In the Schumpeter Wing

Joseph Schumpeter died in 1950, a few weeks before his sixty-seventh birthday, and since then, his reputation as a sage has been appreciating almost constantly, at least outside of economics.

First there was Robert Heilbroner’s The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers. When the book appeared in 1953, Schumpeter had the last chapter to himself, with Heilbroner amplifying the economist’s famous 1942 judgment, in Capitalism, Socialism and Democracy:  “Can capitalism survive? No. I do not think it can.” John Kenneth Galbraith elaborated the Schumpeterian view that the future would consist mainly of bureaucratic planning and administration with The New Industrial State in 1967.

In the 1960s, too, historian Alfred D. Chandler Jr. published Strategy and Structure: Chapters in the History of the American Industrial Enterprise.  His masterly case studies of the rise of General Motors, Dupont, Standard Oil and Sears, Roebuck mentioned Schumpeter once in passing, but the angle of vision was unmistakably the same. Harvard Business School soon called Chandler to teach, and there he turned out such classics of business history as The Visible Hand: The Managerial Revolution in American Business and Scale and Scope. Harvard sociologist Daniel Bell took up the cudgels next, with The Coming of Post-Industrial Society.  In Shifting Involvements: Private Interests and Public Action, Albert Hirschman, of the Institute for Advanced Study, in Princeton, gave him a sly boost as well

On the centenary of Schumpeter’s birth, business guru Peter Drucker wrote him up as being essentially superior to Keynes, in a widely-remarked cover story in Forbes magazine. Both men had been born in 1883, Drucker noted; a hundred years later, Schumpeter, with his emphasis on an innovating, ever-changing economy, had turned out to be right, he argued; it was the stagnationist Keynes who got his ultimate diagnosis wrong.  A scholarly biography by economic sociologist Richard Swedberg followed in 1991.

Now, nearly 60 years after his death, a full-bore biography by a professional historian has arrived, tending to endorse Drucker’s earlier judgment and to expand upon it considerably. Prophet of Innovation: Joseph Schumpeter and Creative Destruction, by Thomas C. McCraw, rescues the great man from playground battles over the role of the public sector in either slackening or quickening the rate of economic growth (or both) and places him on a plane where he truly can be compared as a public figure to his rival. Robert Skidelsky’s three-volume biography of Keynes (Hopes Betrayed, The Economist as Savior, Fighting for Freedom) tips the scale at close to ten pounds and some two thousand pages. But McCraw, with nearly 700 pages of his own, makes a plausible case that the Austrian savant was in touch with some pretty ultimate truths, too.

There are at several reasons this book will be widely read.  McCraw, winner of a Pulitzer Prize for his 1984 book, Prophets of Regulation: Charles Francis Adam, Louis D. Brandeis, James M. Landis and Alfred E. Kahn, frames his narrative confidently and writes beautifully, with all the charm and assurance of a celebrated lecturer at the Harvard Business School whose courses in business history have been among the schools most popular electives for many years. The ample resources of the Harvard University Press are behind the book as well.

And no one will ever follow the great man more carefully through the intricacies of his career: from the University of Vienna, where he read Marx and studied under Eugene Boehm-Bawerk; to the University of Czernowitz, where he fought a duel with the school librarian over students’ right to borrowing privileges (he won); to the University of Graz, from which he sallied forth to lecture in English at Columbia University in 1913. The Great War interrupted his career, but he remained on the sidelines; afterwards he served a disastrous term as finance minister of the new Austrian Republic, and another, even more calamitous appointment as chairman of the Beidermann Bank.  In 1925, he repaired to a professorship at Bonn, visited Harvard first in 1927, then moved there altogether in 1932.  There he remained there until he died in 1950, though for a time he hoped for an offer from The Institute for Advanced Study, where von Neumann, Einstein and Goedel had been hired, and agonized over an invitation from Yale.

