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Project 2000: Significant Works in Twentieth-Century Economic History
Joseph A. Schumpeter, _Capitalism, Socialism and Democracy_. New York:
Harper & Row, 1942, 381 pp.; Third edition, 1950, 431 pp.
Review Essay by Thomas K. McCraw, Harvard Business School.
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The Creative Destroyer:
Schumpeter's _Capitalism, Socialism, and Democracy_
Does Joseph Schumpeter's _Capitalism, Socialism and Democracy_ rank with
the most important works of economic history of the twentieth century? Of
course it does. Has there been a more penetrating analyst of capitalism
than Joseph Schumpeter? No, I do not think there has.
Schumpeter led a melodramatic life (1883-1950), moving from Austria to
England to Egypt to Germany before coming to Harvard for good in 1932. He
was a phenomenally productive scholar, despite occasional forays into
business and government in addition to a plethora of romantic liaisons that
included three marriages. His first published article appeared in 1905, his
last in 1950. His output included fifteen books (several of immense
length), six pamphlets, about one hundred book reviews, and 148 articles,
comments, and occasional pieces.
Long after his death, his influence continues to grow. Massimo M. Augello's
Joseph Alois Schumpeter: _A Reference Guide_ appeared in 1990 and ran to
over 350 pages. Since then, several dozen articles on Schumpeter have
appeared, in addition to biographies by Eduard März, Robert Loring Allen,
Richard Swedberg, and Wolfgang Stolper. All of this work has enriched our
knowledge of this remarkable polymath.
Just how great was Schumpeter? Tibor Scitovsky places him at the very top:
"America's most brilliant economist." The intellectual historian Martin
Kessler agrees, arguing that Schumpeter was, apart from Keynes, "the only
truly great economist the twentieth century has produced." Oskar
Morgenstern sensibly comments that at this level rankings become pointless,
that "all will agree that [Schumpeter] belongs to that small top group
where a further ranking becomes almost impossible."1
Many scholars of business history, most notably Alfred D. Chandler, Jr.,
have looked to Schumpeter as the economist who best understood the rise of
big business and the central roles of innovation and entrepreneurship.2 In
economic history, the work of Nathan Rosenberg and William Lazonick, among
others, is imbued with Schumpeterian insights.3 In the study of "business
strategy," a term probably coined by Schumpeter in _Capitalism, Socialism
and Democracy_, Michael Porter's seminal work places a distinctly
Schumpeterian emphasis on relentless innovation as the essence of
competitive strategy.4 Within economics, Schumpeter's influence in America
is perhaps best exemplified by the work of F. M. Scherer and Richard R.
Nelson. Scherer, a prolific scholar and author of a standard textbook in
industrial organization, acknowledges his intellectual debts in a book
entitled _Innovation and Growth: Schumpeterian Perspectives_ . Nelson's
Schumpeterian proclivities are on display in _An Evolutionary Theory of
Economic Change_ , co-authored with Sidney G. Winter.5 A few other
economists have tried to implement parts of the Schumpeterian system,
particularly those having to do with innovation.6
Most mainstream economists have been frustrated by the difficulty of
operationalizing Schumpeter's models. His aversion to equilibrium as a
realistic picture of capitalist economies restricts the mathematicization
of his system. Then, too, because he insisted on fusing economics with
history, sociology, and psychology, the number of variables becomes almost
impossible for the analyst to control.7
As a scholar Schumpeter never advanced a program of economic reform. He
believed that doing so compromised "scientific" work. In particular he
criticized Keynes and other English economists for their "Ricardian Vice"
of leaping into policy debates with abstract models as general
prescriptions for change.8 Schumpeter himself took a very different
approach in _Capitalism, Socialism, and Democracy_.
_Capitalism, Socialism, and Democracy_ and Its Predecessor Book
Schumpeter's core argument in _Capitalism, Socialism, and Democracy_ is
reducible to three major tenets:
1. The essence of capitalism is innovation ("creative destruction")
in particular sectors. Certain standard tools of economics, such as static
equilibrium and macroeconomic analysis, can therefore disguise reality and
mislead scholars and students.
2. The virtues of capitalism--in particular its steady but gradual
pattern of growth--are long-run and hard to see; its defects, such as
inequality and apparent monopoly, are short-run and conspicuously visible.
3. It is dangerous for economists to prescribe "general" recipes,
because political and social circumstances are always changing.
_Capitalism, Socialism, and Democracy_ was Schumpeter's most popular
success by far. Translated into at least sixteen languages, it still sells
widely in paperback editions. Although the author often compared it
unfavorably with his more scholarly books, it retains its seminal quality
three generations after it appeared.
