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His Secret Life

Opening Doors: The Life and Work of Joseph Schumpeter Vol. 1: Europe Vol. 2: America

by Robert Loring Allen
Transaction Publishers, Vol. 2, 348 pp., $69.95 the set

Schumpeter: A Biography

by Richard Swedberg
Princeton University Press, 293 pp., $24.95

My serious studies in economics did not begin until the fall of 1939, my last year at Harvard, when I took a course with Alvin Hansen in which we wrestled with the problem of understanding the incomprehensible Depression that had been devastating the economy for almost a decade. From time to time various professors came to our class and told us why the Depression would go away as soon as one or another problem was removed, usually irresponsible trade union or government policy. From Hansen himself we learned of another view of the Depression, put forward only three years earlier by John Maynard Keynes—a view that envisioned the Depression as an instance of “unemployment equilibrium,” from which there was no rescue except the deliberate use of government spending to supplement the expenditure of the private sector.

Once, as I remember, we were exposed to an even more heretical idea, propounded by a short, dark, dramatic looking man, who, after removing his long cloak with a flourish, told us in heavily accented English: “Chentlemen, a depression iss for capitalism like a good cold douche”—a statement whose shock value lay not only in the unthinkable sentiment that the Depression had its uses, but in the fact that very few of us knew that a douche was the Europeans’ term for a shower.

This was Joseph Alois Schumpeter, already one of the most celebrated, and certainly the most enigmatic, of Harvard’s economists. Nearly all of us became instant Keynesians, but none of us became an instant Schumpeterian. The Theory of Economic Development, Schumpeter’s then best known book, described capitalism in a most peculiar way. It was depicted as being essentially a system where production and distribution followed changeless routines. This static society, entrapped in a “circular flow” (to use Schumpeter’s term), was only brought to life by the activities of entrepreneurs who imparted to it the characteristic dynamism we associate with the capitalist system. I shall discuss later the rationale for such a strange way of depicting capitalism, but it is not difficult to understand that in the climate of the 1930s a view of heroic entrepreneurship did not win converts.

It was not, in fact, until 1942, when Capitalism, Socialism, and Democracy appeared, that many of us took notice. This was a nuanced and complex book, in which entrepreneurs appeared in a tragic as well as heroic light, and in which capitalism, for all its dynamism, was portrayed as a system that would in the end succumb to degeneration and decay. “Can capitalism survive?” Schumpeter asked on page 61: “No. I do not think it can.” A hundred-odd pages later this was followed with: “Can socialism work? Of course it can.”

The shock of these questions and answers was all the greater in that Schumpeter had by then emerged as perhaps the second most important economist of the times—Keynes being incontestably the most famous and influential. After the Theory of Economic Development came a huge, tedious volume on Business Cycles, which did not win the acclaim Schumpeter had hoped for it, but which was nonetheless widely discussed. An unceasing flow of articles and reviews, plus no small amount of cultivation of his colleagues at meetings of the American Economic Association and elsewhere, also boosted his reputation among economists. Thus, although Schumpeter never enjoyed Keynes’s notoriety (which he pretended that he did not mind), he was widely regarded within the profession as a remarkable and original mind. Moreover, his conservative point of view and generally optimistic outlook with respect to capitalism’s future recommended him to those who did not welcome Keynes’s guarded pessimism. For myself, therefore, the dramatic message of Capitalism, Socialism, and Democracy had a special significance. I was then casting around for someone to follow Keynes in the final pages of a book on the history of economic thought. Schumpeter was obviously my man.

There was, however, a difficulty. Apart from a few celebratory essays written after he died, there was little information available about him. Schumpeter therefore came on stage only for a few moments in the first edition of The Worldly Philosophers, to deliver his startling lines. Even in the book’s most recent edition in 1986, by which time Schumpeter had an entire chapter devoted to himself, there was too little known about his life to permit more than a brief sketch. Some of the information, I now know, was not only inadequate, but inaccurate, and the inaccuracy was based on false information that came from Schumpeter himself.

That we now know much more is largely thanks to Professor Robert Loring Allen, who came under Schumpeter’s influence as a student at Harvard in 1947, and who has since performed prodigies of research on him. He has written a two-volume exploration of Schumpeter’s life and work that helps clear up some of the mysteries that have surrounded him. A second biography by the Swedish economic sociologist Richard Swedberg, takes account of Allen’s work in giving its own perceptive view of Schumpeter, and has the advantages of being less than half its length and price.1

For all their value, however, both biographies fail to make clear connections between the elusive private person and the legendary scholar. Even Allen, who probes deeply into this relationship, fails, I think, to demonstrate the ways in which the private Schumpeter—aristocratic poseur, anti-Semite, mystic—is related to the economic theorist. In the opening pages of his Schumpeter, Swedberg writes that “to appreciate Schumpeter’s work, a knowledge of his life is [not] absolutely necessary.” It is true that biographical details often do not add much to our understanding of intellectual work. Schumpeter’s case, however, is unusual. For what is ultimately important about his work is not so much its analysis of economic dynamics as its “vision”—a word that Schumpeter himself made much of in his extraordinary History of Economic Analysis, written at the end of his life.

In every scientific venture,” he wrote,

the thing that comes first is Vision. That is to say, before embarking upon analytic work of any kind we must first single out the set of phenomena we wish to investigate, and acquire “intuitively” a preliminary notion of how they hang together or, in other words, of what appear from our standpoint to be their fundamental properties.2

Schumpeter’s vision is so self-consciously dramatic, so explicitly based on subjective generalizations, that sometimes we feel at a loss to grasp its meaning. It is his previously undisclosed life that helps us here, adding coherence to what is otherwise only a powerful but puzzling social perspective.

