Before you read on: what did Schumpeter see as the main force driving capitalism forward?
Schumpeter put the entrepreneur and innovation at the heart of capitalism. He doubted that many small firms, each too small to affect the price, drove progress.
- Lived
- Born 8 February 1883 in Triesch, Moravia (now Třešť, Czech Republic); died 8 January 1950 in the United States
- Nationality
- Austrian, born in Moravia, then part of Austria-Hungary; a US citizen from 1939
- Work
- Taught at Czernowitz and Graz; Austrian finance minister in 1919; president of a private bank that failed in 1924; professor at Bonn 1925 to 1932; Harvard from 1932
- Key works
- The Theory of Economic Development (1911 in German; in English 1934), Business Cycles (1939), Capitalism, Socialism and Democracy (1942), History of Economic Analysis (published after his death, 1954)
- School
- Studied under the Austrian school's Eugen von Böhm-Bawerk and Friedrich von Wieser; never built a lasting school of his own
What Schumpeter was reacting to
The economics Schumpeter learned pictured an economy settling into balance, or equilibrium. In his starting model, which he called the circular flow, the same goods are made in the same way year after year.
Schumpeter admired this theory, and named Léon Walras, its great builder, the greatest economist of all. He thought it left out change, which he saw as the most important thing about capitalism. In his account, change comes from innovation carried out by entrepreneurs.
Schumpeter's key ideas
Can you name Schumpeter's four key ideas?
The person who puts a new idea into practice, such as a new good, a new method of production, a new market or a new way of organising a business. Schumpeter separated invention, having an idea, from innovation, putting it to use.
Can you think of an example?
An inventor designs a better battery. The entrepreneur raises the money, builds the factory and gets it into shops. Only the second step is innovation.
The process by which innovation makes older products, skills, firms and industries obsolete while creating new ones. Schumpeter saw it as the essential fact about capitalism.
Can you think of an example?
Music downloads made the compact disc lose its appeal. Digital photography and then the smartphone pushed aside Polaroid's instant camera.
Schumpeter argued that booms and slumps come from innovation. New ventures are financed by fresh bank credit and arrive in bunches, driving a boom. When the wave passes, growth slows while the economy adjusts.
Can you think of an example?
New firms using a new technology, funded by bank loans, lift output and jobs. When the new products are in place, growth slows until the next wave.
In 1942 Schumpeter predicted that capitalism would give way to some form of socialism, by which he meant control of production by a public authority. He thought its success would undo it: big firms would turn innovation into routine work for teams of specialists, making the entrepreneur redundant, and prosperity would breed a class of intellectuals hostile to it.
Can you think of an example?
A richer society can afford a large class of writers, academics and commentators. On Schumpeter's account, many earn their living attacking the system that pays them.