Schumpeterian Theory Of Creative Destruction Book

Schumpeterian theory of creative destruction book

He was born in Moravia, and briefly served as Finance Minister of Austria in In , he became a professor at Harvard University where he remained until the end of his career, eventually obtaining U.

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Schumpeter was one of the most influential economists of the 20th century, and popularized the term " creative destruction " in economics.

Both of his grandmothers were Czech. In , after some study trips, he became a professor of economics and government at the University of Czernowitz. He proposed a capital levy as a way to tackle the war debt and opposed the socialization of the Alpine Mountain plant.

He was also a board member at the Kaufmann Bank. Problems at those banks left Schumpeter in debt. His resignation was a condition of the takeover of the Biedermann Bank in September From to , Schumpeter held a chair at the University of Bonn , Germany.

He lectured at Harvard in — and In , he was a visiting professor at The Tokyo College of Commerce. In , Schumpeter moved to the United States , and soon began what would become extensive efforts to help central European economist colleagues displaced by Nazism. At Harvard, Schumpeter was considered a memorable character, erudite and even showy in the classroom. He became known for his heavy teaching load and his personal and painstaking interest in his students.

Explaining Creative Destruction

He served as the faculty advisor of the Graduate Economics Club and organized private seminars and discussion groups. However, the Schumpeters persevered, and in published what became the most popular of all his works, Capitalism, Socialism and Democracy , reprinted many times and in many languages in the following decades, as well as cited thousands of times.

The source of Joseph Schumpeter's dynamic, change-oriented, and innovation-based economics was the Historical School of economics.

Schumpeterian theory of creative destruction book

Although his writings could be critical of the School, Schumpeter's work on the role of innovation and entrepreneurship can be seen as a continuation of ideas originated by the Historical School, especially the work of Gustav von Schmoller and Werner Sombart. According to Christopher Freeman , a scholar who devoted much time researching Schumpeter's work: "the central point of his whole life work [is]: that capitalism can only be understood as an evolutionary process of continuous innovation and ' creative destruction '".

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Schumpeter's scholarship is apparent in his posthumous History of Economic Analysis , [22] although some of his judgments seem idiosyncratic and sometimes cavalier [ according to whom? Then they could argue that one caused the other in a simple monotonic fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model. In this book, Joseph Schumpeter recognized the implication of a gold monetary standard compared to a fiat monetary standard.

In History of Economic Analysis , Schumpeter stated the following: "An 'automatic' gold currency is part and parcel of a laissez-faire and free-trade economy. It links every nation's money rates and price levels with the money-rates and price levels of all the other nations that are 'on gold.

This is the reason why gold is so unpopular now and also why it was so popular in a bourgeois era. Schumpeter's relationships with the ideas of other economists were quite complex in his most important contributions to economic analysis — the theory of business cycles and development. Following neither Walras nor Keynes, Schumpeter starts in The Theory of Economic Development [25] with a treatise of circular flow which, excluding any innovations and innovative activities, leads to a stationary state.

The stationary state is, according to Schumpeter, described by Walrasian equilibrium. The hero of his story is the entrepreneur. The entrepreneur disturbs this equilibrium and is the prime cause of economic development, which proceeds in cyclic fashion along several time scales.

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In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the Russian Nikolai Kondratiev 's ideas on year cycles, Kondratiev waves. Schumpeter suggested a model in which the four main cycles, Kondratiev 54 years , Kuznets 18 years , Juglar 9 years and Kitchin about 4 years can be added together to form a composite waveform. Actually there was considerable professional rivalry between Schumpeter and Kuznets.

The wave form suggested here did not include the Kuznets Cycle simply because Schumpeter did not recognize it as a valid cycle. A Kondratiev wave could consist of three lower degree Kuznets waves.

Similarly two or three Kitchin waves could form a higher degree Juglar wave.

Schumpeter’s Theory of Economic Development | Economics

If each of these were in phase, more importantly if the downward arc of each was simultaneous so that the nadir of each was coincident, it would explain disastrous slumps and consequent depressions. As far as the segmentation of the Kondratiev Wave, Schumpeter never proposed such a fixed model.

He saw these cycles varying in time — although in a tight time frame by coincidence — and for each to serve a specific purpose.

In Schumpeter's theory, Walrasian equilibrium is not adequate to capture the key mechanisms of economic development.

Creative Destruction

Schumpeter also thought that the institution enabling the entrepreneur to buy the resources needed to realize his vision was a well-developed capitalist financial system, including a whole range of institutions for granting credit. One could divide economists among 1 those who emphasized "real" analysis and regarded money as merely a "veil" and 2 those who thought monetary institutions are important and money could be a separate driving force.

Both Schumpeter and Keynes were among the latter. Schumpeter's most popular book in English is probably Capitalism, Socialism and Democracy. While he agrees with Karl Marx that capitalism will collapse and be replaced by socialism , Schumpeter predicts a different way this will come about.

While Marx predicted that capitalism would be overthrown by a violent proletarian revolution, which actually occurred in the least capitalist countries, Schumpeter believed that capitalism would gradually weaken by itself and eventually collapse.

Specifically, the success of capitalism would lead to corporatism and to values hostile to capitalism, especially among intellectuals. Intellectuals tend to have a negative outlook of capitalism, even while relying on it for prestige, because their professions rely on antagonism toward it.

