by Russell S. Sobel and Jason Clemens
Joseph Schumpeter is one of the most accomplished economists of the twentieth century. Included among his many contributions is his path-breaking work on entrepreneurship—one of the quintessential characteristics of all market economies.
His timeless phrase describing the entrepreneurial process as one of “creative destruction” is likely second only to Adam Smith’s “invisible hand” in its daily use in popular tweets, blog posts, speeches, and articles. Renowned Chicago economist Jacob Viner praised Schumpeter’s History of Economic Analysis as “by a wide margin … the most brilliant contribution to the history of analytical phases of our discipline which has ever been made”. However, it is Schumpeter’s Capitalism, Socialism and Democracy, in which Schumpeter describes the mechanisms—entrepreneurs, innovation, and capital reallocation—that drive the “incessant” recreation of capitalism that is by far his most popular and successful work.
During the 1980s there was a pronounced increase in scholarly interest in Schumpeter’s work as evidenced by the number of citations of his work surpassing citations of Keynes. This volume in the Essential Scholars series explores several of Joseph Schumpeter’s most important insights into entrepreneurship, business cycles, economic development, and the democratic process.
Joseph Schumpeter was born in 1883 to a prominent family in Triesch, a small town south of Prague. After he lost his father when he was four years old, his mother, Johanna, married Sigmund von Keler and the family moved to Vienna. At the time, the radical political and economic changes occurring throughout the Habsburg Empire were largely concentrated in Vienna—an environment very formative for the young Schumpeter. In 1901, he entered the University of Vienna where he was heavily influenced by Friedrich von Wieser and Eugen von Bohm-Bawerk, both students of Carl Menger, a founding member of the Austrian School of Economics. Nevertheless, unlike Ludwig von Mises, a fellow student, Schumpeter described himself not as an “Austrian” but a conservative in his brand of political economics and openly acknowledged his admiration for Edmund Burke’s “good order is the foundation of all good things”.
Schumpeter graduated in 1906 from the University of Vienna and in 1908 returned for the studies necessary to secure employment as a professor. Based on his already published book, The Nature and Content of Theoretical Economics, coupled with lectures and additional scholarship, Schumpeter was quickly certified to teach. He secured a position at the University of Czernowitz where he wrote a break-through book, The Theory of Economic Development, in which he introduced the central role of the entrepreneur in explaining economic progress. In 1911, Schumpeter left for the University of Graz and two years later was invited to guest-lecture at Columbia University.
In 1921, Schumpeter resigned from the University of Graz and began a new phase of his working career as a banker and professional investor. He became a partner with Artur Klein, head of the Biedermann Bank. He was successful in his investments but, when the Vienna stock market crashed, lost much of his personal wealth.
In 1925, Schumpeter returned to academics, accepting a position at the University of Bonn in Germany. He moved to Harvard University in 1932 and, while there, wrote three books: Business Cycles (1939), Capitalism, Socialism and Democracy (1942), and History of Economic Analysis, published posthumously in 1954. Schumpeter was elected president of the American Economics Association in 1947. He died January 8, 1950 in Taconic, Connecticut, USA.
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Listen to the Essential Scholars Explained podcast with host Rosemarie Fike in conversation with the author, Russell Sobel to discuss the work, life, and ideas of Joseph Schumpeter.
Joseph Schumpeter Part 1: Why People Come Back for More
Russell S. Sobel, co-author of The Essential Joseph Schumpeter and Professor of Economics & Entrepreneurship in the Baker School of Business at The Citadel, joins host Rosemarie Fike to discuss Joseph Schumpeter's life and most novel contributions to the field of economics, including "creative destruction" and how entrepreneurs allow consumers to better determine preferences.
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Joseph Schumpeter Part 2: Technology, Innovation, and the Workforce
Russell S. Sobel, co-author of The Essential Joseph Schumpeter and Professor of Economics & Entrepreneurship in the Baker School of Business at The Citadel, once again joins host Rosemarie Fike to discuss Joseph Schumpeter's most enduring and often prescient insights, including how contrary to popular belief, "creative destruction" and the technological innovation that embodies it in modern life doesn't equal mass unemployment.
