After the Depression, Keynes predicted a period of great prosperity in the distant future. Man was slowly becoming more productive, and the economy would continue to grow. The new problem of economics would not be how to find leisure, but how to cope with excess amounts of it. Joseph Schumpeter, a contemporary of Keynes, also acknowledged a growing economy. However, even though both men arose from elite lifestyles, they had dramatically different views of capitalism's future. Schumpeter not only opposed Keynes' views, but was also irked by Keynes the person. Schumpeter felt no need for the government to be an economic priming pump. Instead, he felt in the "short run" (in this case, a century) the economy would continue growing, but in the long run it could not survive.
When Schumpeter was young, his father died, and his mother married a distinguished general. He was then sent to Theresianum, an exclusive aristocratic school, where he gained many of the values that would later affect his economic theories. Schumpeter began his economics education at the University of Vienna, where he was an outstanding student. He soon landed a professorship in an Austrian University where he published The Theory of Economic Development, a "small masterpiece." In it, Schumpeter opens with a depiction of stagnant form a capitalism - one in which accumulation of capital is absent. However, instead of seeing this as the end of capitalism, he saw it as the roots of capitalism. Like Ricardo and Mill, he saw no place for profit in the stagnant economy. The workers would demand their full value, and the capitalists would receive nothing more than their wages as managers.
There still existed the question of where profits came from. Schumpeter answered it simply: "Profits appeared in a static economy when the circular flow failed to follow its routinized course." Thus, the only way to obtain a profit is through innovation. A new innovation would result in widespread profits for the first implementer. However, a slew of imitators would soon appear, each trying to take a piece of the pie. A small economic "boom" would occur as everyone borrowed to update to the innovation. However, profits are soon minimized and some firms may be forced to exit due to poor investments. (The cycle can easily be seen in the movie industry. A hit movie brings about many imitations until the public refuses to buy more tickets.)
Who creates these innovations? Schumpeter called the innovator an entrepreneur, and described his unique position in society. The entrepreneur is not someone that holds a certain transferable job or position. Instead, he is a person with a talent for "perceiving and seizing business advantage." However, he rarely reaps the profits of his endeavors. Though he has motives of obtaining greater economic heights, he creates primarily for the joy of creating.
After publishing The Theory of Economic Development, Schumpeter held a variety of positions. He served on a German industry nationalization commission, as an Austrian finance minister, and a bank president. During this period, he also married, but his wife died during childbirth. Afterwards, he began his serious academic career, serving as a visiting professor in Japan, Germany, and Harvard. While at Harvard, he married Elizabeth Boody, an economist.
In 1939, with the depression in full force, Schumpeter published a thousand page work, Business Cycles. In it he identified three distinct cycles: the short cycle, the seven to eleven year cycle, and the 50 year cycle. The great depression was caused by simultaneous troughs of all three cycles, combined with external factors, such as the Russian revolution. He also noted that the 'faith' needed to sustain the system was waning, thus ushering a decline of the entire economy.
He continued his analysis with 1942's Theory of Capitalist Development. In it, he opened by describing Marx. (As a student, Schumpeter had studied Marx extensively.) While Marx saw the capitalists as glory-minded warriors, Schumpeter stresses their "bourgeois" side. To him, they could be described in terms of a "genesis of lounge suits." Instead, the entrepreneur, a separate breed of person is the key figure in the system.
Schumpeter agreed with Marx that capitalism would fail; however, he differed greatly in explaining the reasons it would fail. To Schumpeter, capitalism may be a great economic success, but it was a sociological failure. The rational capitalist mind-frame leads to its destruction. Innovation is reduced to common practice. The entire bourgeois becomes "infected with the disease of rationalism," and loses faith in itself. The rise in bureaucratization of industry leads to a relaxation of its aggressiveness. Eventually, a planned socialism will result.
However, Schumpeter's prognosis contained some flaws. After growing in size, the multinational corporate giants still retained their competitive, expansionary zeal. Also, faith in capitalism did not continue on a downward cycle - instead, it waxed and waned with the time period. But, his theories still contained some irrefutable logic. Schumpeter saw capitalist development being carried out by a noncapitalist elite. In all societies, the 'elites' are the driving force. The military giant would lead a feudal society, while an economic whiz would take the reigns in a capitalist world. Thus, it is impossible for the "workers of the world [to] unite," and take over as leaders because they fail to lie in the upper strata that has the intellect to lead.
Schumpeter's theories spread outside the traditional economic realms, but provided great insight into the world. To him, all analytical work was biased, based on the analyzer's previous experiences and values. Thus, because of biases, economics more closely resembled a "visionary science" than a totally objective analysis. Similarly, Schumpeter's own values were reflected in his analysis. He was brought up in the aristocracy, and in turn, acknowledge an economic aristocracy - an aristocracy of talent. It's up to history to decide whether Schumpeter achieved his goal of becoming a great economist. However, his visions in and out of the economic field will be acknowledged for ages.
- Jeremy Hubble 5/16/92