Then, too, Schumpeter’s personal life is highly interesting. An only child, he was born and educated in the dying light of the old Austro-Hungarian Empire. His father, a textile manufacturer, was killed in an apparent hunting accident when he was four; his mother, a strong and magnetic woman, remarried when he was ten — to a three-star Austrian general thirty years her senior. Perhaps that was all that was needed to turn her son, an only child, into a womanizer of the first rank. Just as Sylvia Nasar found a wide audience for her life of John Nash by framing A Beautiful Mind as a love story, so McCraw has delivered something of a page-turner by emphasizing the extent to which Schumpeter depended on the women in his life to buttress his self-image, which was never very strong. When his mother and beloved second wife died within a few weeks of one another in 1926 (when he is 43), he turned them into personal saints, whom he regularly addressed in his journals ever after as die Hasen, meaning, literally, rabbits, or, more likely, little pets. Die Ewig Weibliche, the Eternal Feminine, was never more in evidence than when he turned to his diary after giving his presidential Address to the American Economic Association, in 1948: 

“The might of the Hasen stood out gloriously.  Thank you, Hasen, for supporting me and for one of the richest presents.  Everyone rose for my presidential address. The whole of the Cleveland ballroom audience rose and gave me applause. That was not poor and that was not small. And yet so undeserved. Thank you Hasen.  O give me the strength, O Gott and Hasen.  And let me slowly get accustomed to the idea of a voluntary [accepting] death. Should I say, help me to a voluntary death.? O Gott and Hasen thank you. Bless 1949 if you want to. Not much more than a year can I expect.”

(Fifty-three weeks later he died, whereupon his third wife, the admirable Elizabeth Boody Schumpeter, labored over the manuscript of his last book, A History of Economic  Analysis, until it was finally published in 1954..)

Best of all. McCraw is an extremely good interpreter of Schumpeter’s published work, which, in fact, not many people have read in anything resembling its entirety. For instance, I have struggled through most of Capitalism, Socialism and Democracy, which Schumpeter correctly refers to in his journal as his “book of essays.”  It is a thoroughly dated book, enlivened mainly by three sparkling chapters on the inner nature of capitalism near the beginning. But I am one of many students who in the post-World War II generation had never so much as opened Schumpeter’s 1939 two-volume opus, Business Cycles,  a book that arrived stillborn, three years after Keynes’ General Theory of Employment, Interest and Money

It turns out, though, that Business Cycles is not about business cycles nearly so much as it is about growth. Beneath an extensive crust of temporizing about highly predictable historical waves — “Barring very few cases in which difficulties arise, it is possible to count off, historically as well as statistically, six Juglars [8-10 year cycles] to a Kondratieff [50-60 years] and three Kitchins [40 months] to a Juglar” — there is a lengthy and systematic comparison of the rise of the business systems of Germany, Great Britain and the United States. The wave theory was written off quickly enough by economists as “Pythagorean moonshine,” in young Paul Samuelson’s phrase. But its powerful narrative sections — its history of the textile industry, of “railroadization,” and electrification, says McCraw, “presaged the emergence of modern, rigorous business history — a new academic sub-discipline.” Nor, perhaps, should this be surprising from the man who wrote in 1911, in The Theory of Economic Development, “The spontaneity of [human] wants is small. [It is] the producer who as a rule initiated economic change., and consumers are educated by him, if necessary; they are, as it were, taught to want new things….”  But the fact is that Schumpeter’s point was largely lost.

McGraw identifies Schumpeter’s two main claims on our attention. “[He] is the chief proponent and popularizer of the word ‘entrepreneur,’ which appeared in the 1934 English edition of his Theory of Economic Development. (In the original German edition of 1911, he had used the German unternehmer, which never caught on, partly because its literal meaning is ‘undertaker.’) Because of the importance of entrepreneurship, and because Schumpeter wrote about it with such insight and verve, his name will forever be linked with the idea.” (Interestingly enough, the word appears but once in Drucker’s essay. Instead “dynamic disequilibrium,” “structural change,” “innovation,” “productivity” and “technological change” do the heavy lifting there.) The other catchphrase, of course, is “creative destruction.”  Schumpeter coined the term in 1942, McCraw relates, “to describe how innovative capitalist products and methods continually displace old ones. He gave abundant examples.  The factory wiped out the blacksmith shop. The car superseded the horse and buggy, and the corporation overthrew the proprietorship. ‘Creative destruction is the essential fact about capitalism,’ he wrote. ‘Stabilized capitalism is a contradiction in terms.’”   