Despite the book's title, it contains little of lasting interest about
either socialism or democracy. But it bursts with ideas about capitalism,
and as a "performance"--a term Schumpeter liked to apply to others'
works--it may be the best analysis of capitalism ever written.
Only three years before the appearance of this great work, Schumpeter had
brought out another book he thought would be his magnum opus: the 1100-page
_Business Cycles: A Theoretical, Historical, and Statistical Analysis of
the Capitalist Process_. The virtues of the second book, _Capitalism,
Socialism, and Democracy_, can be fully understood only against the
shortcomings of this prior work.
The first problem with _Business Cycles_ was its extraordinary and wholly
unnecessary length. A second characteristic was the author's misguided
attempt to turn business cycle patterns into predictive scientific wave
theories borrowed from physics. As Schumpeter wrote, "Barring very few
cases in which difficulties arise, it is possible to count off,
historically as well as statistically, six Juglars [8-10-year business
cycles] to a Kondratieff [50-60 years] and three Kitchins [40 months] to a
Juglar--not as an average but in every individual case." Why this was so,
he admitted, "is indeed difficult to see."9 As his former student Paul
Samuelson wrote thirty-five years later, the whole exercise "began to smack
of Pythagorean moonshine."10
The third noteworthy aspect of _Business Cycles_ was its remarkable
richness of historical detail and understanding. Though the explanation of
cycles remained problematical, the historical vision was squarely on point:
that capitalism--not all economic activity, just capitalism--is
fundamentally an unstable, disequilibrating process.11
Simon Kuznets, a macroeconomist and future Nobel laureate, wrote for the
_American Economic Review_ a fifteen-page analysis of _Business Cycles_. It
was the most thorough and important of the reviews, kindhearted in tone but
still devastating. Kuznets conceded that Schumpeter had written a
"monumental treatise" that raised all the right questions and did relate
short-term business cycles to long-run economic movements. Still, Kuznets
wrote, business cycles are essentially quantitative phenomena. Instead of
robust statistical argument, Schumpeter had presented the reader with "an
intellectual diary," an account of his own "journey through the realm of
business cycles and capitalist evolution, a journal of his encounters there
with numerous hypotheses, diverse historical facts, and statistical
experiments." These efforts could not substitute for robust quantitative
analysis.12 Two other reviewers noticed Schumpeter's implicit distaste for
macroeconomics, referring to his "vigorous stand against 'the curse of
aggregative thinking.'"13
Given the harsh reception of _Business Cycles_, published only three years
earlier, the content and also the detached and ironic tone of _Capitalism,
Socialism and Democracy_ appear in a different light. It is as though
Schumpeter, now deeply pessimistic about the state of the world, decided to
unburden himself not only on economics but on a broad array of other
subjects as well. Hence the candor and breadth of the 1942 book, which
produced thousands of future citations by scholars in sociology, history,
economics, and other disciplines.14
Some of the major themes represent reworkings of ideas Schumpeter had first
presented in articles published long before, while in his twenties (he was
fifty-nine in 1942). A capitalist economy, he now wrote in _Capitalism,
Socialism and Democracy_, "is not and cannot be stationary. Nor is it
merely expanding in a steady manner. . . . Every situation is being upset
before it has had time to work itself out. Economic progress, in capitalist
society, means turmoil."15
In a 54-page analysis of Karl Marx at the beginning of _Capitalism,
Socialism and Democracy_, Schumpeter considers Marx as Prophet,
Sociologist, Economist, and Teacher. It's hard to avoid the thought that
the author construed himself in the same roles. Certainly his critique of
Marx is full of insight: "Now Marx saw this process of industrial change
more clearly and he realized its pivotal importance more fully than any
other economist of his time." He accomplished a fusion of history and
theory whose result represented something different from either one alone.
Marx "was the first economist of top rank to see and to teach
systematically how economic theory may be turned into historical analysis
and how the historical narrative may be turned into histoire raisonée."
Nevertheless, Schumpeter's final verdict is negative, because of the
"failure of [Marx's] prediction of increasing misery," which in turn
derived from "wrong vision and faulty analysis." Although Marx the
economist and sociologist was mostly correct, Marx the prophet and teacher
proved to be disastrously wrong.16
As prophet, the same might be said of Schumpeter himself. On page 61 of
_Capitalism, Socialism and Democracy_ Schumpeter asks, "Can capitalism
survive?", then replies, "No. I do not think it can."17 This provocative
passage may have been sincere, or simply Schumpeter's way of getting the
reader's full attention. His purpose was to lay bare the core nature of
capitalism--to show how it works, to demonstrate why, on balance, it is a
good thing; and then to highlight its fragility.18
In response to the standard charge that capitalism distributes its fruits
inequitably, Schumpeter points out that "Queen Elizabeth owned silk
stockings. The capitalist achievement does not typically consist in
providing more silk stockings for queens but in bringing them within the
reach of factory girls in return for steadily decreasing amounts of effort.
