Introduction—Schumpeter’slifeandvision
Ever-newerwatersflowonthosewhostepintothesamerivers.
(Heraclitus,ca.535–475bce)
Inmanyeconomicdisciplines—rangingfromentrepreneurship,innovation research,andindustrialorganizationtogrowththeory,businesscycles,business history,andpublicchoice—variousideasofJosefSchumpeterhavebecomewidely acceptedorevencommonplace.Yetthisisnotthecaseinthestudyofmoneyand finance,whichinfactconsumedadisproportionallyhighportionofhistime, effort,andattention.Thisneglectpartlyhastodowithdifficultiesindealingwith hisdedicatedfocusoninnovationandthefinancingofnewventures.Seeking todispelmysteriesandmisunderstandings,thebookwillfollowSchumpeter’s distinctiveangletograsptheoriginalityofhis“venturetheory”ofmoneyand economicdevelopment.
Thisintroductorychapterbeginswithabriefprologueonthelogosof“perpetualchange”—arguablythesinglemostcharacteristicattributeofSchumpeter’s theoreticalvision.Perpetualchangealsocharacterizedhisturbulentpersonalvita. Nextwethereforeofferabriefsynopsisofhislifeandwork,referringtoanumber ofexcellentbiographicalstudiesforfurtherreading.Thefinalsectionexplains theaim,scope,andplanofthebook,layingouttheindividualthreadsthatwill intertwinetotellitsstory.
1.1 Pantarhei—aprologue
Pantarhei,everythingflows,or“allentitiesmoveandnothingremainsstill.”1This notion,whichHeraclitus proclaimedtobethemajorlogosorprincipleofuniversal order,isarguablyalsothemostdistinctivecharacteristicofSchumpeter’svision oftheeconomy—onethatStanleyMetcalfedescribedas“restlesscapitalism.”2 Beyondmerelyacknowledgingthatobjectscontinuouslychange,itconsiders changeabasiccategoryofexistence,inwhichhardlyanythingremainsconstant exceptchangeitself.
1 AsquotedinPlato,CratylusParagraphCrat.401sectiondline5. 2 Metcalfe(1998).
Schumpeter’sVentureMoney.MichaelPenederandAndreasResch, OxfordUniversityPress(2021).©MichaelPenederandAndreasResch. DOI:10.1093/oso/9780198804383.003.0001
Championinganontologyof“becoming”insteadof“being,”Heraclitusencounteredstrongopposition.Forexample,Platoresentedtheimplicationthatsomethingcannotexistifitdoesnotchange.Relatedly,earlyChristianscholarsopposed thelogosofHeraclitus,becauseofitspresumeddenialofapureandperfect,and thereforeimmutable,eternalbeingbehindnature.Inturn,forinstance,in History ofEconomicAnalysis (HEA),SchumpeterexpresseddoubtsaboutPlato’srigidly “stationaryideal.”3
Fromacontemporaryperspective,however,theproclaimedirreversibilityof allnaturalstatesstandsinstrikingaccordancewiththe lawsofthermodynamics, whicharosebythemiddleofthenineteenthcenturyandprovideda“general accountofthetimeasymmetryofordinaryphysicalprocesses.”⁴Inshort,thefirst lawstatesthatinaclosedsystemthetotalquantityofenergyisalwaysconserved, andthatenergycanneitherbecreatednordestroyed,butonlyflowandchangeits form.Thesecondlawstatesthatinaclosedsystementropy,whichisameasureof moleculardisorderorrandomness,increasesovertime.Hence,energydegrades inanirreversibleprocesstowardincreasingdisorderuntilnoneisavailablefor usefulwork.Accordingtothethirdlaw,entropyapproachesitsconstantmaximum valueinthefinalstateofthermodynamicequilibrium,wheretherecanbeno furtherspontaneouschangeandthesystem“iscompletelyidentifiedwithits environment.”⁵Inotherwords,thesystemceasestoexist.
Incontrast,opensystemsmaintaintheirinternalstructurebyabsorbinglowentropyenergyfromtheenvironment.Moreover,theyallowfornovelandcomplex structurestoemerge,typicallyimplyingamoreeffectiveuseoffreeenergy.⁶Living organismscanevolvebecausetheyaresuchopensystems.Bythemiddleofthe nineteenthcentury, CharlesDarwin (1809–82)hadestablishedasetofgeneral principlesofevolutionarychangeinnaturalhistory.Hisconceptof“natural selection”wasaprocessoflocaladaptation,whichallowedanincreasingvariety oforganismstoexploitevermoreecologicalniches,thuseffectivelysupporting theirmeansofsubsistence.Itisforemostatheoryofspeciationandfunctional differentiationundertheconditionsofaperpetualstruggleforexistenceinthe naturalenvironment.Naturalhistoryisthereforeaprocessdrivenbytheinterplay ofgenetic variation, selection infavorofbetteradaptedvarieties,andthe accumulation ofsuccessfultraitsbymeansofgeneticinheritance.
JosefAloisSchumpeter (1883–1950)wasaprogenyofthenineteenthcentury anditsscientificadvances.Ineconomics,thisappliesforemosttotheso-called “marginalistrevolution,”whichhethoroughlyabsorbedfromthefoundersofthe AustrianSchoolofeconomicsathis almamater inVienna.Thiscamewitha strongawarenessthattheanalyticaltoolsofperfectequilibriacanbeuseful,butare invalidasdescriptionsofreality.Unlikemanyofhispeers,heneverdiscardedthe
3 HEA (1954,p.556). ⁴ Drake(2018b). ⁵ NicolisandPrigogine(1989,p.55).
⁶ Georgescu-Roegen(1971);Ayres(1994).
