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