. . . the capitalist process, not by coincidence but by virtue of its
mechanism, progressively raises the standard of life of the masses."19
A by-product of capitalism is the dominance of all life by an economic
calculus, which Schumpeter calls "rationality." He shows how powerfully the
economic way of thinking bestows rewards and penalties: "Prizes and
penalties are measured in pecuniary terms. Going up and going down means
making and losing money. . . . The promises of wealth and the threats of
destitution that [this arrangement] holds out, it redeems with ruthless
promptitude." Constant, relentless change is the hallmark of capitalism.
"It may seem strange that anyone can fail to see so obvious a fact which
moreover was long ago emphasized by Karl Marx."20
Underscoring the deficiencies of any conceptual system that proceeds from
static assumptions, Schumpeter compares the universe of Adam Smith and
other classical economists with the reality of modern industry. The
classicists "recognized cases of 'monopoly,' and Smith himself carefully
noticed the prevalence of devices to restrict competition." Yet neither
Smith nor most other classical and neoclassical economists "saw that
perfect competition is the exception and that even if it were the rule
there would be much less reason for congratulation than one might think. If
we look more closely at the conditions . . . that must be fulfilled in
order to produce perfect competition, we realize immediately that outside
of agricultural mass production there cannot be many instances of it."21
Schumpeter contrasts this situation with modern business, parts of which
involve constantly evolving oligopolies. These new situations do not easily
lend themselves to mathematical modeling. In oligopolies, "there is in fact
no determinate equilibrium at all and the possibility presents itself that
there may be an endless sequence of moves and countermoves, an indefinite
state of warfare between firms."22
The contemporary structure of business is best understood as having evolved
from long "organizational development." It reflects a "process of
industrial mutation--if I may use that biological term--that incessantly
revolutionizes the economic structure from within, incessantly destroying
the old one, incessantly creating a new one."23
In sum, the process is one of "creative destruction"--the sweeping out of
old products, old enterprises, and old organizational forms by new ones. It
is what capitalism consists in and what every capitalist concern has got to
live in."24 For the scholar, this necessitates a lengthy time frame for
analysis: "Every piece of business strategy acquires its true significance
only against the background of that process and within the situation
created by it. It must be seen in its role in the perennial gale of
creative destruction; it cannot be understood irrespective of it or, in
fact, on the hypothesis that there is a perennial lull. . . . As long as
this is not recognized, the investigator does a meaningless job.25
One result of this approach should be a sharper focus on product quality
and on marketing, and a reduced emphasis on price. "[I]n capitalist reality
as distinguished from its textbook picture, it is not [price] competition
which counts but the competition from the new commodity, the new
technology, the new source of supply, the new type of organization (the
largest-scale unit of control for instance)--competition which commands a
decisive cost or quality advantage and which strikes not at the margins of
the profits and the outputs of the existing firms but at their foundations
and their very lives." A theoretical analysis that "neglects this essential
element of the case . . . even if correct in logic as well as in fact, is
like Hamlet without the Danish prince."26
Schumpeter then turns to the question of monopoly. He mounts a devastating
attack on what he regards as popular American attitudes toward this
subject, which, in his judgment, spill over onto big business in general.
Much of what Schumpeter says here was conditioned by what happened in the
1930s, and specifically by New Dealers' assaults on big business. He argues
that the very nature of giant, capital-intensive enterprise requires
strategic behavior not contemplated by orthodox economic theory except to
the extent that the theory holds such behavior monopolistic. As a matter of
historical record, Schumpeter insists, long-run price rigidities are
practically unknown. The same is true of long-run cases of monopoly, which
are rarer than instances of perfect competition.27
It seemed plain to Schumpeter that big business, instead of exploiting
consumers, had radically elevated their living standards. Organizational
innovation, not monopolistic profits, accounted for the prosperity of most
great companies. They should be viewed with pride and awe, not with
detestation and fear. "These units not only arise in the process of
creative destruction and function in a way entirely different from the
static scheme, but in many cases of decisive importance they provide the
necessary form for the achievement. They largely create what they exploit."
Monopoly rents might flow for awhile, but they are inevitably temporary,
"the prizes offered by capitalist society to the successful innovator."
Under capitalism, the idea of a permanent monopoly is ludicrous, especially
in manufacturing.28
Schumpeter next mounts a savage assault on the idea of perfect competition.
He implies that it has evolved from an analytical tool of theoretical
economics into an ideal toward which theory should guide public policy.