historicalapproach,therebymaintainingastrongpreoccupationwithperpetual changeanddevelopmentinallsocialaffairs.Innovationthusbecamehispivotal focus,furtherelaboratedinaseriesofgeneralprinciplesthoughttogovern economicdevelopment.Distinguishingbetween adaptive and creative response, hisaimwastoopenthedoorstoacomprehensiveanalysisofdynamicsystems:
Wheneveraneconomyorasectorofaneconomyadaptsitselftoachangein itsdatainthewaythattraditionaltheorydescribes[…]wemayspeakofthe developmentasadaptiveresponse.Andwhenevertheeconomyoranindustry orsomefirmsinanindustrydosomethingelse,somethingthatisoutsideofthe rangeofexistingpractice,wemayspeakofcreativeresponse.[Thelatter]can alwaysbeunderstood expost;butitcanpracticallyneverbeunderstoodexante, [whileitstill]shapesthewholecourseofsubsequenteventsandtheir“long-run” outcome.(“TheCreativeResponseinEconomicHistory”(CRH),1947,p.150)
ThereisadeepconnectionbetweenSchumpeterandtheabovestrandsofthought. Forinstance,from1934to1936hementoredayoungRomanianmathematician andstatisticiannamed NicholasGeorgescu-Roegen (1906–94),whoisbestknown for TheEntropyLawandtheEconomicProcess (1971),whichbecameafoundationalworkofecologicaleconomics.Sharinghisdedicatedinterestineconomic structureanddynamics,⁷Schumpeterofferedhimapositionattheeconomics facultyatHarvardandplannedtoworkonajointtreatise.⁸Theplansfailed whenGeorgescu-RoegenreturnedtoRomania.However,Schumpeterapparently hadalastingimpact.InGeorgescu-Roegen’sownwords:“Everysingleoneof hisdistinctiveremarkswereseedsthatinspiredmylaterworks.Inthisway, Schumpeterturnedmeintoaneconomist.”⁹Amongotheraspects,bothwere apparentlyinfluencedbythefactthatthelawsofthermodynamicscommand irreversibilityandperpetualqualitativechange.1⁰
Morewidelyknown,however,areSchumpeter’sstruggleswiththeDarwinian principlesofevolutionarychange.11Atayoungerage,hewashighlycriticalof “allkindsofevolutionarythoughtthatcentreinDarwin—atleastifthismeans nomorethanreasoningbyanalogy.”Associatingitwiththemistakennotionofa “uniformunilineardevelopment,”heproclaimedthat“theevolutionaryideaisnow discreditedinourfield”andthat“withallthehastygeneralisationsinwhichthe word‘evolution’playsapart,manyofushavelostpatience.”12Whenhelaterwrote the HistoryofEconomicAnalysis (henceforth HEA)Schumpeterdrewasharper
⁷ “Theparamountimportanceoftimeforeconomicscomesfromthefactthatitenvelopsevery humanaction,actually,allactionsofeverylifebearingstructure”(Georgescu-Roegen,1994,p.235).
⁸ Samuelson(1966);Heinzel(2013). ⁹ Georgescu-Roegen(1992,p.130).
1⁰ Heinzel(2013,p.263). 11 NelsonandWinter(1982);Metcalfe(1998).
12 TheoriederwirtschaftlichenEntwicklung (TED;1911/34,p.57).
distinction.YethestillforcefullydenouncedSocialDarwinismanditsinfamous proponentHerbertSpencer:
Nootherwordbut“silly”willfitthemanwhofailedtoseethat,bycarrying laissez-faireliberalismtotheextentofdisapprovingofsanitaryregulations, publiceducation,publicpostalservice,andthelike,hemadehisidealridiculous andthatinfacthewrotewhatwouldhaveservedverywellasasatireonthe policyheadvocated.Neitherhiseconomicsnorhisethics[…]areworthour while.Whatisworthourwhiletonoteistheargumentthatanypolicyaimingat socialbettermentstandscondemnedonthegroundthatitinterfereswithnatural selectionandthereforewiththeprogressofhumanity.Thereadershouldobserve, however,thatthealmostpatheticnonsensecouldhavebeenavoidedandthatthe soundelementinhisargumentcouldhavebeenpartlysalvagedbyadding“unless methodsmorehumaneandmorescientificthannaturalselectioncanbefound.”
(HEA,1954,p.773f)
Conversely,inHEASchumpeteracknowledgedDarwin’simportanceinnofewer thansevenindependententries,reservingforhimsomeofhismostgenerous accolades.Hepraisedthe OriginofSpecies as“oneofthemostimportantpiecesof scientifichistoryeverwritten”anditsauthoras“alivingandwalkingcompliment tohimselfandalsototheeconomicandculturalsystemthatproducedhim.”13 Essentially,SchumpeterappreciatedDarwin’sprinciplesofevolutionarychange, asappliedtonaturalhistory,whilehimselfclaimingadistinctfacultyforthestudy ofeconomicdevelopment.
1.2Underthe skin,notthe veil ofmoney
Pantarhei,orthe“continuousstreamofevernewwaters,”mayalsobeanapt characterizationofmonetaryhistory.Inshort,moneyhastransformedfrom beingsimplesymbolsofaccounttopreciousitemsthatfacilitateexchange,and fromtheretoplainsocialconventionsincreasinglycastintomeredigitaldata. MiltonFriedman (1912–2006)and AnnaJ.Schwartz (1915–2012),twoinfluential proponentsofmonetarism,explainedtheirfascinationwiththefactthatmoney “issofullofmysteryandparadox.”Owingto“fiction”and“myth,”peopleaccept piecesofpaperasmeansofpayment,becausetheyareconfidentthatotherswill dothesame:“Thepiecesofgreenpaperhavevaluebecauseeverybodythinks theyhavevalue,andeverybodythinkstheyhavevaluebecauseinhisexperience theyhavehadvalue”.1⁴Monetarismisbestknownforitsrevitalizationofthe
13 HEA (1954,p.444). 1⁴ FriedmanandSchwartz(1963,p.695).
classicalquantitytheory.Itportraysmoneyasa veil thatisdetachedfromand hasnosystematicdirectimpactonrealproductionandincomeinthelong-term. Inhisinfluentialsynthesisoftheclassicalorthodoxy, JohnStuartMill (1806–73) expresseditasfollows:
Therecannot,inshort,beintrinsicallyamoreinsignificantthing,intheeconomy ofsociety,thanmoney;[…]Therelationsofcommoditiestooneanotherremain unalteredbymoney:theonlynewrelationintroducedis[…]howtheexchange valueofmoneyitselfisdetermined.(Mill,1848/71,p.351)
Inotherwords,moneyonlymattersindeterminingtheaveragepricelevel,which mustvaryinexactproportiontoitsoverallquantity.Asaconsequence,thelatter hasnosystematicimpactonproductionorrealincome,thatis,theamountand typeofgoodspeoplewillactuallyconsume.Butthereisoneexception:sincethis “fiction”isneitherfragilenorindestructible,1⁵overexpansionorcontractionof themoneybasecanteartheveilandcauseaneconomiccrisis.Thus,thenexus betweenfinanceandgrowthmainlyexistsinthenegativeandistobecontained bysoundmonetarypolicy.