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Watch the Videos
Who was Joseph Schumpeter?
What is Entrepreneurship?
Creative Destruction
The Nature of Competition
Public Choice and the Reality of Government
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Chapter by chapter summary of the book.
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Chapter 1
Who Is Joseph Schumpeter?
Joseph Schumpeter is one of the most accomplished economists of the twentieth century, although he is little known outside academic circles. Included among his many contributions is his path-breaking work on entrepreneurship—one of the quintessential characteristics of all market economies. His timeless phrase describing the entrepreneurial process as one of “creative destruction” is likely second only to Adam Smith’s “invisible hand” in its daily use in popular tweets, blog posts, speeches, and articles. This volume in the Essential Scholars series explores several of Joseph Schumpeter’s most important insights into entrepreneurship, business cycles, economic development, and the democratic process.
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Chapter 2
Entrepreneurship, New Combinations of Resources, and the Profit-and-Loss System
Would orange slices go well on top of a pizza? How about pineapple? Do they go equally well with ham and turkey as the meat on the pizza? Does turkey even taste good on a pizza? If you have ever been to one of those make-your-own pizza restaurants, you already know there are many possible topping combinations you could, in theory, put on a pizza. With some mathematical formulas, it is possible to figure out exactly how many possible combinations you could make out of a certain set of ingredients; and the numbers get large quickly. If there were twenty different toppings you could use for your pizza, and you were to choose only three of them, how many possible pizza combinations do you think could you make?
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Chapter 3
Creative Destruction: Schumpeter’s Perennial Gale
If you could get into a time machine (perhaps a DeLorean) and travel back to visit a typical shopping mall in the 1980s, it would have been packed with shoppers. Had you interviewed a store owner about their worries for the future, they would have probably mentioned the fear of facing competition from new stores opening in that mall or from a new mall opening in the same town that might drive them out of business. Indeed, if you visited that same mall today most of the stores in that mall are probably closed and it is depressingly empty, with many vacancies. It turns out, of course, that it was not a new competing mall or other stores in that same mall that the owners should have been worried about driving them out of business … it was the coming of the Internet, and Amazon in particular. But, of course, in the 1980s, there was no such thing as the Internet to worry about, nor did the store owners imagine such a thing would ever exist.
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Chapter 4
Contestable Markets and the Nature of Competition
In the classic board game, Monopoly, the objective is to drive all of your opponents into bankruptcy by owning and developing blocks of colour-coded property until you are the only remaining player. Players collect rent from their opponents and can charge higher prices as they own more properties of each colour. The game is built on the idea that monopolies—one firm controlling a market—generally produce worse outcomes for consumers (higher prices, for example) than markets characterized by many business firms in competition with one another.
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Chapter 5
Business Cycles: Understanding the Ebbs and Flows of the Economy
As was the case with many of Schumpeter’s contemporaries, he showed great interest in understanding the nature and causes of business cycles, that is, the ebb and flow of the economy from expansion and prosperity to recession, and at times, economic crisis and depression. Schumpeter’s work in the Theory of Economic Development (TED) coupled with his later two-volume masterpiece Business Cycles (BC1) focused on the broad issue of how and why economies progress. One of the many contributions of Schumpeter’s work in the field of business cycles was the introduction of innovation as a causal explanation. A subtle aspect of his argument, but one that needs to be recognized, is that the business cycle or the fluctuation between expansion and contraction is natural or, as Schumpeter put it “like the beat of the heart”.
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Chapter 6
Democracy, Public Choice, and Government Policy
Joseph Schumpeter is largely known for his seminal contributions to our understanding of the role of entrepreneurs, innovation, and creative destruction in economic growth and development. However, Schumpeter’s economic insights extend far beyond just his most well-known work on innovation. Another area where Schumpeter was well ahead of the economics profession and provided real insights is the nature of politics and the democratic process of collective decision making. The economic analysis of the process of politics and collective decision making is the focus of a modern field of economics known as public choice. While Schumpeter wrote prior to the formal origins of this field in economics, early scholars such as Anthony Downs did cite and attribute some of his ideas to Schumpeter’s writings in Capitalism, Socialism, and Democracy (CSD).
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Chapter 7
Can Capitalism Survive?