This, he suggests, is catastrophic:
If we try to visualize how perfect competition works or would work
in the process of creative destruction, we arrive at a still more
discouraging result. . . . In the last resort, [cases approaching perfect
competition, such as] American agriculture, English coal mining, [and] the
English textile industry are costing consumers much more and are affecting
total output much more injuriously than they would if controlled, each of
them, by a dozen good brains.29
Pushing his analysis to its limits, Schumpeter identifies capitalist
entrepreneurship with technological progress itself. As a matter of
historical record, they were "essentially one and the same thing," the
first being "the propelling force" of the second."30
At this point in the book, Schumpeter begins to lay the foundations for his
famous argument that capitalism contains the seeds of its own
destruction--not for economic reasons but for sociological ones. His
reasoning proceeds as follows:31
1. In pre-capitalist times, no sheer economic achievement, by
itself, could advance anyone into the ruling class. 2. When capitalism
began to develop, persons of "supernormal ability and ambition" became
upwardly mobile provided they would "turn to business."
3. It was hard to succeed in business, yet success remained
inglorious: "no flourishing of swords about it, not much physical prowess,
no chance to gallop the armored horse into the enemy. . . . The stock
exchange is a poor substitute for the Holy Grail." 4. There can be no
assurance that people are "happier" or "better off" under industrialism
than in the medieval manor or village. Efficiency is only one of many human
desiderata, and perhaps not the most important one.
5. So the future of capitalism can't be assured purely because of
its economic superiority. "I am not going to argue, on the strength of that
performance, that the capitalist intermezzo is likely to be prolonged."
6. Capitalism all but destroyed most of the secular underpinnings
of civilized society--the manor, village, and craft guild. Yet it replaced
these institutions with nothing: no idealism, no sense of organic life, no
essential ability for social organization of a non-economic nature. 7.
In particular, the talents necessary for economic success don't translate
well into other realms of life. "A genius in the business office may be,
and often is, utterly unable outside of it to say boo to a goose--both in
the drawing room and on the platform." 8. So, without protection from some
other source, "the bourgeoisie is politically helpless and unable not only
to lead its nation but even to take care of its particular class interest."
9. Because capitalist evolution, and particularly the rise of big
business, attacks masses of small producers and merchants, it alienates its
natural allies, indirectly giving reinforcements to the enemy. 10. The
substitution of a share of stock for tangible goods "takes the life out of
the idea of property." If this process goes on long enough and thoroughly
enough, "there will be nobody left who really cares to stand for
[property]."
11. Capitalism works gradual changes within the psyches of
individuals. By reducing everything to an economic calculus, it
"rationalizes" thinking. It "creates a critical frame of mind which, after
having destroyed the moral authority of so many other institutions, in the
end turns against its own." 12. The philosophical case for capitalism
is beyond the intellectual capacity of most persons, even most economists.
"Why, practically every nonsense that has ever been said about capitalism
has been championed by some professed economist."
13. Most important, the case for capitalism "must rest on long-run
considerations." In the short run, it is impossible for most people, even
intellectuals, to ignore exasperating "profits and inefficiencies" and
focus instead on long-range trends.
14. Uniquely among types of societies, capitalism is so successful
economically that it "creates, educates and subsidizes a vested interest in
social unrest." It underwrites a class of hostile intellectuals who have no
"direct responsibility for practical affairs" and little experience in
managing anything.
15. The rise of mass media makes this situation more dangerous by
multiplying the access of demagogues to short-run human instincts and
desires. In the process, "public policy grows more and more hostile to
capitalist interests."
16. Bureaucracies in Europe antedate the capitalist epoch and owe
no allegiance to bourgeois values. Bureaucracies in America, however, with
no real civil service tradition, hold onto their antipathy toward
capitalism because they don't grasp the vast stakes at issue. Given the
"legislative, administrative and judicial practice born of that hostility,
entrepreneurs and capitalists--in fact the whole stratum that accepts the
bourgeois scheme of life--will eventually cease to function."
17. Most alarming of all, the bourgeois family may disintegrate. As
soon as men and women "introduce into their private life a sort of
inarticulate system of cost accounting," they will become aware that
"children cease to be economic assets." When this happens, the last pillar
of bourgeois society will fall.