Schumpeterdissentedfromtheclassicalorthodoxyinmanyrespects.Characteristically,helikedtocontrasttheimageofmoneyasaveilwiththatofmoney asa skin,thatis,anorganwhichisinvariablyandintimatelyconnectedtothe livingorganism.1⁶Theskincarriesoutindispensablefunctions,suchasenabling thesensationoftouchandheatorhelpingtoregulatebodytemperature,andat thesametimeitreflectstheoverallhealthofanorganism.Similarly,thecondition ofamonetarysystemsimultaneouslyhasanimpacton,respondsto,andmirrors theperformanceoftheeconomyatlarge.Inshort,Schumpetertreatedmoneyas endogenoustotheeconomicsystem.
HavingexperiencedthetimesofhyperinflationinAustriaandthereinlosta fortune,Schumpeterclearlyacknowledgedthedangersofamismanagedcurrency. However,incontrasttotheclassicalorthodoxy,alongwithmonetarismandother followersofthequantitytheory,herefusedtothrowthebabyoutwiththebath water.Instead,hedeliberatelyembracedthehistoricalevolutionandgrowing speciationofmoneyandfinanceintoincreasinglycomplexsocialinstitutionsthat aremalleabletothevariousneedsofentrepreneurialfinance.Heabsorbeditintoa deliberatelymonetarytheoryofdevelopment,inwhich“credit”—definedbroadly asanyformofpre-financingofnewventures—istheindispensable alterego of entrepreneurialinitiative,jointlyfosteringinnovation,structuralchange,andthe growthofrealincome.
1⁵ FriedmanandSchwartz(1963,p.696). 1⁶ DasWesendesGeldes (WDG;1970,p.2).
However,beforeweturntothesecorethemesofthemonograph,wewould liketobrieflysummarizeselectedbiographicalfactsinordertoplotthepersonal backgroundofSchumpeter’sdiversemonetaryventures.
1.3Schumpeter’slifeandwork
Finally, pantarhei,theprincipleofperpetualchange,offersasuccinctdescription ofSchumpeter’seventfullifestory.Livingduringatimeofgreatpoliticaland socialtransformation,twoworldwars,anddeepeconomiccrisis,hispathwas oneofprofessionalstruggles,alternatingtriumphsanddefeats,personaldrama, andexceptionalendurance(Tables1.1and1.2).Havinggrownupasahalforphan,hewouldmarrythreetimesandevenbeaccusedofbigamy.Inaddition tohisnumeroustravels,heresidedinMoravia,Graz,Vienna,Chernivtsi,Cairo, andBonnbeforefinallysettlingdowninCambridge,Massachusetts,atHarvard University.Amonghismanyprofessionalactivities,heworkedasalawyer,state secretaryforfinance,bankpresident,and“proto-venturecapitalist.”Yetdespite thesetemporarydistractionsfromhismaincallingtopursueanacademiccareer, hisscientificoutputwasexuberant.Itcomprisedvariousextensivemonographs inadditiontoinnumerablearticlesandspeeches.Itisnowonderthathislife andworkhasbeenthesubjectofnumerousbiographiesandtreatiseswhichhave regularlyfoundnewanglestoexplore.Giventhewealthofexistingmonographs
Table1.1 SelectedmilestonesofSchumpeter’slifeandworkPt.1
Year Milestones
1883 BorninTřešt
Adolescence
1887 Deathofhisfather(atextilemanufacturer)
1888 RelocationtoGraz
1893–901EducationatanelitehighschoolinVienna
1901–6StudiesandPhDattheUniversityofVienna
1902–5ManagementstudiesattheExportAcademy
1906–7Studytrips(Berlin,London,Cambridge,etc.)
1907–20FirstMarriagewith GladysRicardeSeaver
1907 PracticeoflawinCairo Scienceprodigy
1908 DasWesenundderHauptinhaltdertheoretischenNationalökonomie (WHN)
1909–11ProfessorattheUniversityofCzernowitz
1911 TheoryofEconomicDevelopment (TED)
1911–21ProfessorattheUniversityofGraz
1913 VisitingprofessoratColumbiaUniversity
1917–18 MoneyandtheSocialProduct (MSP)
1918 DieKrisedesSteuerstaates (KSS)
Table1.2 SelectedmilestonesofSchumpeter’slifeandworkPt.2
YearMilestones
The“greatwaste”
1919Statesecretaryforfinance(MarchtoAugust)
1921–24PresidentoftheBiedermannBank
1921–25“Proto-VentureCapitalist”
1925–32ProfessorattheUniversityofBonn
1925Secondmarriagewith AnnieReisinger
1926Withinashortperiodoftimehismotherdies,thenhiswifeandson inchildbirth
Harvard
1927/30VisitingprofessoratHarvardUniversity
1930Co-founderofthe EconometricSociety
1931VisitingprofessorinTokyo
1932–50ProfessoratHarvardUniversity
1937Thirdmarriagewith ElizabethBoodyFiruski
1939UScitizenship; BusinessCycles (BC)
1942 Capitalism,SocialismandDemocracy (CSD)
1947 CreativeResponseinEconomicHistory (CRH)
1948PresidentoftheAmericanEconomicAssociation
1950DiesonJanuarythe8th
1954 HistoryofEconomicAnalysis (HEA)
1970 DasWesendesGeldes (WDG)
andshorterarticlesonSchumpeter,1⁷inthisintroductionabriefbiographical sketchshouldbesufficienttoprovideacontextforourlateranalyses.
Educationandearlycareer
Schumpeterwasbornin1883intheMoraviantownofTřešt,whichatthe timebelongedtotheHabsburgEmpireandisnowpartoftheCzechRepublic. HismothercamefromatownnearVienna,whilehisfatherwasalocaltextile manufacturerwhobelongedtotheGerman-speakingminorityoftheregion.His fatherdiedasaresultofahuntingaccidentwhenJosefwasonly4yearsold. TakinghersonandmovingtoGraz,hismotherthenmarriedaretiredarmy officerandmemberoftheAustriannobility.HermarriageenabledSchumpeter toattendtheTheresianum,anelitesecondaryschoolinVienna.There,hereceived arigorouseducation,notonlyinmathematics,science,andhistory,butalsoin Latin,Greek,English,Italian,andFrench.Hisknowledgeofmanylanguageswas clearlyinstrumentaltohislatercareer.Itnotonlycompelledhimtopracticehis
1⁷ See,forinstance,März(1983/91);Allen(1991);Swedberg(1991);Stolper(1994);Shionoya(1997); Hanusch(1999);McCraw(2007);Andersen(2011);CantnerandDopfer(2015);orSturn(2016).
