Who is Joseph Schumpeter? What is it known for?


Who is Joseph Schumpeter?

Joseph Alois Schumpeter (1883-1950) was an Austrian-trained economist, economic historian, and author. It is considered one of the 20th greatest intellectuals of the century. Schumpeter is best known for his theories on business cycles. and the development of capitalist economies, and by the introduction of the concept of entrepreneurship. For Schumpeter, the entrepreneur was the cornerstone of capitalism: the source of innovation, which is the life force that drives a capitalist economy.

Key takeaways

  • Joseph Alois Schumpeter is best known for his 1942 book Capitalism, socialism and democracy, the theory of creative destruction, and for offering the first German and English references to methodological individualism in economics.
  • Schumpeter served as finance minister in the Austrian government, president of a private bank, and professor, before being forced to emigrate due to the rise of the Nazi Party.
  • The economist coined the term “creative destruction” to describe how the old is constantly being replaced by the new.
  • Schumpeter also introduced the concept of entrepreneurship.
  • Schumpeter’s work was initially overshadowed by the contrasting theories of his contemporary, John Maynard Keynes, but has now become the centerpiece of modern thinking about how economies evolve.

Early age and education

Schumpeter was born in Moravia (now the Czech Republic) in 1883 to German parents. He studied economics with the progenitors of the Austrian school tradition, including Friedrich von Wieser and Eugen von Bohm-Bawerk. Schumpeter served as Austrian government finance minister, president of a private bank, and university professor. From 1925 to 1932, Schumpeter held a professorship at the University of Bonn.

Uncomfortable with the rise of the Nazi Party, he moved to the United States to teach at Harvard in 1932. Fifteen years later, in 1947, he became the first immigrant to be elected president of the American Economic Association.

By the early 20th century, economic science in the United States and Great Britain had developed alongside static and mathematically oriented general equilibrium models. Schumpeter’s work differed at times, typifying the continental European approach — more nuanced and less hypothetical — although some of his theories were also drawn from the Walrasian general equilibrium.

Notable achievements and theories

Schumpeter made many contributions to economic science and political theory, but is best known for his 1942 book Capitalism, socialism and democracy, which describes the theory of dynamic economic growth known as creative destruction. The first German and English references to methodological individualism in economics are also attributed to him.

Creative destruction

Schumpeter’s most enduring legacy came from a six-page chapter in Capitalism, socialism and democracy entitled “The process of creative destruction”.

In this chapter, Schumpeter offered a new and unique view of how economies grow, deviating dramatically from the traditional economic dictates of his day, which held that markets tend passively toward equilibrium until profit margins are eliminated. Instead, Schumpeter argued, economic progress is not gradual and peaceful, but rather disjointed, abrupt, and sometimes unpleasant. The economist used the term “creative destruction” to describe the dismantling of long-standing practices to make way for new technologies, new types of products, new methods of production, and new means of distribution.

Existing businesses must quickly adapt to a new environment (or fail). If it sounds somewhat Darwinian, it is, Schumpeter hinted: a “process of industrial mutation, if I may use that biological term, incessantly revolutionizing the economic structure from within, incessantly destroying the old, incessantly creating a new one,” as he wrote. “This
process of creative destruction is the essential fact about capitalism. ”

Entrepreneurship

In many respects, Schumpeter saw capitalism as a kind of ongoing revolution that breaks the current social and economic hierarchy. And within this system, the entrepreneur becomes a revolutionary, altering the established order to generate dynamic change.

Schumpeter is believed to be the first scholar to introduce the world to the concept, or at least the economic importance of entrepreneurship. Came up with the german word Entrepreneurship, that is, an entrepreneurial spirit, adding that these people controlled the economy because they are responsible for generating innovation and technological change.

Entrepreneurs are often the guiding force behind creative destruction because they promote new products, technology, and / or production methods that provide momentum for change. Innovation and business experimentation constantly destroy the status quo and introduce new balances, making higher living standards possible.

Business cycles

These theories are related to Schumpeter’s belief in the presence of business cycles.

In Schumpeter’s analysis, the history of capitalism has been marked by long and short waves. A long wave is driven by the emergence of a new set of technologies and industries. According to this theory, major breakthroughs in innovation can be predicted every 50 to 100 years.

“Except for very few cases in which difficulties arise, it is possible to count, historically and statistically, six Juglars [8-10-year business cycles] to a Kondratieff [50-60 years] and three Kitchins [40 months] to Juggler, not as an average but in each individual case ”, wrote Schumpeter in his book The theory of economic development, published in 1911.

