players are pursuing innovation and bringing about creative 
destruction. If they are, then the program is Schumpeterian. If they 
are not, it isn't" (169). McCraw discusses in greater detail than 
previous biographers the popular articles Schumpeter wrote in the 
1920s for _The German Economist_, a business magazine edited by his 
friend Gustav Stolper. I was not surprised by the extent to which 
Schumpeter comes off in these articles as a supply-sider (my term, 
not McCraw's). Many articles favored low taxes, sound fiscal policy, 
and the encouragement of savings. But I was a bit surprised by the 
level of dirigisme Schumpeter was inclined to countenance. He favored 
"selective lending to companies in industries with high growth 
potential. 'The strong ones, or those that can become strong, are to 
be strengthened, but the weak ones are not to be nursed.' As 
conditions for public assistance, he argues, the companies must be 
forced to adopt innovative practices" (173).

In the years after 1914, and especially during the Great Depression, 
Keynes's vision captured the temper of the times, whereas 
Schumpeter's optimism seemed quaint and irrelevant (even though real 
GDP per capita in the U. S. had in fact almost doubled between 1914 
and 1940). After World War II, however, and perhaps especially after 
1989, it was Schumpeter who began to seem right on target. Capitalism 
was discovering investment opportunities literally unimaginable in 
1940; liberalism, globalization, and freer trade were back; and 
economic historians (if not necessarily the general public) were 
coming around to the view that, far from being a massive meltdown of 
capitalism, the Great Depression was more like a colossal failure of 
the mechanisms of short-run tinkering with the monetary and banking 
systems.

Of course, Schumpeter was far from the only economist who was 
eclipsed by Keynes. Robert Skidelsky, Keynes's biographer, has 
recently attempted to encapsulate why Keynes's vision won out over 
that of another Austrian, F. A. Hayek. "Hayek believed that the 
market economy was a smoothly-adjusting machine in the absence of 
credit creation by the banking system. Keynes saw monetary 
'management' by the central bank, which could include credit 
creation, as the only way to keep it stable. This was the pith of 
their debate. Keynes won it, because he made the more relevant 
statements" (Skidelsky 2006). Keynes won the debate with Schumpeter 
(in the Keynesian short run) for much the same reasons. But, in terms 
of pure economic theory, Schumpeter was far less the anti-Keynes than 
was a Hayek or a Friedman; in particular, Schumpeter's monetary 
theory was far more Keynesian (or maybe even Post-Keynesian) than it 
was monetarist. Though he disagreed fundamentally with stagnationism, 
Schumpeter believed that the process of growth could never be made 
stable through monetary policy of any sort, since, in his view, the 
money supply was the endogenous product of the entrepreneurial 
process. Business cycles are thus an inevitable manifestation of 
creative destruction. In his massive 1939 tome _Business Cycles_, 
which he hoped would be a defining theoretical statement to rival 
_The General Theory_, Schumpeter sought the touchstone to these 
inevitable fluctuations in the scientistic necromancy of predictable 
cycles. The result was a kind of steampunk in which colorful 
historical details mingle with tantalizingly mathematical forces. 
McCraw rightly sees the book as a massive failure, not merely because 
it was out of step with the temper of the times but also because it 
was a near-unreadable jumble of facts and ideas. One might also add 
that as theory it was completely wrong.

In the longer-run, however, Schumpeter's emphasis on entrepreneurship 
enabled him to capture the tenor of _our_ times in a 
much-less-obviously political way than a Hayek or a Friedman. Whereas 
many economists since Cantillon and Smith have insisted that economic 
initiative would naturally flourish in an environment of good 
institutions and good economic policies, Schumpeter gave 
entrepreneurship an independent life and causative force. His ideas 
could thus become a rallying point for those who wished to theorize 
about, and to promote, growth and innovation while disagreeing about 
what constitute good institutions and good policies.