8introduction—schumpeter’slifeandvision
skillsbyreading,butenabledhimtodirectlysourceliteraturesfromexceptionally variedhistoricalandgeographicalorigins.
In1901heenrolledattheUniversityofViennatostudyjurisprudence(economicswasnotyetanindependentbranchofstudy).There,heattendedthe classesofEugenBöhm-Bawerk,FriedrichWieser,andotherproponentsofthe AustrianSchoolofeconomics.Furthermore,hehadtotakeasubstantialnumber ofcoursesinphilosophy,afieldinwhichthepositivistlegacyofthephysicist andphilosopherofscienceErnstMachstillexertedastronginfluence.According toAndersen,Schumpeteradditionally“designedforhimselfanextensiveand fairlyadvancedprogrammeofmathematicscourses.”1⁸ThisrenderedSchumpeter distinctlycapableofabsorbingmoderndevelopmentsineconomictheoryand embracinganopenperspectiveonmethodology—especiallywhencomparedto hispeersfromtheAustrianandGermanSchools,whodisplayedlittleinclination forandoftenhostilitytowardtheuseofmathematicaltoolsineconomics.
SchumpeteralsosigneduptostudymanagementattheExportAcademy,the precursoroftoday’sViennaUniversityofEconomicsandBusiness.Between1902 and1905hetookclassesthatincludedeconomicgeography,commerciallaw, andaccounting,aswellasthehandlingofbusinesscorrespondenceinGerman, English,andFrench.Yet,accordingtoourfindingsandjudgingfromthequite poorgrading,heseemsnottohavetakenthesestudiesveryseriously.Forexample, onascalerangingfromone(“excellent”)tofive(“failed”)hebarelypassedhis introductorycoursesinbusinessaccountingandbookkeepingwithagradeoffour (“sufficient”)inhisfirstsemester,andthenfailedbothinthesubsequentcourses.1⁹ Inretrospect,onecouldconsiderthesepoorgradesabadomenforhisbusiness venturesduringthe1920s.
AfterearninghisPhDattheUniversityofViennain1906,Schumpetersetout oneducationaljourneystoBerlin,Paris,London,Oxford,andCambridge.In1907, hemarriedhisfirstwife, GladysRicardeSeaver (1871-1932).Thecouplemovedto Cairo,whereSchumpeterrepresentedclientsattheInternationalMixedTribunal andmadeacertainfortune.Simultaneously,hemanagedtowritehishabilitation thesis:DasWesenundderHauptinhaltdertheoretischenNationalökonomie(henceforth WHN,1908).2⁰
HabilitationmadeSchumpetereligibletoholdachairatauniversity.He initiallybecameanassociateprofessorattheUniversityofCernivtsi,21wherehe
1⁸ Andersen(2011,p.22f).Andersenestimatedthatmathematics“coverednearly30percentofthe halfofSchumpeter’ssyllabusthatwasnotdedicatedtojurisprudence.”
1⁹ Schumpeter’sstudiesattheExportAcademywentlargelyunnoticedbyhisbiographers,butwas pointedoutbyHedtkeandSwedberg(2000,p.5).Ourrecentfindingsonhisgradingoriginatefromthe ArchiveoftheViennaUniversityofEconomicsandBusiness,ReportCardsofJosefSchumpeter,1902/3 to1904/5,andFirstMainCatalogue,FirstVolume,Colloquia(from1901to1908/9).
2⁰ Thetitletranslatesas“TheNatureandContentofTheoreticalEconomics.”
21 ThencalledCzernowitz,locatedintheHabsburgEmpire’seasternprovinces(nowwestern Ukraine).
authoredwhatisarguablyhismostoriginalandimportantwork:22the Theoryof EconomicDevelopment (henceforth TED;translatedtoEnglishin1934).In1911, SchumpeterbecameafullprofessorattheUniversityofGraz.Whenin1913heleft forColumbiaUniversitytoworkasvisitingprofessorforayear,hiswifeGladys chosetoreturntoEngland.AfterSchumpetercamebacktoGraz,theoutbreakof theFirstWorldWarmadeherreturnunlikelyandthecommunicationbetween themincreasinglydifficult.AccordingtoMcCraw,by1920heconsideredhimself unmarried,withouteverhavingbotheredtogetaformaldivorce.23Morerecently, however,newevidenceconfirmedthatthespouseswereformallydivorcedon December24,1920,atthedistrictcourt“InnereStadt”inVienna.
The“greatwaste”
DuringtheFirstWorldWarSchumpeterwasapronouncedpacifistopposing attemptsatacustomunionwithGermany,sincehefearedthiswouldbethe firststeptowardafurtherconsolidationoftheGerman-speakingterritories.2⁴ Inprivatecommunication,headvocatedaseparatepeacetreatyoftheAustroHungarianEmpirewiththeAlliedforces,anticipatingthattheHabsburgmonarchywouldintheendsufferthegreatestlossesamonganywarparticipants. AccordingtoMcCraw,hispoliticalvisionatthetimewastosavetheempire throughagradualtransformationtowardconstitutionalmonarchy,similartothe Britishexample.2⁵
YetwiththeendoftheFirstWorldWarthepoliticalorderinwhichSchumpeter hadgrownupinevitablyfellapart.Immersinghimselffirstinpoliticsandthen business,inthewar’saftermathhealsofoundhisprivatelifeshatteredbyaseries ofspectacularfailures.Schumpeterlaterreferredtothisperiodasthe granrifiuto or“greatwaste”ofhislife.2⁶Itbeganquiteinnocuouslywithaneconomictext onthecrisisofpublicfinance(DieKrisedesSteuerstaates;henceforth KSS,1918), inwhichSchumpeteraddressedthechallengesofeconomicreconstruction.On recommendationofRudolfHilferding2⁷hebecamestatesecretaryforfinancein
22 HanuschandPyka(2007). 23 McCraw(2007,p.87f).
2⁴ Aletterwrittenin1916tohisformerteacherandmemberofparliamentHeinrichLammasch, demonstrateshisalertnesstotheprospectofunification:“Considerwhatallthismeans[…]APrussianLutheran-militaristicCentralEurope(‘Mitteleuropa’)wouldfromnowonconfronttherestoftheworld likeapredatoryanimal.[…] that Austriawhichweknowandlovewouldceasetoexist”(quotedfrom McCraw,2007,p.91).