The vision is already apparent in Schumpeter’s second book, The Theory of Economic Development, published in 1911, when he was twenty-eight years old and widely celebrated as a Wunderkind. Although it would not be translated into English until 1926, the book made an immediate impression in the German-speaking world because it contained a stunning explanation of an economic problem that had always given the classical and postclassical theorists a difficult time—a nonexploitative explanation of profits.

Here is where the concepts of circular flow and heroic entrepreneurs make their initial appearance. Like many economists before him, Schumpeter describes the economy as tending under the pressure of competition toward a condition in which profits are gradually eliminated. To this he adds the further assumption that the central aspect of life in such an increasingly profitless society will be its domination by routine. It is not a restless search for “maximizing” income that describes the temper of circular flow capitalism, but the overriding pressure of inertia:

All knowledge and habit once acquired becomes as firmly rooted in ourselves as a railway embankment in the earth…. Everything we think, feel, or do often enough becomes automatic, and our conscious life is unburdened of it…. This holds good likewise for economic daily life. 3

Into this stationary system now enters the entrepreneur. He possesses no capital—he will have to borrow the funds he will eventually need; he typically owns no resources, and commands no labor force. His contribution is principally that of intellect and character. Thus the entrepreneur organizes and sets into motion undertakings that create new products and processes. The activity needed to realize these projects brings life and growth to the circular flow. The rewards that accrue from such projects, being outside the previous channels of distribution of such a system, bring to their creator a form of remuneration absent from them—profit.4

Already in the counterpoint between the static circular flow and the entrepreneur we encounter the distinction between Schumpeter the economic theorist and Schumpeter the visionary. From an analytical point of view, the concept of a capitalism based on a circular flow of economic activity without profit has always seemed to me on a par with that of a monarchical society without kings. But there is no denying the power of Schumpeter’s vision of capitalism as a system driven by a creative, disruptive process of innovation. Moreover, his vision also offers us a plausible, if somewhat disquieting explanation of that innovative impulse. It is lodged in one of the “fundamental properties” that figure prominently in Schumpeter’s idea of how social phenomena hang together. This is the uneven distribution of human capacities.

The connection is explicitly stated in a passage from The Theory of Economic Development, in which Schumpeter writes about the range of “aptitudes” in an “ethnically homogeneous population”:

[A] quarter of the population may be so poor in those qualities, let us say here provisionally, of economic initiative that the deficiency makes itself felt by poverty of their moral personality, and they play a wretched part in the smallest affairs of private and professional life in which this element is called for. We recognize this type and know that many of the best clerks, distinguished by devotion to duty, expert knowledge, and exactitude, belong to it.

Then comes the “half,” the “normal.” These prove themselves to be better in the things that even within established channels cannot simply be “dispatched,” but must also be “decided” and “carried out.” Practically all business people belong here, otherwise they would never have attained their positions; most represent a selection—individually or hereditarily tested….

From there, rising in the scale we come finally into the highest quarter, to people who are a type characterized by super-normal qualities of intellect and will. Within this type are not only many varieties (merchants, manufacturers, financiers, etc.) but also a continuous variety of degrees of intensity in “initiative”…. So also the great political leader of every kind and time is a type, not yet a thing unique, but only the apex of a pyramid from which there is a continuous variation down to the average and from it to the subnormal values.5

The entrepreneur now appears in a special light—not merely the agent of a particular task of rearranging society’s inputs, but as a bearer of natural gifts, genetically or racially destined—or at least favored—to prevail. As we shall see, this idea will be a strategic part of Schumpeter’s prognosis for both capitalism and socialism.

  1. 1

    I must add a complaining footnote about various disservices that Allen’s publishers have done to their author. Opening Doors would not be so prohibitively priced had it been published in a single volume, which would also have avoided the maddening problem of consulting an index only printed at the end of Volume 2. Perhaps more important, the two volumes have only the words Opening Doors and the author’s name on the cloth spine, and nothing on the cloth face, so that a browser in the library stacks cannot get the remotest clue as to what the book is about. (The title, incidentally, is meant to suggest Schumpeter’s extraordinary gifts as a teacher.) In addition, the book’s paper jacket advertises other publications of the publisher, but is devoid of any endorsements for the book in question, such as those from Samuelson and Galbraith and Randall Collins that accompany Swedberg’s book.

  2. 2

    Schumpeter History of Economic Analysis (Oxford University Press, 1954), p. 561–562.

  3. 3

    Schumpeter, Theory of Economic Development (Harvard University Press, 1949), p. 84.

  4. 4

    In modern terminology they are “rents”—the rewards of temporary monopolies that will disappear as less innovative businessmen follow in the pioneers’ tracks.

  5. 5

    Theory of Economic Development, pp. 82–83 (slightly edited). Allen has many references to Schumpeter’s fascination with social elites, but does not recognize what I believe to be the central place of elitism in his historical vision. In particular, neither he nor Swedberg perceive the manner in which Schumpeter’s view separates him from Marx and aligns him with Vilfredo Pareto. One of the few who does perceive this theme is the late Austrian economist Eduard März, whose interesting essays on various aspects of Schumpeter’s life and work, have been collected in Joseph Schumpeter: Scholar, Teacher and Politician (Yale University Press, 1991).

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