A scientific failure in mid-career does not move the engine of 
techno-romantic biography along unless it is quickly followed by 
triumph. In Schumpeter's case, this came in the form of _Capitalism, 
Socialism, and Democracy_, a book Schumpeter wrote during the darkest 
years of the century. McCraw sees this work as a masterpiece, and a 
return to what was really Schumpeter's great contribution all along: 
economic sociology rather than economic theory. Other biographers, 
notably Swedberg, would agree. But not all are persuaded. In his 
review of _Prophet of Innovation_ in _The New Republic_, Robert Solow 
(2007) makes a point of minimizing the book's importance, though he 
admits to a prejudice against big-think social science. And one 
cannot forget Frank Knight's perhaps apocryphal dismissal of the book 
as "superbly entertaining dinner-table conversation." In this matter 
I take McCraw's side. Schumpeter's most important contribution 
remains his theory of entrepreneurship. But _Capitalism, Socialism, 
and Democracy_ is significant for the way it attempts to place that 
theory in the larger currents of social thought. It is not always 
right, by any means; but it is important for the broad ways of 
thinking it introduces. Indeed, I consider the book important even in 
an area where McCraw thinks otherwise. McCraw tells us that 
Schumpeter's theory of democracy was largely anticipated by a 
tradition of American writing since colonial times of which 
Schumpeter seemed largely ignorant. True or not, this point misses 
the extent to which Schumpeter's formulation of the issues 
anticipated and influenced modern public-choice economics.

Though written during World War II, the darkest period within a dark 
period, _Capitalism, Socialism, and Democracy_ actually addresses 
what would become a central issue of the post-War period: the battle 
of capitalism against socialism. To his credit, and unlike the 
majority of commentators over the years, McCraw understands that 
Schumpeter's brief in favor of socialism is not meant to be taken 
literally; it is parody, rhetorical deception. What comes through 
less clearly in McCraw's treatment, however, is that, in a manner 
reminiscent of Thorstein Veblen, the black humor has a deadly serious 
function. Socialism may very well win. And it will be a tragedy.

 From our perch in the twenty-first century, we may wonder why 
Schumpeter took full-blown socialism so seriously -- until we recall 
that, until 1989, the only economists who predicted a victory for 
capitalism were considered cranks. (We may also want to keep in mind 
that our second age of modern globalization may itself someday come 
to an end as well.) McCraw is more inclined to wonder why Schumpeter 
failed to see that a stable mixed economy is possible and desirable. 
After heaping justifiable praise on Schumpeter's last major work, 
_The History of Economic Analysis_ (published posthumously under the 
editorship of Schumpeter's third wife, the economic historian 
Elizabeth Boody Schumpeter), and after documenting the signs of 
Schumpeter's growing influence in present-day economic discourse, 
McCraw gives himself to wondering in epilogue how Schumpeter would 
have reacted to the modern world. Surely, says McCraw, Schumpeter 
would have decried the "accounting frauds, outrageous executive pay 
schemes, back-dating of stock options, and other looting of corporate 
treasuries by the very executives who were supposed to be their 
stewards. He would have considered these kinds of practices a 
betrayal of capitalism. All of them embodied the negation of the 
system Schumpeter had supported. They also represented reminders of 
the need for eternal vigilance and timely action by government 
regulators -- factors that Schumpeter, along with a large majority of 
his fellow citizens, persistently underestimated" (498). I am not 
surprised to hear the author of _Prophets of Regulation_ taking this 
view. But I have a hard time imagining the author of _Capitalism, 
Socialism, and Democracy_ doing so. Schumpeter would have been far 
more likely to say that the fall of Enron and related events are good 
examples of creative destruction cleaning up the system, and I would 
have expected him to warn against, rather than to embrace, the idea 
of subjecting capitalists to a New Class of regulators. Schumpeter 
ever outrageous, ever defiant. Wouldn't that have made a better -- 
not to say more accurate -- ending to a gothic techno-romance?

References:

Allen, Robert Loring. 1991. _Opening Doors: The Life and Work of 
Joseph Schumpeter_. New Brunswick, NJ: Transaction Publishers.

Diamond, Arthur. 2006. "Schumpeter vs. Keynes: In the Long Run Not 
All of Us Are Dead," paper presented at the International Joseph A. 
Schumpeter Society meeting, June 22, Sophia Antipolis, France.

McCraw, Thomas K. 1984. _Prophets of Regulation_. Cambridge, MA: 
Harvard University Press.

Skidelsky, Robert. 2006. "Hayek versus Keynes: The Road to 
Reconciliation." Retrieved July 18, 2007, from 
http://skidelskyr.com/index.php?id=2,83,0,0,1,0.

Solow, Robert M. 2007. "Heavy Thinker," _The New Republic_, May 21.


Richard N. Langlois is Professor of Economics at the University of 
Connecticut. His latest book, _The Dynamics of Industrial Capitalism: 
Schumpeter, Chandler, and the New Economy_ (Routledge 2007), was a 
recipient of the 2006 Schumpeter Prize of the International Joseph A. 
Schumpeter Society. [log in to unmask]

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