2⁵ McCraw,(2007,p.92ff).Hedtke(2004a,b)offersthemostcomprehensiveanalysisofSchumpeter’s politicalmemoranda.
2⁶ McCraw(2007,p.104).
2⁷ AndwiththeconsentofEmilLedererandOttoBauer,bothformerclassmatesofSchumpeterin thefamousseminarheldbyBöhm-BawerkattheUniversityofVienna.
10introduction—schumpeter’slifeandvision
thecoalitiongovernmentheadedbythesocialistKarlRennerinMarch1919.However,lackinganypartyaffiliation,independentpowerbase,politicalexperienceor skills,hewasforcedtoresignbyAugustofthesameyearwhenthecabinetrefused tosupporthisfirstfinancialplan.
Tomakeabriefstory2⁸evenshorter,withinfivemonthsSchumpeterhad managedtoalienatethesocialistmembersofthecabinet(inparticulartheforeign ministerOttoBauer)byopenlyopposingunificationwithGermany,advocating thecompleterepaymentofthestate’sdebts,andimpedingnationalizationby supportingthesaleofindustrialsharestoforeigninvestors.Atthesametime,he lostthesupportoftheconservativepartybydemandingacapitallevyonallliquid assetsofcompaniesandprivatecitizensinordertocurbthepost-warinflation. Whiletheeconomicsbehindhisproposalsseemreasonable,Schumpeterlacked theawarenessandskillswithwhichtoformpoliticalalliancesandantagonized thecabinetwithhissolitary,know-it-alldemeanor,whichborderedondisloyalty. Inlightoftheseshortcomings,fewpeopleappreciatedhiseconomicprinciples.Of thosewhodid,onewashisformerteacherattheUniversityofVienna,Friedrich Wieser.InhisdiariesheacknowledgedthatSchumpeterwas“notmisledby prevalentsentiment”and“hascourage,anassetwhichcannotbeover-praised.”2⁹
AfterSchumpeterdroppedoutofthecabinethehadnoinclinationtoreturnto hisacademicpositionattheUniversityofGraz.Instead,hewaskeentoliveouthis theoreticalvisionbyactivelyparticipatinginthepost-warreconstructioneffort, bothaspresidentoftheBiedermannBankandastheco-founderofanindustrial groupinvestinginnew,mostlytechnology-orientedstart-upcompanies.Both ventures,however,failed,leavingSchumpeterwithalargepersonaldebttopay offthroughoutmanyyearstocome.Still,hewasfortunatetobeclearedofany legalaccusations.
In1925,SchumpeterescapedhisinevitablesocialdeclineinViennabyacceptinganappointmenttoholdachairattheUniversityofBonn.Withtheprospect ofanotherprestigioussocialpositionandregularincome,herushedtopropose marriageto AnnaJosefinaReisinger (1903–26).3⁰Yet,accordingtoAustrianlaw, Schumpeter’searlierdivorcewasconsideredanobstacleto(re-)marriageand requiredformalspecialpermission.31InCatholicAustriathispermissionwas
2⁸ See,forinstance,März(1983/91)andStolper(1991).
2⁹ QuotationfromMcCraw(2007,p.101).
3⁰ AnnaReisingerwastwentyyearsyoungerthanhimandthedaughteroftheconciergeofthe apartmentbuilding,whereSchumpeter’smotherlivedinVienna.Despitetheirparents’disapproval, neithertheagedifference,nordifferentsocialrank,northefactthatAnnahadhadanabortionfrom apreviousrelationshipseemtohavematteredmuch.Theirdiariesandlettersprovideampleevidence ofthegenuineaffectionbetweenthetwo.See,forexample,McCraw(2007,p.113ff).
31 From1922on,averyvaguelawprovidedforthepossibilityofgrantingspecialpermissionfor marriagedespitesuchanobstacle.Thatsameyear,ViennawasseparatedfromLowerAustriaand becamegovernedasanindependentprovincebyaSocialDemocratmajority.Theprovincialgovernor ofVienna,AlbertSever,unlikehisconservativecolleaguesintheotherprovinces,madegeneroususe ofthispossibility.
generallydeniedbytheconservativeauthorities,butatthetimeaffordedliberally in“RedVienna.”JosefandAnniehadtoleavetheCatholicchurchsothat Schumpetercouldapplyfortheindulgenceofthe“marriageobstacleofmarriage,” whichwasgivenwithoutdelay.HeandhisfiancéethenjoinedtheEvangelical ChurchoftheAugsburgConfessionandmarriedonNovember5,1925inthe Protestantcityparishchurch.Neithersetofparentsattendedtheceremony,but HansKelsen (1881–1973),afamousJewishlegalscholarand“architect”ofthe Austrianrepublicanconstitutionwashisbestman.32
HisprivatehappinesswithAnnagreatlyhelpedSchumpetercopewithhisacute financialdistressandnewprofessionalstart.Theirlifeindeedtookaverypositive turn,asbothAnnaandJosefwerewellreceivedinBonnandexcitedlyexpectinga baby.However,personaltragedywouldsoonimpedetheirreturntoastablelife.In 1926,Josef’smotherpassedaway.Sixweekslater,Annaandthecouple’snew-born sondiedinchildbirth.Havingeffectivelylostatoncethethreemostimportant peopleinhislife,Schumpeterneverfullyrecovered.Thebreakisapparentin bothhispersonalityandhisscientificoutput,whichchangedfromthealmost frivolousoptimismandself-confidenceofhisearlyyearstoadarkerandmore pessimistic,sometimescynicalmindset.InalettertoGustavStolper,Schumpeter clearlyarticulatedwhatheneededtokeephismindtogether:“[e]verythingnow hangsonmyabilitytowork.”33
Monetaryanalysis
Inthefollowingyears,themajorfocusofSchumpeter’sintellectualeffortwas anattemptedgeneraltreatiseonmoney.However,ashedidnotrapidlyrecover fromtheabovecatastrophes,hiscapacityforfocusedandproductiveworkwas diminished.Seriouswritingonthebookprobablybeganin1926,buthewasnever abletoconsolidatehisideasintohisaspiredgeneraltheoryofmoney.Despite repeatedannouncements,themoneybooknevermaterializedintoacohesivework whichhewouldhaveconsideredworthyofpublication.
