The Economics of Joseph Schumpeter

When an economic theory successfully fuses into one vast system the ideas that an economy continuously reproduces itself without altering levels of production or consumption patterns, that perfect balancing of economic forces is attainable, that the prime movers in economic development are adventurous entrepreneurs whose perpetual search for profit induces such change, and that capitalism will fail simply because it is too successful, there is little doubt that it can be described as an intriguing and even startling doctrine. This was the system constructed by one of the great economists of our time, Joseph A. Schumpeter, who was professor at Harvard from 1927 until his death in 1950.

Schumpeter’s theories, however, were not an eclectic collection of conglomerate notions. He has a cohesive theory of the origin, functioning and decline of capitalism out of which is built an imposing set of hypotheses on business cycles, money, interest and prices. Much of Schumpeter’s ideas were fixed when he was still a young man. In 1908, at the age of 25, he published a work on theoretical economics that touched on virtually all of the problems of the field and even suggested the solutions at which he would in later life arrive. By the time he was 30, he had written a short history of economics which was to be expanded decades later into the posthumous and fantastically huge magnum opus, the History of Economic Analysis.* Yet he remained basically a kind of old-fashioned economist, for he rejected the more recent developments in monopolistic competition and Keynesian doctrine. Despite the fact that he acknowledged the importance of advertising and product differentiation, his own doctrinal system was based essentially on “pure” competition. His rejection of the Keynesian message was even sharper, stemming from a distaste for the implication that an economy could be tinkered with to make it work. His own ideas were based on a kind of prime-mover notion: once capitalism started it should be permitted to keep going under its own sealed-in, self-lubricating power. This implied that for “pure” theory, it would be necessary to reject all political, philosophical and ethical considerations.

The type of theory with which Schumpeter was concerned deals with the behavior of single business units in an environment over which they exercise but little control. It was, in the main, the traditional body of thought and he sought to reformulate it in terms of general equilibrium, an approach that emphasized simultaneity and interdependence. But there was always implicit in this structure the notion of marginal utility, which never quite avoided the accusation of making economic man a dexterous balancer of pleasures and pains.

In an early work, Das Wesen and der Hauptinhalt der Theoretischen Nationalokonomie, Schumpeter insisted that economic analysis could be freed of hedonism and that theory...