Perhaps the most interesting aspect of Schumpeter’s lifelong work in economics was a similarity between his work and that of Karl Marx, the most noted socialist writer in history. What makes this similarity striking is that Schumpeter’s greatest insights relate to the role of the innovative entrepreneur at the heart of capitalism. Yet, despite this insight, Schumpeter, like Marx, believed that the economic system of capitalism would eventually be replaced by socialism as a result of forces from within. In Capitalism, Socialism, and Democracy (CSD) Schumpeter himself states: “My final conclusion therefore does not differ, however much my argument may, from that of most socialist writers and in particular from that of all Marxists”.
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Chapter 8
Entrepreneurial Economist Predicted Socialism
Entrepreneurial Economist Predicted Socialism is a new essay that documents how the early 20th century economist Joseph Schumpeter predicted the end of capitalism as a result of capitalism’s very successes: the declining prominence of the innovator, increased calls for barriers to entry from successful businesses, and calls for government to limit the forces of creative destruction.
About the Author
Russell S. Sobel
Russell S. Sobel is Professor of Economics & Entrepreneurship in the Baker School of Business at The Citadel in his hometown of Charleston, South Carolina. He received his Ph.D. in economics from Florida State University in 1994. He is co-editor of the Southern Economic Journal and is a member of the editorial boards for the journals Public Choice and the Journal of Entrepreneurship & Public Policy. He serves as a Regional Advisory Committee Member for the South Carolina Revenue and Fiscal Affairs Office Board of Economic Advisors. He is the recipient of numerous awards for both his teaching and research including the Kenneth G. Elzinga Distinguished Teaching Award from the Southern Economic Association, the Georgescu-Roegen Prize for Best Article of the Year in the Southern Economic Journal, the Association of Private Enterprise Education Distinguished Scholar Award, and the Sir Antony Fisher International Memorial Award for his book Unleashing Capitalism. He has produced over two dozen Ph.D. students, most of which have gone on to pursue distinguished academic careers. He is the author or coauthor of over 250 academic journal articles and books including Growth and Variability in State Tax Revenue: An Anatomy of State Fiscal Crises, The Rule of Law, Unleashing Capitalism, and The Essential Joseph Schumpeter. His publications have appeared in a wide variety of academic journals including the Journal of Political Economy, Journal of Law and Economics, Public Choice, Journal of Business Venturing, Small Business Economics, and Economic Inquiry. His research has been featured in many leading news outlets including the New York Times, Wall Street Journal, Washington Post, U.S. News and World Report, Investor’s Business Daily, The Economist Magazine, The Financial Post, CNBC, and the CBS Evening News. His current recent research focuses on the intersection of entrepreneurship and economic policy.
Jason Clemens
Jason Clemens is the Executive Vice President of the Fraser Institute and the President of the Fraser Institute Foundation. He has an Honors Bachelors Degree of Commerce and a Masters Degree in Business Administration from the University of Windsor as well as a Post Baccalaureate Degree in Economics from Simon Fraser University. Before rejoining the Fraser Institute in 2012, he was the director of research and managing editor at the Ottawa-based Macdonald-Laurier Institute and, prior to joining the MLI, Mr. Clemens spent a little over three years in the United States with the San-Francisco-based Pacific Research Institute. He has published over 70 major studies on a wide range of topics, including taxation, government spending, labour market regulation, banking, welfare reform, health care, productivity, and entrepreneurship. He has published over 300 shorter articles, which have appeared in such newspapers as the Wall Street Journal, Investors Business Daily, Washington Post, Globe and Mail, National Post, and a host of US, Canadian, and international newspapers. Mr. Clemens has been a guest on numerous radio and television programs across Canada and the United States. He has appeared before committees of both the House of Commons and the Senate in Canada as an expert witness and briefed state legislators in California. In 2006, he received the coveted Canada’s Top 40 Under 40 award presented by Caldwell Partners as well as an Odyssey Award from the University of Windsor. In 2011, he was awarded (along with his co-authors) the prestigious Sir Antony Fisher International Memorial Award for the best-selling book, The Canadian Century. In 2012, the Governor General of Canada on behalf of Her Majesty the Queen, presented Mr. Clemens with the Queen Elizabeth II Diamond Jubilee Medal in recognition of his contributions to the country.