Thoughhismonetarywritingsremainedscatteredandfragmented,hisgeneral visionwasformedearlyonandhisideasappearstrikinglyconsistentfromthefirst tothelast,evenunfinishedposthumouspublications.3⁴Characteristicelements alreadyappearedinhiscomprehensivesurveyofthereceiveddoctrinein WHN (1908).Therein,Schumpeterannouncedplannedextensions,whichherealized afewyearslaterin TED (1911/34).There,themajorelementsofhismonetary theorywereinplace,thoughitsbroaderfoundationsoftenremainedimplicitand little-developed.In MoneyandtheSocialProduct (henceforthMSP,1917–18/56;
32 Budischowsky(2014).
33 FromalettertoGustavStolper,quotationfromMcCraw(2007,p.140).
3⁴ SeealsoMarget(1951)orNaderer(1990).
12introduction—schumpeter’slifeandvision
translatedtoEnglishin1956)hesetouttoexpandonthegeneralroleofmoneyas asocialtechnologyforthesettlingofaccounts.InfluencedbyWieser,hethereby elaboratedanincome-expenditureapproachwithendogenousmoneythatstood incontrastwiththetraditionalquantitytheory.Itismostlybasedonthisthemeof asocialclearingmechanismthatheenvisageddeliveringageneraltreatisewithin whichhewouldintegratemonetarytheoryandhisdynamicvisionoftheeconomy.
DuringtheyearsinBonn,Schumpeterexpandedontheprevioustextof MSP, addingnewchaptersonsuchdiverseaspectsasthehistoryofmonetarythought andthesociologyofmoneyorindexnumbers,anddraftingdetailedfinancialflows betweenhouseholds,firms,banks,andthecentralbank.Yetprogresswasslow.In additiontobeingdrainedbyunsettlingpersonaltragedy,hepouredmuchtime andattentionintopublicspeechesandshorterarticles,whichhepursuedinorder topayoffthedebtsfromhisfailedfinancialadventures.
Then,Keynes’ TreatiseonMoney appearedin1930.Accordingtosomereports, SchumpeterbelievedthatKeyneshadappropriatedsomeofhisideaswithout attribution.3⁵Ifthiswasthecase,hedidnotindicateitinpublic.Onthecontrary,heacknowledgedKeynes’treatiseasa“splendidachievement”and“spoke admiringly”ofitinhisBonnlectures.3⁶Inanycase,Keyneshadraisedthebar foranotherendogenoustheoryofmoneytostriketheprofessionasprofoundly novel.Despiteseveralprematureannouncementsofitspublication,Schumpeter practicallyceasedworkonhis“moneybook”intheearly1930s.3⁷Finally,an unfinishedandincompleteGermanversionofthemanuscriptwasposthumously publishedin1970as DasWesendesGeldes (henceforth WDG),whilethreefurther draftchaptersremainedintheHarvardUniversityArchives.3⁸
Despitetheenormousefforthehadinvested,Schumpeterconsideredthebook afailure.3⁹AsdidRothschild(1973),whencommandingrespectforhis“heroic” decisionnottopublishit.Incontrast,Tichy(1984)appreciatedtheoriginalityand relevanceofSchumpeter’scontribution,butconsidereditsgeneralizationintoa genuinedynamictheoryavainendeavor.HepointedatSchumpeter’sunlimited ambitionandstrivingforperfectionasthesourceoffailure.Andindeed,the attemptedgeneraltheoryofmoneyandbankingoftenstraysintolong-windedand detaileddiscussions,whichmanyreaderswillfindtedious.Whileitdemonstrates muchintellectandeffort,thebookaddslittlenewthoughtcomparedtohismore radicalearlierpresentations.Itscentralcontributionistheanalysisofthemanifold
3⁵ McCraw(2007,p.155).
3⁶ SeeLettertoWalterEucken,April19,1932,reproducedinStolper(1994,p.48)orDatheand Hedtke(2018,p.19).
3⁷ Schumpeter,however,refusedtoletthe“moneybook”goforgood.Inaletterwrittentwomonths beforehisdeath,heexpressedhisintentionoffinishingitwithin“ayearortwo”(HedtkeandSwedberg, 2000,p.391).
3⁸ SeeMessori(1997)foranexcellentdiscussion.
3⁹ McCraw(2007,p.155)reportsthatSchumpeterhimself“judgedthewholeeffort‘athoroughly badperformance,’”eventhoughhehad“pouredendlesshoursintothebook.”
interactionsthroughwhichthecreditmarketcoordinatesentrepreneurialactivity duringthebusinesscycle,whichreceivedamuchmorethoroughaccountthan ithadinhispreviouswork.Firstunknownandthenpublishedatatimewhen monetaryanalysishadlongshiftedtoothertopics,itsappearancehadlittle impactonthediscipline.Amongthenotableexceptions,Messoriacknowledges itsenduringvalueandconsidersit“thepeakofthatstreamofanalysis,”which iscomprisedofMarx,Wicksell,A.Hahn,Robertson,andKeynes.⁴⁰Contrasting Schumpeter’sattempttospecifythesequentialstructureofinteractionswiththe latermethodsofoptimization.Hellwigpointsoutthat“Schumpeterwasaheadof histimeinmanywaysandmanyunsolvedproblemsstillare.Youcouldsaythat todayweareconfusedatahigherlevel.”⁴1
SettlingatHarvard
Schumpeter’sturbulentlifefinallyculminatedinanindustriouslatecareerat HarvardUniversity.Ontheinitiativeofhismentorandfriend FrankTaussig (1859–1940),hefirstarrivedthereasavisitingprofessorinautumn1927(his initialcoursewason“MoneyandBanking”)⁴2andthenagainin1930.In1931 helecturedinTokyo,beforebeingappointedtoapermanentchairatHarvardin 1932.There,hisardentsupportofamathematicalapproachtoeconomicsstood instarkcontrastwiththelackofanyformalmodelinginhisownwork.Tothe facileobserverthismayappearavainmasquerade.However,Andersen’scareful examinationrevealstheintriguinginnerstruggleofaresponsibleinstructorand creativescientist.⁴3
TogetherwithRagnarFrisch(1895–1973)andJanTinbergen(1903–94),Schumpeterwasoneoftheco-foundersofthe EconometricSociety andchaireditsinitial meetingin1930.AfterjoiningthefacultyatHarvard,healsobecamecommittedto advancingtheuseofmathematicaltoolsintheeconomicscurriculum.Asnobody volunteeredtodothis,hetaughtthefirstclasses,butsoonhandedthemoverto amoregiftedyoungergeneration(inparticular,hisprotégéWassilyLeontief).⁴⁴ Still,heremainedalertandattentivetotheworkofhismoremathematically inclinedcolleagues.RichardGoodwin,forinstance,rememberedthatSchumpeter patientlylistenedtohislecturesbutfoundnowaytoapplythedeterministic modelstohisownanalyticalproblems.Awarethathistheoriesweretoo“refractorytomathematicalformulations,”Schumpeterincreasinglyturnedhisattention
⁴⁰ Messori(2014,p.56).
