Joseph Alois Schumpeter (1883-1950) was one of the greatest economists of the 20th century—commonly bracketed with such giants as Keynes, Hayek and Friedman. He is best known for his theory of “creative destruction”—the view that the capitalist system progresses by constantly revolutionising its economic structure. New firms, new products, new technologies continually replace old ones. Since innovation comes in fits and starts, the capitalist economy is naturally, and healthily, subject to cycles of boom and bust. The agent of this revolutionary process is the heroic entrepreneur: the individual owner in the 19th century, big business in the 20th. Innovation needs its reward, hence a dynamic economy is one which allows the innovator huge profits. Temporary monopoly is nature’s way of allowing innovators to gain from their inventions. Short-run inequity is the price of long-run progress.
Along with Schumpeter’s positive contribution went a persisting critique of conventional economics, whose concern with static problems of allocation in perfectly competitive markets rules out change and the role of the entrepreneur. But Schumpeter’s speculations ranged far beyond this, into the question of the durability of a civilisation which lives by continually destroying what it has created—a line of thought which went back to Marx in his Communist Manifesto. It may well be that Schumpeter has more to tell us about the nature of capitalism than the new breed of market idealists spawned by globalisation or by such 20th-century apostles of stabilisation as Keynes.
At least, that is the argument of Thomas K McCraw in Prophet of Innovation, his new biography of the great Austrian economist. It is a fine book, well paced and readable. There are plenty of good photographs, of Schumpeter himself and of the important people and places in his life. The theme of creative destruction appears against the background of Schumpeter’s own family uprooting, the dissolution of the Austro-Hungarian empire, the turmoil of the interwar years, and the restless, and tragic, circumstances of his adult personal life. McCraw puts it like this: “Over the years he reinvented himself many times…Thinking not of where he started but of how he might move forward, he was well suited to grasp the mindset of the entrepreneur… [In Vienna] he learned that one’s identity in a rapidly changing world might come more from innovation than inheritance; that exchanging security for opportunity could bring great rewards; and that for someone with his gifts almost anything was possible.”
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