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Ambivalent Prophet of Capitalism

Prophet of Innovation: Joseph Schumpeter and Creative Destruction, Thomas K. McCraw, Belknap/Harvard University Press, 719 pages

When the Harvard economist Joseph Schumpeter was writing what would become his best-known work, Capitalism, Socialism, and Democracy, in the 1930s, capitalism appeared to be living on borrowed time. Already in 1921, the one-time muckraker Lincoln Steffens had spoken for advanced opinion in saying, after returning from a trip to the USSR, “I have been over into the future, and it works.” The worldwide depression of the next decade seemed to prove the point. Capitalism was due for the dustbin; the future belonged to socialism, just as Marx had predicted. Even John Maynard Keynes, by his own lights a defender of capitalism, agreed that it was an economic system grown old and feeble, in need of managed care. His was a vision of “capitalism in the oxygen tent,” as Schumpeter put it.


On the surface, Capitalism, Socialism, and Democracy might seem inspired by the dour spirit of the times. Schumpeter began the second section of his book by asking, “Can capitalism survive?” and promptly answered, “No. I do not think it can.” That was what he wrote, but it wasn’t what he meant. Capitalism, Socialism, and Democracy is a book rich in deliberate irony—Schumpeter’s reaction to the monolithic pessimism of Keynesianism and socialism. Not that he was at all sure that capitalism would indeed survive. He was quite serious in those passages of the book that warned of capitalism’s suicidal tendencies—its creation of a hostile class of intellectuals and its corrosive effects on its own pre-capitalist foundations, especially the family. But as an economic system, capitalism still outstripped its rivals, and Schumpeter explained why—because of a never-ending process he called “creative destruction.”


Today the phrase has become a much-abused cliché. Neoconservative journalist Michael Ledeen appropriated the term for his description of the destruction of Arab lives and cities in order to create a compliant and democratic Middle East. Seismographers might register the late economist’s reaction to this on the Richter scale as he spins in his grave. War was the last thing Schumpeter would have endorsed: he had seen the Austro-Hungarian Empire, the milieu of his youth and early manhood, sundered by an earlier democratist crusade. Nor did Schumpeter—who hated Hitler and did all he could to help displaced Jewish and socialist scholars—later celebrate the Allies’ tactic of “area bombing” in World War II. Biographer Thomas McCraw quotes Schumpeter’s diary on this point: “Headline: ‘Every Jap City to be wiped out.’ Another headline: ‘Miles of Ruin.’ And no voice even of decent regret—they gloat over it…”


There was nothing creative about that destruction. What Schumpeter had in mind was very different: the ultimate failure of any attempt to build a business empire without end. Not only most startups, but all firms sooner or later—and usually sooner—are destroyed by competitors who avail themselves of innovative technologies and production methods. This constant process of economic revolution was the product of a special kind of man, not just the businessman or even the inventor, but the entrepreneur, a man of initiative and imagination (though crucially, and contrary to Marx, the capital he risks is not his own). As Schumpeter explained, an extensive system of credit is indispensable to entrepreneurism and hence capitalism.


“Creative destruction” had nothing to do with bombs or even bulldozers: Schumpeter was an old European as well as a theorist of capitalism. He had no intention of sacrificing beauty to progress. Henry Regnery, who was once a graduate student of Schumpeter’s, recalled that in a discussion of whether socialism was more productive than capitalism, Schumpeter replied, “It all depends on what you want. If I had the choice, I would take the society that produced the cathedral at Chartres.” By his own account, Schumpeter was a conservative, and he subscribed to a kind of conservatism that meant, in his words, “the bringing about of transitions from your social structure to other social structures with a minimum of loss of human values.”


Threaded with ambivalence, contradiction, and irony, Schumpeter’s work was never salesmanship. A thinker as multifaceted as Schumpeter demands much of a biographer, and in Prophet of Innovation: Joseph Schumpeter and Creative Destruction, Thomas McCraw delivers. He is himself a professor at Harvard, in the business school—as McCraw points out, Schumpeter is nowadays more admired among business faculty than in economics departments—and he is a Pulitzer Prize winner for his 1984 book, Prophets of Regulation. He’s well-equipped to elucidate Schumpeter’s thought, though McCraw is more supportive of government intervention in the market than Schumpeter ever was. As a student in Vienna, Schumpeter had studied, alongside Ludwig von Mises, under Eugen von Böhm-Bawerk. Although not nearly as uncompromising in defense of laissez-faire as Mises and Böhm-Bawerk, Schumpeter loathed the New Deal, and it is hard to imagine him writing as fondly as does McCraw of the Securities and Exchange Commission. But McCraw is careful not to let his differences with his subject intrude too much into what is, in fact, an exemplary biography.