Additional Resources
Listed below are links to other websites and resources where you can learn more about Joseph Schumpeter, his written works, his lectures, and biographies.
Listed below are links to other websites and resources where you can learn more about Joseph Schumpeter, his written works, his lectures, and biographies.
Creative Destruction, Entrepreneurship & Discovery
Based on the work of noted economist Joseph Schumpeter, Russ Sobel explores the different definitions of entrepreneurship.
A History of Joseph Schumpeter
Richard M. Ebeling, BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, writes a brilliant history of Schumpeter’s life and his theories of economics. This piece is published by The Future of Freedom Foundation.
Short Biography
A brief biography of Schumpeter, including his major contributions to economic literature, on the Famous Economists website.
Remembering Joseph Schumpeter
Robert Bradley, Jr., CEO and founder of the Institute for Energy Research, explores and remembers the life and ideas of Schumpeter and their relation to “dynamic market capitalism.” This article is posted on the free market energy blog Master Resource.
History of Schumpeter’s Works
A history of Schumpeter’s works presented by the Schumpeter Center for Innovation and Development, an organization seeking to improve the entrepreneurship environment in West Africa.
Schumpeter and Libertarianism
Published on Libertarianism.org, this article serves partly as a biography and partly as a review of Schumpeter’s ideas understood through a libertarian lens.
Mises Institute Collection
A collection of Schumpeter’s writings and works published by the Mises Institute.
Excerpts from the Foundation of Economic Education
On this page, the FEE has published two important excerpts by Schumpeter: the chapter of Capitalism, Socialism, and Democracy dealing with creative destruction, and a segment from The Sociology of Imperialisms refuting the Marxist claim that capitalism and imperialism are intertwined, arguing instead that capitalism is foundationally anti-imperialist.
The Creative Destruction of Economics
A piece about Schumpeter’s revolutionary mark on economics written by Mark Sagoff, Professor of Philosophy and Senior Fellow of the Institute for Philosophy and Public Policy at George Mason University.
Schumpeter, the Tech Giants, and Monopoly Fatalism
Ryan Bourne, the R. Evan Scharf Chair for the Public Understanding of Economics at the CATO Institute, discusses how Schumpeter’s idea of creative destruction applies to the future of today’s dominant tech companies. This CATO paper is accompanied by a short podcast, linked at the top of the article.
Today’s Schumpeterian Economy
Adam Thierer, a senior research fellow with the Technology Policy Program at the Mercatus Center at George Mason University, describes how today’s economy holds a strong resemblance to the economic world that Schumpeter envisioned.
Creative Destruction, Uber, and the Taxi Industry
Mark J. Perry, an AEI scholar and professor of economics and finance at the University of Michigan, provides a contemporary example of Schumpeterian creative destruction at work.
Schumpeter and the Great Recession
Natasha Piano writes in the University of Chicago blog Pro Market about Schumpeter’s critiques of responses to the Great Depression and how they apply to contemporary responses to the Great Recession.
EconTalks Podcast: Thomas McCraw on Schumpeter
The late Thomas McCraw, biographer of Schumpeter and Harvard University professor, talks about the ideas of Joseph Schumpeter from his 2007 book, Prophet of Innovation: Joseph Schumpeter and Creative Destruction.
Video: What’s the Legacy of Economist Joseph Schumpeter?
In this 2014 video produced by Bloomberg, “Foreign Affairs” Editor Gideon Rose discusses the legacy of Joseph Schumpeter.
Film: The Man Who Discovered Capitalism
This hour-long documentary focuses on the life and ideas of Joseph Schumpeter and how they influence the world today, featuring commentary from some of the world’s leading contemporary economic thinkers. Available on Vimeo, this film can be rented online for CA$5.00.
Essential Scholars is brought to you by
Fraser Institute
Institute for Economic Affairs
Institute of Public Affairs
Foundation for Economic Education
Acknowledgements
Made possible by generous grants from the Lotte and John Hecht Memorial Foundation, the John Templeton Foundation, and the Peter and Joanne Brown Foundation.