Much of Schumpeter's argument here might be interpreted as a cry
from the heart of a brilliant but unlucky European elitist, who had
witnessed one catastrophe after another during the bloody first half of the
twentieth century. Even in contemporary America, a unique opportunity for
the development of an advanced capitalist society stood on the edge of
disaster. It was happening in the United States because of the Great
Depression, the ascendance of fascism and communism in Europe, and the
onset of World War II. It had not happened earlier because "The scheme of
values that arose from the national task of developing the economic
possibilities of the country drew nearly all the brains into business and
impressed the businessman's attitudes upon the soul of the nation."32
Schumpeter professed to see not only the decline of capitalism but also the
ultimate triumph of socialism. "Can socialism work?" he asks. "Of course it
can." In large part, it can work because it inspires people to noble ends,
to something larger than themselves. Socialism implies "a new cultural
world" whose psychic rewards may be worth the price of optimal economic
efficiency. For true believers, "Socialist bread may well taste sweeter to
them than capitalist bread simply because it is socialist bread, and it
would do so even if they found mice in it."33
Despite memorable aphorisms such as this one, Schumpeter's analysis of
socialism and democracy is a good deal less compelling than his dissection
of capitalism. He says of democracy that it is best understood not as a
system but merely a "method"--an "institutional arrangement for arriving at
political decisions in which individuals acquire the power to decide by
means of a competitive struggle for the people's vote." Of course there is
much more to democracy than this, but Schumpeter's real interests lie
elsewhere.34
At the very end of _Capitalism, Socialism and Democracy_, Schumpeter
delivers a philippic about the intrusion of modern government, and
specifically the New Deal state, into economic life. He mentions
counter-cyclical policies, redistributive taxation, antitrust, price
controls, monetary policy, the regulation of labor, securities legislation,
and the "indefinite extension of the sphere of wants" to be supplied by
public enterprise. Yet, ever the "scientist" reluctant to succumb to the
Ricardian Vice, Schumpeter closes with this remarkable statement: "It would
spell complete misunderstanding of my argument if you thought that I
"disapprove" or wish to criticize any of these policies. Nor am I one of
those who label all or some of them "socialist."35
The Book's Reception
_Capitalism, Socialism and Democracy_ received a modicum of attention in
1942, when it was first published. A second edition, which appeared in
1946, attracted wider notice, and the third, in 1950, became an
international best-seller.
Reviewing the first edition, the Cambridge economist Joan Robinson found
that Schumpeter "has little love for socialism, and none at all for
socialists. His natural sympathy is all with the heroic age of expanding
capitalism." Herself a leading theorist of imperfect competition, Robinson
found Schumpeter's analysis of that subject the "most brilliant" part of
the book: "his argument blows like a gale through the dreary pedantry of
static analysis." Although Schumpeter had little to say about contrary
evidence, especially in his argument about the fadeout of capitalism and
its replacement by socialism, "The reader is swept along by the freshness,
the dash, the impetuosity of Professor Schumpeter's stream of argument."
Whether or not the reader was totally convinced, "this book is worth the
whole parrot-house of contemporary orthodoxies, right, left, or centre."36
Reviewing the 1946 edition of _Capitalism, Socialism and Democracy_, Arthur
M. Schlesinger, Jr. wrote that the book "burst into the generally sterile
atmosphere of political discussion like a collection of firecrackers and
skyrockets." Schumpeter's analysis made it pointless to keep repeating
mindless slogans about the evils of monopoly. Even if he were wrong, "there
is no percentage in dodging the uncomfortable points he raises. The
intellectual rigor of his analysis sets a standard that liberal writers
should try to meet." The book "is the performance of an intellectual
virtuoso, brilliant, complex, perfectly controlled."37
In 1981, a retrospective analysis of the book appeared, entitled
_Schumpeter's Vision: Capitalism, Socialism, and Democracy After 40
Years_.38 Here several of Schumpeter's former students and associates
joined with some European scholars in evaluating the book's legacy. Paul
Samuelson led off, conceding that the subject under discussion was "a great
book." He added that from a game theoretic viewpoint Schumpeter might have
taken account of the propensity of democratic groups to change the nature
of capitalism and to bend it to their own self-interest. Schumpeter's
praise of Marx for "being learned, bold to speculate, and broad in his
dynamic vision" describes Schumpeter himself, Marx thereby being "a
veritable chip off the new block." Yet "Schumpeter was of all my teachers
the one whose economics was essentially farthest from Marx's."39
The sociologist Tom Bottomore, a man of the Left, lamented Schumpeter's
disinclination to cast his analysis in terms of economic and social class.
Thus, he had overlooked some important changes that now (in the 1980s) were
clearer: "A very large part of the middle class, in spite of variations. .
. has maintained a political orientation which is much more favourable to
parties of the right and the centre than to those of the left. . . .