A 700-page biography an economist might not sound very enticing. But McCraw not only excels at conveying the innovation and excitement in Schumpeter’s work, he keeps readers riveted to the story of the economist’s life, and some of twists are almost novelistic. As a young professor Schumpeter fought—and won—a fencing duel with the librarian of the University of Czernowitz to win greater borrowing privileges for his students. He styled himself an aristocratic raconteur and was known to boast that he intended to become the world’s greatest economist, lover, and horseman. Although he was never a very good rider, he came close to living up to his other ambitions: not only was he one of the world’s most famous economists during his lifetime (second only to Keynes), his prowess in amorous affairs was sufficiently remarkable that an ex-girlfriend once wrote to ask him for advice she might give to her inexperienced husband to make him a better bedmate. Women found Schumpeter magnetic, and the feeling was mutual. When he looked back late in life on distractions that had hampered his work, “Women” topped the list.


Yet McCraw sensitively illustrates the ways in which five women were, far from impediments, the forces that impelled Schumpeter to his success. There was first of all his beloved mother, Johanna, who not only sent him to Vienna’s best schools despite her meager means (his father had died when Schumpeter was a small boy), but also married into petty nobility to advance him socially. Social advancement also played a role in Schumpeter’s first marriage to a well-connected Englishwoman Gladys Ricard Seaver, a dozen years his senior. His years with her were bohemian—“neither he nor Gladys put much restraint on their libidinous impulses,” McCraw reports. World War I quite literally drove them apart: she had been visiting England when war broke out and found it impossible to reunite with him in Austria. As correspondence became unreliable, their practical separation became a virtual divorce.


Over time, Schumpeter fell in love with the woman who would become his second wife, and, next to his mother, mean the most to him in life—Annie Reisinger, the daughter of his concierge. When she died in childbirth less than a year after they were married, and just weeks after his mother had died, Schumpeter plunged into a depression that would last, with only periodic reprieves, for the rest of his life. He maintained his outward pose as a charming boulevardier, but in his diary he expressed almost constant despair and a truly religious devotion to the ghosts of his mother and wife. After their deaths, he felt all he had left was his work.


But Schumpeter was wrong, even if he did not realize it at the time. His young secretary, Mia Stöckel, was a source of solace and companionship, and it was she who tended Annie Schumpeter’s grave during Joseph’s sojourns to America. After he relocated to the States permanently, he eventually married again, this time to one Elizabeth Boody Firuski, an able economist in her own right and a better mathematician than her husband to boot. (All his life, Schumpeter sought to further integrate mathematics and economics, but his own mathematical skills were not adequate for the task.) Elizabeth’s self-sacrificing commitment to Schumpeter made his years with her the most productive of his career. Still, no one could replace Annie, whose picture Schumpeter kept by his bedside even after he married Elizabeth.


McCraw treads lightly around anything that smacks of psychoanalysis, which is one of the virtues of his book. But he doesn’t overlook the obvious correlations between Schumpeter’s life and work. He had seen “creative destruction” first hand in the transformation of Austria-Hungary before World War I, and his own rise from humble origins to fame and esteem testified to the entrepreneurial virtues. Not that everything was so easy for him: in addition to the wreckage of his personal life, he had also suffered setbacks in business and government—for a time after World War I he had been finance minister of Austria, but he was unable to tame the hyperinflation crippling the country.


Even when he was successful, as he certainly was during his Harvard years, Schumpeter’s reputation sometimes exceeded his influence. He was chagrined when his 1939 work, Business Cycles, was eclipsed by Keynes’s General Theory of Employment, Interest, and Money, and even his own graduate students were more interested in his rival’s book, which seemed to provide straightforward solutions for the Great Depression. His students certainly felt his personal influence—and they included several future Nobel laureates, among them Paul Samuelson, James Tobin, and Wassily Leontief—but he never cultivated disciples for a distinctly Schumpeterian school of thought. And ironically, considering his championing of mathematical modeling in economics, today’s econometricians have little use for Schumpeter’s largely historical and sociological works.


Yet in the long run his thought—or at least his catchphrases—won out. The 1990s tech-boom provided textbook examples of creative destruction and entrepreneurial action, and McCraw reports that Schumpeter is now cited more often than Keynes. This is all to the good. But as McCraw’s book shows, Schumpeter’s thought is too nuanced to be reduced to slogans. There’s much more in his work that deserves to be rediscovered, for Schumpeter understood better than most both the workings and the discontents of modern capitalism. There is a depth to his analysis —in his integration of economics, sociology, and history—that is unmatched by anyone in the field today. The economics profession could use more Schumpeters and fewer number-crunchers and Stephen J. Levitts. For now, at least we have this outstanding biography. 

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