To make his tale come out well, McCraw finds that, more or less at the last moment, Schumpeter abandoned his life-long quest for an “exact economics” in order to be redeemed by history.  From the marginalism of his first book, The Nature and Content of Theoretical Economics, to the empiricism of his participation in the founding of the Econometric Society in 1933, to the meglocyclomania of Business Cycles, to the back-handed certainties of Capitalism, Socialism and Democracy, Schumpeter had shared the economists’ dream — a rigorous theory with which to predict the future. As late as 1946, he was still trying to learn enough mathematics to be able to set his ideas in the formal style that had overtaken the field.

But in commencing work on A History of Economic Analysis, he unwittingly “entered a new intellectual phase,” McCraw says — one in which he would argue that a “principle of indeterminacy” was at work in human affairs, such that the creative responses of specific individuals to changing circumstances could never be wholly anticipated. “Where he was headed now, mathematics was unlikely to follow.” What was needed now was history, and plenty of it, Schumpeter argued, historical case studies designed to address specific standard questions. In his comments on a research plan that led to the creation of the Center for Research in Entrepreneurial History at Harvard, he wrote that such a project could result “in a new wing being added to the economist’s house.”

And so it has.  Business history is the enterprise in which McCraw, Alfred Chandler, and many other researchers have spent their lives, to extremely good effect. McCraw’s biography of Schumpeter is only the latest efflorescence from the Harvard Business School. Richard Vietor’s How Countries Compete: Strategy, Structure and Government in the Global Economy has just appeared; Richard Tedlow’s biography of Intel’s Andy Grove appeared last year. Chandler himself has produced narratives of the development of the consumer electronics and pharmaceutical industries in the last few years, although he is pressing ninety. Nor is IT only the Harvard Business School that produces first-rate history in this vein. Indeed, Pudue’s Jonathan Hughes’ 1965 The Vital Few, reissued in 1985, by which time he was at Northwestern University,  communicates a better sense of the varieties of entrepreneurial activity than anything that Joseph Schumpeter ever wrote.

At this point I probably should acknowledge that I have a foot planted firmly in the other camp — the wing of the economists. The flip side of all that literary expression by Schumpeter is that you can get out of him almost anything that you wish. In Knowledge and the Wealth of Nations: A Story of Economic Discovery, I argue that a clearer view of economic growth can be obtained today through the use of formal methods. Creative destruction is often now matter-of-factly described as “churn” or “turbulence,” its extent and costs and benefits measured through the Census Bureau’s Longitudinal Employer-Household Dynamics Program. The study of markets and hierarchies has been largely overhauled by the likes of Michael Jensen, Oliver Williamson and their many students. Our view of the economics of knowledge has been transformed by Paul Romer. So I am somewhat embarrassed to be going on, uninvited, about the great merit of business history in general, and of a definitive biography of Schumpeter in particular.

Indeed, it is the pedagogy that seems to me the greatest contribution of the group that formed around Chandler, McCraw and the others at the Harvard Business School. A course known as “The Coming of Managerial Capitalism” has been taught there one way or another since the 1920s as an elective. In the 1960s and 1970s, it attracted between twenty and forty students a year.  After Chandler reformulated it in the 1980s, and, with McCraw, Nancy Koehn and others teaching it, between 300 and 400 students regularly enrolled. More’s the pity, then, that when Harvard University president Derek Bok sought to persuade Chandler to teach the course to Harvard College students across the Charles River, business school dean John McArthur quietly stalled the plan.

The result is that introductory economics, with its analytic bent, remains the single most popular course in the college, completely uncontested by a more plausible account of the path to the present day. History is too important to leave to schools of business, much less to economics departments.