[Schumpeter] thought that the 'march into socialism' was well-nigh
irresistible, and deplored the fact. I, on the contrary, think that this
'march' has come to an untimely halt, and regret the eclipse of the highest
ideal that has emerged in modern Western culture."40
In a third essay, Schumpeter's fellow Austrian and longtime Harvard
colleague Gottfried Haberler wrote that although Schumpeter never said so
in _Capitalism, Socialism and Democracy_, it was clear that his "real
feeling" was "that capitalism or the 'bourgeois' society is very much worth
fighting for." Schumpeter's forecast of capitalism's downfall "has shocked
and puzzled many people. If all qualifications, reservations, and
elucidations are given their proper attention, however, the forecast of
capitalism's early doom becomes less apodictic and the demise of capitalism
loses much of its inevitability." Then, too, Schumpeter's emphasis on
rising resentment of taxation anticipated the American tax revolt that
began in the 1970s, a movement of extraordinary importance.41
The economist Robert L. Heilbroner, a first-rate stylist himself, judged
_Capitalism, Socialism and Democracy_ partly on artistic terms: "There is
[in the book] a great deal of attitudinizing. . . an open delight in epater
le bourgeois and tweaking the noses of radicals. There is also pomposity
and pedantry, mixed with an arrogance that teeters on the edge of a
dangerous elitism." Yet the book remains full of "perceptive insights,"
such as Schumpeter's remark that "The evolution of the capitalist lifestyle
is best described 'in terms of the genesis of the modern lounge suit,' a
remark worthy of Thorstein Veblen."42
Arthur Smithies, Schumpeter's former student and colleague, saw
_Capitalism, Socialism and Democracy_ in part as a reaction against
Keynesianism. Schumpeter had openly derided the "stagnation thesis"
introduced in Keynes's _General Theory_. This thesis holds that as a
country grows richer investment opportunities shrink but the propensity to
save increases; therefore savings and investment balance only at high
unemployment. "If valid," wrote Smithies, "the long-run Keynesian argument
provided an impregnable case for socialism." Yet Schumpeter saw that the
underpinnings of the stagnation thesis were the atypical conditions of the
Great Depression. He "maintained his sanity" and insisted that such
problems were not permanent but cyclical. As for Schumpeter's concern with
inflation, in the 1940s Anglo-American economists thought it "obsessive,"
but in fact Schumpeter proved remarkably prescient.43
Herbert K. Zassenhaus, another economist from the generation just behind
Schumpeter, detected "a certain mysticism" in _Capitalism, Socialism, and
Democracy_. "In the shape of the 'entrepreneur,'" Schumpeter introduces "a
social miracle in the precise sense of the word: an event beyond the laws
of nature and society."44
In perhaps the most telling of all the retrospective comments, the Dutch
scholar Henrik Wilm Lambers recalled Schumpeter's influence on him as a
youth and the continued appeal of his book. In _Capitalism, Socialism and
Democracy_, Lambers wrote, "Schumpeter accomplished the feat of moving five
layers of thought--the firm, the markets, the institutions, the cultural
values, the leaders of society--as one interwoven dynamic process. With
incomparable skill he made history go through time as one stream." Lambers'
own students were invariably taken with the book: "After many an oral
graduate examination, I have often heard remarks like: 'to be honest, the
one stimulating book was Schumpeter'." Radical and conservative students
alike "say, each in their own way, 'he keeps me puzzled: is it my fault or
did he intend to?'"45
_Capitalism, Socialism, and Democracy_ continues to puzzle and provoke
readers--to make them think, to question their own perceptions measured
against their own ideologies and to wonder about the author's intentions.
Only the very greatest books do this, and age so well.
Endnotes:
1. Tibor Scitovsky, "Can Capitalism Survive? -- An Old Question in a New
Setting," Ely Lecture, _American Economic Review_, 70 (May 1980), p. 1;
Martin Kessler, "The Synthetic Vision of Joseph Schumpeter," _Review of
Politics_, 23 (July 1961), p. 334; O. Morgenstern, "Obituary," _Economic
Journal_, 61 (March 1951), p. 203.
2. Chandler, _Strategy and Structure: Chapters in the History of the
Industrial Enterprise_, Cambridge, MA: MIT Press, 1962, p. 284; and
Chandler, _Scale and Scope: The Dynamics of Industrial Capitalism_,
Cambridge: Harvard University Press) pp. 597, 830-831 n1. 3. See, for
example, Lazonick, _Competitive Advantage on the Shop Floor_, Cambridge:
Harvard University Press, 1990, pp. 3, 10, 323-324; and Rosenberg, "Joseph
Schumpeter: Radical Economist," in _Exploring the Black Box: Technology,
Economics, and History_, New York: Cambridge University Press, 1994.