The growing number of people with higher education is a great advantage of capitalism, according to Schumpeter. Yet, unemployment and a lack of fulfilling work will cause intellectual critique, discontent and protests.

Schumpeterian theory of creative destruction book

Parliaments will increasingly elect social democratic parties, and democratic majorities will vote for restrictions on entrepreneurship. Increasing workers' self-management , industrial democracy and regulatory institutions would evolve non-politically into " liberal capitalism ". Thus, the intellectual and social climate needed for thriving entrepreneurship will be replaced by some form of " laborism ". This will exacerbate " creative destruction " a borrowed phrase to denote an endogenous replacement of old ways of doing things by new ways , which will ultimately undermine and destroy the capitalist structure.

Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy. In the same book, Schumpeter expounded a theory of democracy which sought to challenge what he called the "classical doctrine". He disputed the idea that democracy was a process by which the electorate identified the common good, and politicians carried this out for them.

He argued this was unrealistic, and that people's ignorance and superficiality meant that in fact they were largely manipulated by politicians, who set the agenda. Furthermore, he claimed that even if the common good was possible to find, it would still not make clear the means needed to reach its end, since citizens do not have the requisite knowledge to design government policy.

Instead he advocated a minimalist model, much influenced by Max Weber , whereby democracy is the mechanism for competition between leaders, much like a market structure. Although periodic votes by the general public legitimize governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role for individuals is usually severely limited. Schumpeter defined democracy as the method by which people elected representatives in competitive elections to carry out their will.

Schumpeter's view of democracy has been described as "elitist", as he criticizes the rationality and knowledge of voters, and expresses a preference for politicians taking decisions.

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Schumpeter was probably the first scholar to theorize about entrepreneurship , and the field owed much to his contributions. In Mark I, Schumpeter argued that the innovation and technological change of a nation come from the entrepreneurs, or wild spirits.

He coined the word Unternehmergeist , German for "entrepreneur-spirit", and asserted that " Schumpeter developed Mark II while a professor at Harvard. Many social economists and popular authors of the day argued that large businesses had a negative effect on the standard of living of ordinary people. Contrary to this prevailing opinion, Schumpeter argued that the agents that drive innovation and the economy are large companies which have the capital to invest in research and development of new products and services and to deliver them to customers more cheaply, thus raising their standard of living.

In one of his seminal works, Capitalism, Socialism and Democracy , Schumpeter wrote:.

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As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the door of the large concerns — which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector — and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down.

Schumpeter was the most influential thinker to argue that long cycles are caused by innovation, and are an incident of it. His treatise on business cycles developed were based on Kondratiev's ideas which attributed the causes very differently. Schumpeter's treatise brought Kondratiev's ideas to the attention of English-speaking economists. Kondratiev fused important elements that Schumpeter missed. Yet, the Schumpeterian variant of long-cycles hypothesis, stressing the initiating role of innovations, commands the widest attention today.

Schumpeterian theory of creative destruction book

Fluctuations in innovation cause fluctuation in investment and those cause cycles in economic growth. Schumpeter sees innovations as clustering around certain points in time periods that he refers to as "neighborhoods of equilibrium", when entrepreneurs perceive that risk and returns warrant innovative commitments.

These clusters lead to long cycles by generating periods of acceleration in aggregate growth.

Schumpeterian theory of creative destruction book

The technological view of change needs to demonstrate that changes in the rate of innovation governs changes in the rate of new investments, and that the combined impact of innovation clusters takes the form of fluctuation in aggregate output or employment. The process of technological innovation involves extremely complex relations among a set of key variables: inventions, innovations, diffusion paths and investment activities.

The impact of technological innovation on aggregate output is mediated through a succession of relationships that have yet to be explored systematically in the context of long wave. New inventions are typically primitive, their performance is usually poorer than existing technologies and the cost of their production is high.

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A production technology may not yet exist, as is often the case in major chemical inventions, pharmaceutical inventions.

The speed with which inventions are transformed into innovations and diffused depends on actual and expected trajectory of performance improvement and cost reduction.

Creative destruction

Schumpeter identified innovation as the critical dimension of economic change. These temporary monopolies were necessary to provide the incentive for firms to develop new products and processes. He was married three times.

His best man at his wedding was his friend and Austrian jurist Hans Kelsen. His second was Anna Reisinger, 20 years his junior and daughter of the concierge of the apartment where he grew up.

Joseph Schumpeter

As a divorced man, he and his bride converted to Lutheranism in order to marry. The loss of his wife and newborn son came only weeks after Schumpeter's mother had died. In , Schumpeter married the American economic historian Elizabeth Boody, who helped him popularize his work and edited what became their magnum opus, the posthumously published History of Economic Analysis.

Schumpeter claimed that he had set himself three goals in life: to be the greatest economist in the world, to be the best horseman in all of Austria and the greatest lover in all of Vienna. He said he had reached two of his goals, but he never said which two, [53] [54] although he is reported to have said that there were too many fine horsemen in Austria for him to succeed in all his aspirations. Schumpeter died in his home in Taconic , Connecticut, at the age of 66, on the night of 7 January For some time after his death, Schumpeter's views were most influential among various heterodox economists , especially European, who were interested in industrial organization, evolutionary theory , and economic development, and who tended to be on the other end of the political spectrum from Schumpeter and were also often influenced by Keynes, Karl Marx, and Thorstein Veblen.