⁴1 QuotationfromanoralpresentationofMartinHellwigon DasWesendesGeldes ataSchumpeter ColloquiumoftheUniversityofVienna,Ocober14,2016.
⁴2 McCraw(2007,p.187). ⁴3 Andersen(2011).
⁴⁴ W.L.Cruminvitedhimtoco-authorthesecondeditionofhistextbookon RudimentaryMathematicsforEconomicsandStatisticians (CrumandSchumpeter,1947),afterSchumpeterhadprovided detailedcommentsandvariousamendmentstoit.
14introduction—schumpeter’slifeandvision towardthestudyofhistory.However,thefactthathefailedtoproduceaformal representationofhistheoryneverpromptedhimtodiscardthepromiseofprecise analyticaltools.InalettertoGottfriedHaberlerheadmittedtofeeling“likeMoses musthavefeltwhenhebeheldthePromisedLandandknewthathehimselfwould notbeallowedtoenterit.”⁴⁵
Schumpeter’sthoroughtheoreticalfoundationsandundogmaticbutprincipledapproachtomethodologycertainlycontributedtotheriseandfameof theeconomicsdepartmentatHarvardUniversity.Amongthemanydistinctive scholarsanddiscipleswhoworkedwithorstudiedunderSchumpeteronefinds, forinstance,WassilyLeontief,PaulSamuelson,JamesTobin,RichardMusgrave, RichardGoodwin,HymanMinsky,PaulSweezy,orJohnKennethGalbraith.
Schumpeter’sprivatelifealsotookamuchneededpositiveturnwhenhebecame acquaintedwith RomaineElizabethBoody (1898-1953),herselfanaccomplished economist,fifteenyearsyoungerandalsodivorced.Theymarriedin1937.Her lettersandcorrespondenceattheUniversityArchivesinHarvardrevealanemancipated,confident,andunassumingcompanion,whomusthavegreatlyhelped tostabilizehisprecariousmentalcondition.Later,herdedicationandsupport wouldrenderpossibletheposthumouspublicationofhisfinalandunfinished monograph,whichshepursuedwithmuchskillandendurance.Nevertheless, Schumpeter’ssolitaryimmersionintohisambitiousacademicendeavorsappears tohavemadehimincreasinglydetachedfromtheworldaroundhim.Though manystudentsdescribedhimasanexceptionallyattentiveandflamboyantteacher, sarcasticstatementsandilltempercausedtensionswithinthefaculty.Furthermore,atatimewhenKeynes’(1936) GeneralTheory provedextremelypopular amonghisyoungerdisciples,hisownrepudiationofthe NewDeal politicscontributedtohisalienation.
ComparedtoKeynes,hisapproachandattitudetowardpolicygenerallyplaced himoutsidethelimelightwhenitcametopracticalrelevanceandpublicattention. WhileKeyneswasnevershytospelloutclearpoliticalprioritiesandconcrete policyprescriptions,Schumpeter’smaininterestalwayslayintheessentialtheoreticalaspects,evenwhenaskedtocommentonpolicy.Heattemptedtocontribute byhelpingauthoritiesandthepublicbetterunderstandasituation,butprovided nosolutionsfortheconsiderablecomplexityanduncertaintyinvolvedinreallifedecisions.Wemaysaythathetriedtoeducateratherthangiveprescriptions, pointingatthehistoricalandinstitutionalspecificityofapolicy,butleaving theconcretechoices(and,accordingly,responsibility)tothepolicymakers.⁴⁶ Forexample,intheintroductionto BusinessCycles (henceforth BC)Schumpeter franklydeclared:“Irecommendnopolicyandproposenoplan.[…]Whatour
⁴⁵ ReproducedinHedtkeandSwedberg(2000,p.240).
⁴⁶ Consequently,theSchumpeterianapproachdoesnotlenditselfeasilytoasystematicanalysisof economicpolicy.See,forexample,Hanusch(1999,p.lvi).
timeneedsmostandlacksmostistheunderstandingoftheprocesswhichpeople arepassionatelyresolvedtocontrol”(BC,1939,p.vi).
Finally,andconsistentlywithhisearlierpacifismduringtheFirstWorldWar, hefavoredappeasementwiththeNaziregime.HenaivelyhopedthattheGermans wouldthemselvesgetridofthetyrannyandinsteadworriedmoreabouttheriseof Stalin’spower.⁴⁷Anotherreasonforhisrestraintinpublicstatementswasthathe stillhadfriendsthere,whomhecaredabout,andforwhomhefearedretaliation.⁴⁸ Allthesematterstakentogether,hemusthaveincreasinglyappearedtobea hopelessreactionary.Incontrast,hisenduringsupportofEuropeanmigrant economists,mostofwhomwereeitherJewishand/orsocialists,inreceiving fellowshipsandjobsintheUSprobablywentratherunnoticed,exceptamonghis closefriends.⁴⁹
Byanymeasure,Schumpeter’syearsatHarvardarecharacterizedbyanenormousacademicoutput.Afterhemovedthere,hisattentiontothemoneybook soongavewayto BC (1939),inwhichheproducedacomprehensiveelaboration oftheemergenceofcapitalismwithmorethan1,000pagesandplentyofhistorical andempiricaldetail.Yet,despitethisbeingthemostambitiousprojectheever completed, BC hadlittleenduringimpactontheprofession.Thoughreviewers weregenerallyrespectful,theystruggledwithwhattomakeofthework.One reasonforitslukewarmreceptionwasthatSchumpeterconsidereditatreatise onbusinesscycles,thoughitwasmoreanextensionandattemptedempirical validationof TED.Thereby,heportrayedtheeconomyasevolvingthroughthe continuousstreamofrecurrentfluctuationscausedbymultipleandoverlapping wavesofdifferentlength.Thisrenderedtheirstatisticalidentificationextremely difficultandcalledfordetailedhistoricalanalysis.Anotherreasonforitsfailure wastheunfortunatetimingofBC.PublishedthreeyearsafterKeynes’GeneralTheory,towardtheendofthegreatrecessionandatthebeginningoftheSecondWorld
⁴⁷ InthewordsofMcCraw(2007,p.316):“SchumpeterradicallyunderestimatedtheNazi’sstrength andcapacityforevil;butatthesametimeheanticipatedwithgreatinsightthesituationthatledtothe Soviet-AmericanColdWarof1945–89.”
