Prophet of Innovation

Prophet of Innovation

Thomas K. McCraw
Copyright Date: 2007
Published by: Harvard University Press
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  • Book Info
    Prophet of Innovation
    Book Description:

    The destruction of businesses, fortunes, products, and careers is the price of progress toward a better material life. No one understood this economic principle better than Joseph A. Schumpeter, who made his mark as the prophet of incessant change. Drawing on all of Schumpeter's writings, including many intimate diaries and letters never before used, this biography paints the full portrait of a magnetic figure who aspired to become the world's greatest economist, lover, and horseman-and admitted to failure only with the horses.

    eISBN: 978-0-674-04077-9
    Subjects: History, Economics

Table of Contents

  1. Front Matter
    (pp. I-VI)
  2. Table of Contents
    (pp. VII-VIII)
    (pp. IX-XII)
  4. PART I L’Enfant Terrible, 1883–1926:: Innovation and Economics
    • PROLOGUE: Who He Was and What He Did
      (pp. 3-9)

      Schumpeter first used the phrase creative destruction in 1942, to describe how innovative capitalist products and methods continually displace old ones. He gave abundant examples. The factory wiped out the blacksmith shop, the car superseded the horse and buggy, and the corporation overthrew the proprietorship. “Creative destruction is the essential fact about capitalism,” he wrote. “Stabilized capitalism is a contradiction in terms.”¹

      The notion of creative destruction expresses two clashing ideas, not surprising for someone whose personal life embodied so many paradoxes. Schumpeter epitomized F. Scott Fitzgerald’s test of a first-rate intelligence: the capacity “to hold two opposed ideas in...

    • 1 Leaving Home
      (pp. 10-22)

      The year is 1887. Joseph Schumpeter, whose family calls him Jozsi (YO-shee), is four years old. Since his birth he has lived in the small town where his father’s family operates a textile factory. Everyone in the town knows who Jozsi is. He has no reason to worry about the present or think much about the future.

      But then his father dies in an apparent hunting accident, at the age of thirty-one. His mother, Johanna, a proud and striking woman, is stunned. Within a year, both of her own parents also die.

      In 1888, shortly after these traumas, Jozsi and...

    • 2 Shaping His Character
      (pp. 23-37)

      When he first arrived in Vienna, the young Schumpeter had moved with his mother and stepfather into an elegant new apartment near the city’s central boulevard, the Ringstrasse. To encourage occupancy of these apartments by the “right” sort of people, the Austrian and Viennese governments had granted a thirty-year exemption from property taxes. Beginning in the 1860s, the two governments had also sponsored a series of new public structures along the Ringstrasse, using land prepared by leveling fortifications that had protected the city from a siege by the Turks in 1683. The varied designs and uses of the new buildings...

    • 3 Learning Economics
      (pp. 38-56)

      No city could have suited the young Schumpeter’s intellectual obsessions better than Vienna. After completing his eight years at the Theresianum in 1901, he entered the University of Vienna, located just a few blocks from the apartment where he continued to live with his mother and stepfather. The remodeled university had opened in 1884, a year after Schumpeter’s birth, and architects had decorated the huge structure with elaborate ornamentation. In the decades since then, modern buildings have been added, but the halls where Schumpeter moved from class to class remain mostly unchanged. Statues and busts of Habsburg rulers and academic...

    • 4 Moving Out
      (pp. 57-66)

      With his future up in the air, Schumpeter decided to do what young men with aristocratic pretensions often did. He took a Grand Tour. He wanted not only to visit other parts of the world but also to meet the European economists whose works he had been reading. As it turned out, the next three years became a whirlwind for him. He traveled to Germany, France, England, and Egypt, trying on different identities and deciding on a vocation.¹

      Soon after graduating from the University of Vienna, he went to Germany. For the next few months, he studied at the University...

    • 5 Career Takeoff
      (pp. 67-83)

      Lincoln, only twenty-nine at the time and himself extremely ambitious, went on to say that in their quest for “celebrity and fame,” singularly talented people almost always strike out in bold new directions. This is what the twenty-six-year-old Schumpeter did in Czernowitz, and he did it deliberately. The book he wrote there,The Theory of Economic Development,is a full reflection of his genius. It launched his rise to stardom and became one of the classic economics texts of the twentieth century.¹

      Schumpeter’s very acceptance of the Czernowitz post underscored his resolve to try for academic celebrity at any cost....

    • 6 War and Politics
      (pp. 84-103)

      The great war, as it was called, proved catastrophic for the entrepreneurial, future-oriented capitalism Schumpeter had portrayed inThe Theory of Economic Development.It also marked a defeat for Schumpeter personally, for the more he tried to inject himself into affairs of state, the more he displayed his own political ineptitude.

      The war interrupted the trading of goods across national borders, the migration of people, and the easy transfer of money. The advance toward freer markets went into reverse gear. Nobody had yet coined the word “globalization,” but that phenomenon stood closer to fulfillment in 1914 than it would for...