Schumpeter often spoke on the relationship between history and theory:
"Personally, I believe that there is an incessant give and take between
historical and theoretical analysis and that, though for the investigation
of individual questions it may be necessary to sail for a time on one tack
only, yet on principle the two should never lose sight of each other"; see
Schumpeter's 1949 essay, "Economic Theory and Entrepreneurial History,"
reprinted in Richard V. Clemence, editor, [Schumpeter's] _Essays: On
Entrepreneurs, Innovations, Business Cycles, and the Evolution of
Capitalism_, New Brunswick, NJ: Transaction Publishers, 1989. See also
Schumpeter, "The Creative Response in Economic History," _Journal of
Economic History_, 7 (November 1947). 4. Porter, _The Competitive Advantage
of Nations_, New York: Free Press, 1990, p. 778 n.46.
5. Frederic M. Scherer, _Innovation and Growth: Schumpeterian
Perspectives_, Cambridge, MA: MIT Press, 1984. Richard R. Nelson and Sidney
G. Winter, _An Evolutionary Theory of Economic Change_, Cambridge, MA:
Harvard University Press, 1982. Part V of this book (pp. 273-351) is
entitled "Schumpeterian Competition," and in it the authors try,
mathematically, to apply Schumpeter's insights to the process of
innovation.
6. See, in general, Richard V. Clemence and Francis S. Doody, _The
Schumpeterian System_, Cambridge, MA: Addison-Wesley, 1950. For more
specialized efforts, and critiques of them, see Carolyn Shaw Solo,
"Innovation in the Capitalist Process: A Critique of the Schumpeterian
Theory," _Quarterly Journal of Economics_, 65 (August 1951), pp. 417-428;
Franklin M. Fisher and Peter Temin, "Returns to Scale in Research and
Development: What Does the Schumpeterian Hypothesis Imply?" _Journal of
Political Economy_, 81 (January/February 1973), pp. 56-70 [see also
Comments by Carlos Alfredo Rodriguez and Reply by the authors in _Journal
of Political Economy_, 87 (April 1979), pp. 383-389]; Morton I. Kamien and
Nancy L. Schwartz, "Market Structure and Innovation: A Survey," _Journal of
Economic Literature_, 13 (March 1975), pp. 1-37; Carl A. Futia,
"Schumpeterian Competition," _Quarterly Journal of Economics_, 94 (June
1980), pp. 675-695; Meir Kohn and John T. Scott, "Scale Economies in
Research and Development: The Schumpeterian Hypothesis," _Journal of
Industrial Economics_, 30 (March 1982), pp. 239-249; and Horst Hanusch,
editor, _Evolutionary Economics: Applications of Schumpeter's Ideas_,
Cambridge: Cambridge University Press, 1988.
7. During the 1990s the Schumpeter literature became especially voluminous,
with articles in such publications as the _Journal of Evolutionary
Economics_ and the _Journal of Institutional Economics_. These pieces often
drew as much on Schumpeter's sociology as on his economics. Several sought
to apply biology to Schumpeter's evolutionary analysis.
8. Schumpeter actually used the word "sins": "I did not exactly wish to put
Ricardo and Keynes on the same level, but I do think that there is striking
similarity between their sins." (Letter to Arthur W. Marget, Feb. 24, 1937,
Schumpeter Papers, Harvard University Archives.) 9. Joseph A. Schumpeter,
_Business Cycles: A Theoretical, Historical, and Statistical Analysis of
the Capitalist Process_, New York: McGraw-Hill, 1939, Volume I, pp. 169,
173, 174. 10. Samuelson, "Joseph A. Schumpeter," _Dictionary of American
Biography, Supplement Four, 1946-1950_, New York: Scribner, 1974, p. 723.
11. In this book the orientation appears most clearly in some vivid
passages on pages 220-245 of Volume I.
12. Simon Kuznets, _American Economic Review_, 30 (June 1940), pp. 257,
266-271.
13. E. Rothbarth, _Economic Journal_, 52 (June-Sept. 1942), p. 229; J.
Marschak, _Journal of Political Economy_, 48 (Dec. 1940), p. 892. 14. An
insightful analysis of Schumpeter's state of mind when he wrote
_Capitalism, Socialism, and Democracy_ may be found in Chapter 7 of Richard
Swedberg, _Schumpeter: A Biography_, Princeton, NJ: Princeton University
Press, 1991.
15. _Capitalism, Socialism, and Democracy_, New York: Harper Torchbook
Edition, 1976, pp. 31-32.
16. _Capitalism, Socialism, and Democracy_, p. 32, 34, 44. 17. _Capitalism,
Socialism, and Democracy_, p. 61. 18. In the revised edition of
_Capitalism, Socialism and Democracy_ appears Schumpeter's final paper,
"The March into Socialism" (December 1949). Here he speaks candidly about
capitalism's social implications: "Capitalism does not merely mean that the
housewife may influence production by her choice between peas and beans; or
that the youngster may choose whether he wants to work in a factory or on a
farm; or that plant managers have some voice in deciding what and how to
produce: it means a scheme of values, an attitude toward life, a
civilization--the civilization of inequality and of the family fortune" (p.