⁴⁸ SchumpetercontinuedtosupportthefamilyofAnnaReisingerandinparticularMiaStöckel,his formersecretaryandlatercompanionafterthedeathofhissecondwife.Thetwomaintainedalively correspondence,whichtheywereawarecouldbemonitoredbytheGermanauthorities.Schumpeter regularlysenthermoney,evenaftershehadmarriedayoungeconomistfromSerbiaandmovedto NoviSad.AletterinwhichherfatherreportedtoSchumpeterthekillingofMiaandherhusbandby theHungarianalliesofNaziGermanyisadeeplystirringdocumentofthecrueltyoftheregimeand thewar(HUG(FP)—4.5,Box1,Folder“LetteronMia’sdeath”).
⁴⁹ See,forinstance,McCraw(2007,p.229ff).Incontrast,Schumpeterandhiswife,whowasan expertontheJapaneseeconomy,weresubjecttoinvestigationsoftheFBIandclearedofpotential sympathieswiththewarenemy.Rothschild(2015,p.234)reportsontherelationshipbetween Schumpeterand EduardMärz (1908–87),aJewishemigrantstudentatHarvard,who—aftertheendof theSecondWorldWar—founda“strangelypeacefulandalmostsereneSchumpeterwhohadbecome reconciledwiththeworld.Märzthinksthatthismayhavebeenduetothefactthathehadbecome moregratefultobeintheUSafterhavinglearnedaboutthecrueltiesoftheNaziregime(“ThankGod forAmerica”becameafrequentutterance).”
16introduction—schumpeter’slifeandvision
War,Schumpeter’slengthyelaborationofthewave-likeevolutionofcapitalismwas simplynotofgreatappealtotheprofession.
Afewyearslater,however,Schumpeterwrotewhatwouldbecomehismost famousbook: Capitalism,SocialismandDemocracy (henceforth, CSD).⁵⁰While TED hadlaidoutthebasictheoreticalframework, BC reachedfarbackinhistory foritsempiricalvalidation.Incontrast, CSD (1942/50)concludedSchumpeter’s trilogyontheevolutionofcapitalismwithaboldvisionofwhereitmightbe headed.Arguably,itishisonlybookthathappenedtobeintunewithoneofthe dominantpublicconcernsofthetime.FollowingthedevastationsoftheSecond WorldWarandappearingonthevergeoftheColdWar(whichwashighlycharged withideologicalcombat)Schumpeterpositedanunsettlinganswertoasimple question:“Cancapitalismsurvive?No.Idonotthinkitcan.”⁵1
Fromtheeminentscholaroftheevolutionofcapitalism,onewouldhave expectedtohearotherwise.Andindeed,therearegoodreasonsnottobecanonical aboutthis.Ontheonehand,Schumpeter’spessimisticoutlookpartlyreflectedhis depressedmentalsituationduringhislateryears.Ontheotherhand,henever consideredthestatementadefiniteprediction,butratheranextrapolationof developmentsthathewasconcernedabout.Bybringingthemtotheirlogical conclusion,hehopedtocallforthandstrengthenthesystem’sresilienceagainst it.⁵2Apparentlyhispersonalbetwasonthegrowingsocializationofsociety, albeitconcedingthatcapitalismcouldstill“haveanothersuccessfulrun.”⁵3In anycase, CSD isamasterfulexampleofhisreasoningbyapparentparadoxes. TurningupsidedowntheMarxistpredictionofthecollapseofcapitalismduetoits inherentflaws,Schumpeterarguedthatcapitalismwillindeeddisbandeventually, butasaconsequenceofitsownsuccess.Inshort,Schumpeterreasonedthat, duetothegrowingroutinizationofinnovation,“economicprogresstendsto becomedepersonalizedandautomatized,”wherebycapitalistenterprisesrender themselvessuperfluousthroughtheirownachievements:
Theperfectlybureaucratizedgiantindustrialunitnotonlyouststhesmallor medium-sizedfirmand“expropriates”itsowners,butintheenditalsoousts theentrepreneurandexpropriatesthebourgeoisieasaclasswhichintheprocess standstolosenotonlyitsincomebutalsowhatisinfinitelymoreimportant,its function.(CSD,1942/50,p.134)
⁵⁰ Afterthedisappointingreceptionof BC,hewassurprisedbyitssuccess,pointingoutthathe hadpursueditwithfarlessambitionandeffortthanhispreviousbook.Despitethis,itgainedmuch popularity,especiallyafterthepublicationofitssecondeditionin1947(McCraw,2007,p.347ff;p.371).
⁵1 CSD (1942/50,p.61).
⁵2 AsSchumpeterexplained,scientificanalysis“neveryieldsmorethanastatementaboutthe tendenciespresentinanobservablepattern.Andthesenevertelluswhatwill happentothepatternbut onlywhat would happeniftheycontinuedtoactastheyhavebeenactinginthetimeintervalcovered byourobservationandifnootherfactorsintruded”(CSD,1942/50,p.61).Inalaterspeechreprinted inthethirdeditionof CSD (1942/50,p.416),healsoputitclearly:“Idonotadvocatesocialism.Nor haveIanyintentionofdiscussingitsdesirabilityorundesirability.[…]tomakeitquiteclearthatIdo not‘prophesy’orpredictit.”
⁵3 CSD (1942/50,p.163).
