Joseph Schumpeter (1883 – 1950)

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Joseph Schumpeter, Harvard Yard

1909: Professor of Economics in Vienna

1909: Professor of Economics in Vienna1919: Brief stint as Minister of Finance

1909: Professor of Economics in Vienna1919: Brief stint as Minister of Finance1920-1924: President of private bank, which

goes bankrupt—as does Schumpeter

1909: Professor of Economics in Vienna1919: Brief stint as Minister of Finance1920-1924: President of private bank, which

goes bankrupt—as does Schumpeter1927: moves to United States; professor at

Harvard

Economics as science (mathematically driven social science)

but continues to insist on historical economics and the cultural dimensions of capitalism

Capitalism on the defense:

Capitalism on the defense:1917: Russian Revolution

Capitalism on the defense:1917: Russian RevolutionGreat Depression: 1929 until 40s

Capitalism on the defense:1917: Russian RevolutionGreat Depression: 1929 until 40sContinuing mass unemployment

US unemployment rate

Capitalism on the defense:1917: Russian RevolutionGreat Depression: 1929 until 40sContinuing mass unemploymentNew Deal: deficit spending

Was capitalist growth until 1914 (WWI) exception?

Was capitalism suffering from inherent weaknesses?

Was capitalist growth until 1914 (WWI) exception?

Was capitalism suffering from inherent weaknesses?

Would it be destroyed from within or without?

Schumpeter:

“Can capitalism survive? No. I do not think it can” (61).

Schumpeter:

“Can capitalism survive? No. I do not think it can” (61).

Can socialism work? Of course it can” (167).

Theories of capitalism’s demise

1. Monopolies form, eliminating competition.

1. Monopolies form, eliminating competition.2. Vanishing investment opportunity. Great

industrial breakthroughs are over.

1. Monopolies form, eliminating competition.2. Vanishing investment opportunity. Great

industrial breakthroughs are over.3. Capitalism needs to conquer new markets

and materials. It may run out of both.

All three are wrong. They underestimate the revolutionary innovations of capitalism.

Schumpeter’s thought experiment

Circular flow economy. Perfect competition forces employers to pay workers the full value of their labor, eliminating profits. Same products are produced in same manner. Capitalism reaches equilibrium and collapses.

Schumpeter’s thought experiment

Circular flow economy. Perfect competition forces employers to pay workers the full value of their labor, eliminating profits. Same products are produced in same manner. Capitalism reaches equilibrium and collapses.

Why has this not happened?

Creative destruction. “Capitalism is by nature a form or method of economic change”

“in dealing with capitalism we are dealing with an evolutionary process [ . . ] a fact which moreover was long ago emphasized by Karl Marx” (82)

Creative destruction. “Capitalism is by nature a form or method of economic change”

“in dealing with capitalism we are dealing with an evolutionary process [ . . ] a fact which moreover was long ago emphasized by Karl Marx” (82)

“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”

Karl Marx, Friedrich EngelsThe bourgeoisie has through its exploitation of the world market given

a cosmopolitan character to production and consumption in every country. To the great chagrin of Reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilised nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations.

Karl Marx, Friedrich EngelsThe bourgeoisie has through its exploitation of the world market given

a cosmopolitan character to production and consumption in every country. To the great chagrin of Reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilised nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations.

Source of creative destruction is entrepreneur

“The function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on.”

“To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type” (132)

“His [the entrepreneur’s] role, though less glamorous than that of medieval warlords, great or small, also is or was just another form of individual leadership acting by virtue of personal force and personal responsibility for success.”

Entrepreneur emerges from the culture (or spirit) of capitalism

What is this culture?

Spirit of capitalism

Rational thinking born from everyday economic tasks: “all logic is derived from the pattern of the economic decision” (123)

Money becomes unit of calculation: accounting and rational cost-profit calculation

Mathematical and scientific world born from the “spirit of rationalist individualism, the spirit generated by rising capitalism”; new “habits of mind”

Capitalist art

Capitalist artDa Vinci: capitalist rationality

Capitalist artDa Vinci: capitalist rationalityExpressionism: liquidation of the object?

Capitalist artDa Vinci: capitalist rationalityExpressionism: liquidation of the object?Capitalism is anti-heroic?

Why is capitalism probably doomed?

Labor movement (abolishes free contracts)

Labor movement (abolishes free contracts)Class war

Labor movement (abolishes free contracts)Class warBureaucracies

Labor movement (abolishes free contracts)Class warBureaucraciesNo support among intellectuals

1979 Margaret Thatcher elected

1979 Margaret Thatcher elected1980 Ronald Reagan elected

Revival of Schumpeter (along with Milton Friedman and Friedrich Hayek) in the eighties, after a period of high inflation

April 13, 2013

Ding Dong the Witch is Dead number 2 in U. K. singles charts

Joseph Schumpeter (1883 – 1950)

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