Schumpeter, Joseph (1883–1950)

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SCHUMPETER, JOSEPH (1883–1950)

Austrian economist and sociological theorist.

Joseph Alois Schumpeter was in his lifetime an influential figure in economics. Now he is thought of more as a fertile sociological theorist. Born in the Austro-Hungarian Empire in the Czech province of Moravia, he was successively a practicing lawyer before the Mixed Tribunals in Egypt (1907–1908) representing the interests of foreign investors there, an instructor in law and economics in the Universities of Vienna and Czernowitz (Cernauçi, Romania; 1909–1911), and professor of economics at Graz University (1911–1918).

The defeat of the empire in 1918 and its dismemberment into separate national units, an event that he regarded as tragic, propelled him to political eminence as minister of finance of the rump state of "German Austria" (1919). He was forced to resign that post in the same year when the Social Democratic Party, seeking to nationalize a large steelworks, the Alpine-Montangesellschaft, exposed the less-than-transparent way in which he had thwarted them by selling the company's shares for foreign exchange to support the weakening Austrian currency on international exchange markets. He became president of the Biedermann Bank (1921–1924), but his financial help to a group of Hungarian nobles who staged in Austria a bungled coup against the communist regime of Béla Kun (1886–1937) in Hungary forced his resignation.

There were few prospects of a return to academic life in Austria for a supporter of the restoration of the emperor who was also an opponent of any merger with the postwar German Republic, but it was, ironically, a German University, Bonn, that offered him a post as professor of public finance (1925). Soon, however, the Nazi movement, with its implicit threat to the independence of Austria, persuaded Schumpeter to emigrate further. After twice being visiting professor of economics at Harvard University he accepted a permanent post there in 1932. He served a spell as president of the American Economic Association, and it was in the United States that he wrote his later works and died.

Born in the same year as John Maynard Keynes (1883–1946), he was similarly influenced by the Great Depression of 1929. He interpreted such downward cyclical movements as "creative destruction," replacing outdated production methods by new technologies. Like Keynes, he argued that monetary and fiscal policies should be used to accelerate a return to equilibrium. He questioned, however, the value of economic equilibrium as a concept. Economic policy, he argued, had always to operate on an economy in perpetual movement and therefore in unique historical circumstances. Any state intervention in the economy beyond short-term relief was necessarily acting in ignorance.

Schumpeter's later works can be understood as an extended description and theoretical interpretation of a long-run process of economic development and social change, to much of which equilibrium was irrelevant. It could not, he argued, explain the movement of capital, of interest rates, or entrepreneurial initiative. He questioned the prevailing views that the competition of individuals generated uniquely advantageous conditions for economic growth and that rational expectations were a sound analytical basis for economic theory and policy. From such standpoints he constructed a dynamic analysis of economic development. The insertion of cultural factors into this description led to a vision of capitalism with some affinity to that of Karl Marx (1818–1883), of powerful forces working to destroy any existing equilibrium so that it might never again become attainable. All economies, he believed, would become "socialist," in the sense that entrepreneurs would no longer be dynamic individuals but, instead, major corporations. Nevertheless, innovation would remain the driving force in development and for this, investment, sound money, interest, and entrepreneurship remained essential. Because these depended on a society whose base was private property, Schumpeter came politically to one conclusion diametrically opposite to those of Marx; only in a capitalist society would economic development take permanent root.

His work led to attempts to formalize and categorize the particularities of societies that generated a higher proportion of entrepreneurial activities. Such work was far from mainstream economic theory, and historical research provided only contradictory answers. For their wide range of intellectual inquisitiveness, many of Schumpeter's publications remain, nevertheless, stimulating and relevant.

See alsoDepression; Keynes, J. M.