About:
The year 1883 portends changes in perspective for economic philosophy: Marx dies, and Keynes and Schumpeter are born. Born in Morovia and studying at the University of Vienna, Schumpeter’s life included work in government, industry, and academia. While not very successful as a minister of finance or bank president, Schumpeter has been lauded in one movie as Schumpeter: the Man Who Discovered Capitalism. His ideas on capitalism and financing are often juxtaposed with Marx and Keynes. In a 1928 article, “The Instability of Capitalism”, published in The Economic Journal, the official publication of the royal society of economics, Schumpeter predicted that that three aspects of capitalism create the conditions for its own demise (creative destruction).
- Private property, which provides access to capital through financing or loans
- Production for private exchange, which relates to free market (capitalist) economies where private individuals can own and trade all economic resources
- Credit. Schumpeter distinguishes between credit for production and consumption; credit for consumption is destabilizing. Schumpeter notes that capitalism is the only system that has all three components.
While at the time, John Maynard Keynes’ ideas overshadowed Schumpeter’s theories; however, Schumpeter is now considered one of the premiere economic thinkers of the 20th century.
Influential Books and Other Writings:
Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process (1939)
Capitalism, Socialism, and Democracy (1942)
Key Concepts:
Creative destruction—capitalism will eventually destroy itself through through its own success, notably through boom/bust cycles as well as the monopolistic tendency of capitalism
Entrepreneurs and innovation—individuals/entrepreneurs drive innovation. Innovations generate surplus (profit) for new businesses. These innovations disrupt preexisting processes, thus causing s0me existing businesses to fail. Failed businesses’ assets are snapped up by the entrepreneurs. And the cycle continues.
Methodic economic growth—long business cycles are temporarily disrupted when entrepreneurs/innovation changes how business is conducted.