Whenever an entrepreneur disrupts an existing industry, existing workers, businesses or even entire sectors are likely to suffer temporary losses, he said. These cycles are tolerated, he explained, because it allows freeing up resources for other, more productive uses.

Schumpetarian theory example

The Internet is one of the best examples of creative destruction, a term that Schumpeter coined to describe the dismantling of long-standing practices to make way for new technologies, new types of products, new methods of production and new means of distribution. . Existing businesses must quickly adapt to a new environment (or fail).

The advent of the Internet made many products, production methods and means of distribution obsolete. It also led to a drastic reduction in many jobs, including positions for bank tellers, secretaries, travel agents and retail store clerks. With the rise of mobile Internet technology, publishers of printed materials, from magazines to maps, also suffered.

The Internet, along with other innovations in the information technology field – microprocessor, lasers, fiber optics, and satellite technologies – have fundamentally altered the way business is conducted.

Joseph Schumpeter vs. John Maynard Keynes

During his many years in public life, Schumpeter developed informal rivalries with the other great economic thinkers of the West, including John Maynard Keynes, Irving Fisher, Ludwig von Mises, and Friedrich Hayek. His work was initially overshadowed by some of these contemporaries, especially Keynes. Although they were born only a few months apart, the couple had radically different points of view.

Early in his career, Schumpeter scoffed at the use of statistical aggregates in economic theory, probably an attempt by Keynes, in favor of focusing on individual choice and action.

Keynes considered the economy to be healthy when it was in static equilibrium. Schumpeter rejected this theory, claiming that equilibrium is unhealthy and that innovation is the engine of the economy. The two also had contrasting views on government intervention. Keynes believed that a permanent balance of prosperity could be achieved through the monetary policies of the central bank. Schumpeter argued that government intervention increased inflation and destroyed the economy.

The Internet is one of the best examples of creative destruction, a term that Schumpeter coined to describe the dismantling of long-standing practices to make way for new technologies, new types of products, new methods of production and new means of distribution. . Existing businesses must quickly adapt to a new environment (or fail).

The advent of the Internet made many products, production methods and means of distribution obsolete. It also led to a drastic reduction in many jobs, including positions for bank tellers, secretaries, travel agents and retail store clerks. With the rise of mobile Internet technology, publishers of printed materials, from magazines to maps, also suffered.

The Internet, along with other innovations in the information technology field – microprocessor, lasers, fiber optics, and satellite technologies – have fundamentally altered the way business is conducted.

The bottom line

Joseph Schumpeter’s work initially received little acclaim, due in part to the great popularity of his contemporary, John Maynard Keynes. That changed over time and he is now seen as one of the greatest economists of modern times. He introduced the concept of the entrepreneur and the influence of entrepreneurship in economic systems. His theory of creative destruction has become the centerpiece of modern thinking about how economies, especially capitalist ones, evolve.

Frequently Asked Questions about Joseph Schumpeter

What is the history of Joseph Schumpeter’s economic analysis?

At the time of his death in 1950, Schumpeter was working on a new book, History of economic analysis. In the book, Schumpeter attempts a complete history of the field of economics, from ancient Greece to the present day (the end of World War II). Not only limited to economics, the book also traced the history of political and philosophical ideas and served as a record of important events.

Although it was never completely completed, History of economic analysis it has gained recognition as an important work, due to its wide scope and original examination of significant historical events. Some of the notable topics it addresses include the techniques of economic analysis, contemporary developments in other sciences, and the sociology of economics.

What did Joseph Schumpeter believe capitalism would destroy?

Schumpeter believed that capitalism would eventually be destroyed by its success. He hypothesized that the economic system would eventually create a large intellectual class that survived by attacking the system of private property and freedom that was necessary to sustain its own existence. Although Schumpeter predicted the demise of capitalism, he was a fervent supporter of it.

What is Joseph Schumpeter’s theory of profit from innovation?

Schumpeter believed that he was going to introduce successful innovations. The innovation theory of profit states that the main function of an entrepreneur is to introduce, well, innovations, which Schumpeter defined as any new policy that reduces the total cost of production or increases the demand for products. Any benefit an entrepreneur receives from these efforts is a form of reward for their performance. Creating innovations was the first step on the path to success and financial gain for entrepreneurs.

What is Schumpeterian growth?

Schumpeterian growth is economic growth driven by innovation and governed by the process of creative destruction. Formal economic models have been created that operationalize Schumpeter’s notion of creative destruction. These growth models help economists understand the role of competition, business dynamics, and reallocation between companies and sectors.

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Mark Holland

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