419). 19. _Capitalism, Socialism, and Democracy_, pp. 67-68. 20.
_Capitalism, Socialism, and Democracy_, pp. 73-74, 77 n1, 82. In _History
of Economic Analysis_, published posthumously (New York: Oxford University
Press, 1954), Schumpeter wrote that in capitalism, "Disequilibrium prevails
throughout, but Marx saw that this disequilibrium is the very life of
capitalism" (p. 1051). 21. _Capitalism, Socialism, and Democracy_, pp.
78-79. 22. _Capitalism, Socialism, and Democracy_, p. 79. 23. _Capitalism,
Socialism, and Democracy_, p. 83. 24. _Capitalism, Socialism, and
Democracy_, p. 83. 25. _Capitalism, Socialism, and Democracy_, pp. 83-84.
26. _Capitalism, Socialism, and Democracy_, pp. 84-86. 27. _Capitalism,
Socialism, and Democracy_, pp. 93, 99. 28. _Capitalism, Socialism, and
Democracy_, pp. 101-102. 29. _Capitalism, Socialism, and Democracy_, pp.
104-106. 30. _Capitalism, Socialism, and Democracy_, p. 110. Schumpeter
adds that making such a distinction is "quite wrong--and also quite
un-Marxian."
31. My summary here is abstracted from _Capitalism, Socialism and
Democracy_, pp. 124-157.
32. _Capitalism, Socialism, and Democracy_, p. 331. This point echoes one
of Schumpeter's pet themes: that all societies suffer from a paucity of
first-rate talent. Legal issues, labor problems, price control issues, and
antitrust prosecutions add up to a "drain on entrepreneurial and managerial
energy." So much effort is expended on such issues that an executive often
"has no steam left for dealing with his technological and commercial
problems." One consequence is that except in very large companies, which
can afford numerous specialists, "leading [management] positions tend to be
filled by 'fixers' and 'trouble shooters' rather than by 'production men'"
(p. 388.)
33. _Capitalism, Socialism, and Democracy_, pp. 167, 170, 190. 34.
_Capitalism, Socialism, and Democracy_, p. 269. 35. _Capitalism, Socialism,
and Democracy_, p. 418. This passage is from Schumpeter's last address,
delivered to the American Economic Association in December, 1949, three
weeks before his death. The address was entitled "The March into
Socialism." 36. Joan Robinson, in the _Economic Journal_, 53 (December
1943), pp. 381-383.
37. Arthur M. Schlesinger, Jr., in _The Nation_, April 26, 1947, pp.
489-491.
38. Arnold Heertje, editor, _Schumpeter's Vision: Capitalism, Socialism and
Democracy after 40 Years_, New York: Praeger, 1981. 39. Paul A. Samuelson,
"Schumpeter's Capitalism, Socialism and Democracy," in _Schumpeter's
Vision_, pp. 1, 13, and passim. 40. Tom Bottomore, "The Decline of
Capitalism, Sociologically Considered," in _Schumpeter's Vision_, pp.
22-29, 44. 41. Gottfried Haberler, "Schumpeter's _Capitalism, Socialism and
Democracy after Forty Years_," in _Schumpeter's Vision_, pp. 70, 71, 74-75,
83, 84, 89.
42. Robert L. Heilbroner, "Was Schumpeter Right?" in _Schumpeter's Vision_,
pp. 95, 96, 99-100, 101-102, 106. 43. Arthur Smithies, "Schumpeter's
Predictions," in _Schumpeter's Vision_, pp. 130-132, 145-146.
44. Herbert K. Zassenhaus, "_Capitalism, Socialism and Democracy_: The
'Vision' and the 'Theories,'" in _Schumpeter's Vision_, pp. 173, 176, 181,
189.
45. Hendrik Wilm Lambers, "The Vision," in _Schumpeter's Vision_, pp.
107-129.
Thomas K. McCraw is the Isidor Straus Professor of Business History at the
Harvard Business School and editor of the _Business History Review_. He is
author of _Morgan Versus Lilienthal_ (William P. Lyons Award, 1970), _TVA
and the Power Fight_ (1971), co-author of _Management Past and Present_
(1996); and editor of _Regulation in Perspective_ (1981), _America Versus
Japan_ (1986), _The Essential Alfred Chandler_ (1988), and _Creating Modern
Capitalism_ (1997). His book _Prophets of Regulation_ won both the Pulitzer
Prize in History for 1985 and the Thomas Newcomen Award for 1986. His
_American Business, 1920-2000: How It Worked_ (2000) was recently reviewed
on EH.NET.
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