Born: February 8, 1883, in Triesch, Moravia, Austria-Hungary; Died: January 8, 1950, in Taconic, Connecticut; Austrian; business cycles, economic development, entrepreneurship, evolutionary economics; Major Works: “The Common Sense of Economics” (1933), Theory of Economic Development (1934), Business Cycles (2 vols., 1939), Capitalism, Socialism and Democracy (1942), History of Economic Analysis (1964).
Joseph Schumpeter was an Austrian economist who developed a comprehensive theory about economic growth and business cycles that saw the entrepreneur as a major reason for economic growth and evolution. He was responsible for the term “creative destruction” as a way of describing economic growth. He was also a strong proponent of the use of mathematics in economics. Schumpeter died in 1950.
Joseph A. Schumpeter was born on February 8, 1883, in Triesch, Moravia (now the Czech Republic) in what was then Austria-Hungary. His father owned a factory, but he died while Schumpeter was still very young. Schumpeter would remain very close to his mother throughout the rest of her life. When she remarried, his stepfather was able to send him to a prestigious school, which would prepare him well for attending the University of Vienna.
While there, Schumpeter would study law and economics. He would also spend some time at Cambridge, Oxford, and the London School of Economics. In the area of economics, Schumpeter was a student of two of the leading members of the Austrian School, Friedrich von Weiser and Eugen von Böhm-Bawerk. Despite this, Schumpeter would not develop along the lines of that school choosing instead to follow a more classical line of inquiry in his work.
Upon leaving the University of Vienna, Schumpeter would take up a teaching post at the University of Czernowitz where he would be from 1909 until being offered a position at the University of Graz in 1911 at the age of 28. Schumpeter was the youngest professor in the entire Austro-Hungarian Empire.
In 1912, Schumpeter completed his first major work. His Theory of Economic Development was received to critical acclaim. But it would not receive wide recognition until it was translated into English in 1934. It was in the Theory of Economic Development that he would first address one of the areas that would make him a major figure in twentieth-century economics, the role of the entrepreneur. While entrepreneurs had been a subject of study throughout classical economics, Schumpeter made a clear distinction between the role of the entrepreneur and the role of the manager.
After World War I, the Austro-Hungarian Empire was dismantled. Austria, like its ally Germany, was in dire financial straits. Additionally, the winds of socialism were blowing across much of central Europe. In this climate, Schumpeter was appointed minister of finance for the new Austrian Republic in 1919. Unfortunately, his ideas were not popular and he would leave the post the next year. This was followed by a stint in banking, which was also not successful. In 1925, Schumpeter found himself at a low point. He enthusiastically accepted a position at the University of Bonn, in Germany. While at Bonn, his “Explanation of the Business Cycle” would be published in Economica. This was a precursor to his two-volume work, Business Cycles. That work would be published after he left Bonn in 1932, concerned about the rise of Hitler and the Nazi Party in Germany.
Schumpeter landed in the United States at Harvard. He would stay there until his retirement in 1949. It was at Harvard that the rest of his major works took shape. Business Cycles would be published in 1939. Schumpeter's theory began with a static analysis, assuming a period of stability. However, the stability would be punctuated by periods of upheaval. These booms represented eras of innovation that resulted in fundamental changes in production. Over time, the resulting changes led to periods of dynamic growth that were occasionally punctuated by downturns as the resources of the economy were reallocated. The innovation that caused this instability was generated, to a certain extent, by the entrepreneur working in an environment that allowed innovation to take place.
Schumpeter would follow that work with Capitalism, Socialism and Democracy (1942). It was in this work that two of his most famous ideas would become part of the public discussion. The first was his belief that, despite its superiority, capitalism would eventually be replaced by socialism. The success of capitalism would, in his view, lead to the rise of a large class of intellectuals. These same intellectuals would make their living from attacking the system that made their existence possible. But this work also built on some of his earlier work. The success of capitalism was due, in his view, in large part to the entrepreneur. It was here that second of his famous ideas from this book came into play.
According to Schumpeter, it was the entrepreneur who unleashed what he labeled creative destruction. Creative destruction disrupted the static situation that is represented by the circular flow diagram. This disruption causes the creation of new enterprises and the destruction of the old with resources being reallocated in the process. This was the cause of the underlying dynamism described in Business Cycles. Furthermore, the creative destruction was the connection between the microeconomics we see in studying the firm, and the macroeconomics we see in studying policy. It is the enterprise that creates change, which results in new policies, which change incentives, which lead to new enterprises.
Schumpeter held a number of roles of professional leadership during his career. He was a founding member of the Econometric Society in 1933, president of the American Economic Association in 1948, and chair of the International Economic Association in 1949. During his tenure at Harvard, Schumpeter would be able to count Paul Samuelson, Wassily Leontief, and James Tobin among those he worked with or influenced.
His last major work, History of Economic Analysis, was published by his wife in 1964, 14 years after his death.
Joseph Schumpeter died at his home in Taconic, Connecticut, on January 8, 1950.
See also: Böhm-Bawerk, Eugen von; Friedman, Milton; Hicks, John; Menger, Carl; Pareto, Vilfredo; Samuelson, Paul; Tobin, James; Walras, Leon; Wicksell, Knut; Wieser, Friedrich von
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