    • 7 Gran Rifiuto
      (pp. 104-112)

      Schumpeter liked to speak of the years during and after his time at the Finance Ministry as hisgran rifiuto—an Italian phrase meaning great waste. During these years he took active roles in both government and business. He learned about the perils of starting new companies, the hazards of commerce and industry, and the fickleness of finance. He made many mistakes, but his first-hand lessons about the nature of capitalism proved priceless when he returned to his true calling in the academy.

      In 1922, three years after his departure from the Finance Ministry, Austria was still in deep economic...

    • 8 Annie
      (pp. 113-125)

      During hisgran rifiuto, Schumpeter made one good investment that yielded significant returns: he fell in love with the beautiful young Anna Josefina Reisinger. Annie was the daughter of Franz Reisinger, concierge of the apartment building in Vienna where Schumpeter grew up. Annie and her siblings, Willy and Emilie (Milly), shared their parents’ modest quarters in the building. The family also operated a small store there.¹

      Schumpeter was twenty years older than Annie and had known her since she was a child. At the age of fifteen she had begun work as a bank clerk while continuing her high school...

    • 9 Heartbreak
      (pp. 126-142)

      Bonn, the schumpeters’ new home, lies in a pleasant spot along the banks of the Rhine on the western edge of Germany, fifteen miles south of the great metropolis of Cologne. Both cities are near Germany’s borders with Belgium, Holland, Luxembourg, and France and are much closer to Paris and London than to Vienna. Bonn had originated as a center of regional government, and its founders had actively discouraged factories and other industrial developments. Its economy was organized around services and commerce, and during the nineteenth century it became a kind of millionaires’ retreat. When Joseph and Annie Schumpeter moved...

  5. PART II The Adult, 1926–1939:: Capitalism and Society
    • PROLOGUE: What He Had Learned
      (pp. 145-150)

      The onset of widespread entrepreneurial capitalism is very recent. There were early forerunners in Venice, Florence, and the Netherlands, but they did not develop into full-fledged market economies. These kinds of economies, measured backward from the twenty-first century, have a short history—the equivalent of four human lifetimes of seventy-five years each. Before about 1700, human beings had organized themselves almost everywhere according to traditional patterns.

      The most striking fact about capitalism, therefore, aside from its economic efficiency, is its late appearance. Why did it take so long to arrive? Once it did emerge, why was it so widely resisted...

    • 10 New Intellectual Directions
      (pp. 151-166)

      After the deaths of Johanna and Annie, Schumpeter could hardly concentrate on anything except his grief. It seemed inconceivable to him that so many blows had hit in such quick succession. And in addition to his personal tragedies, he worried about his large financial debts in Vienna—envisioning subpoenas, indictment, and a scandal that would “damage me as a professor.” This nightmare, though much exaggerated by his sorrows, was not entirely irrational, and he lived with it for many years afterward.¹

      In the meantime, he tried to bury his miseries through constant work. As he wrote Gustav Stolper, “I now...

    • 11 Policy and Entrepreneurship
      (pp. 167-183)

      As schumpeter’s workload grew heavier in Bonn, he decided to hire someone to run his household. Fortunately, a good candidate was at hand. In January 1926, three months after he and Annie arrived in Bonn, he had employed as his secretary Maria Stöckel, an intelligent young woman from the town of Jülich, forty miles northwest of Bonn. About a year after Annie’s death, he asked Mia, as she was called, to move in and manage his large residence. Mia soon proved to be an exceptionally capable assistant. She continued her work as secretary, typing his manuscripts and organizing his correspondence....

    • 12 The Bonn-Harvard Shuttle
      (pp. 184-204)

      Long before schumpeter revised hisTheory of Economic Developmentor brought out the English-language edition, the book had piqued the interest of Harvard’s Economics Department. One of its members published a favorable review of the original German version of the book, written in 1911. The university itself had also shown early interest in Schumpeter as a rising star of the profession. The longtime leader of the Economics Department, Frank W. Taussig, had corresponded with him in 1912 and had met him during his term as Austrian exchange professor at Columbia. In October 1913 Taussig wrote Harvard’s president, A. Lawrence Lowell,...

    • 13 Harvard
      (pp. 205-221)

      When schumpeter arrived at Harvard in 1932, the focal point of the campus was Harvard Yard, the shady grove where the university had been founded in 1636. The Yard was framed with old brick structures, one of which still survived from the seventeenth century. Harvard’s many small and medium-sized buildings contrasted strikingly with the models of Vienna, Czernowitz, Graz, and Bonn, where a single imposing structure housed most classrooms, libraries, and offices.

      Today, Harvard Yard remains a living architectural museum, attracting hundreds of thousands of tourists each year. But Harvard in the twenty-first century is a very different place from...

    • 14 Suffering and Solace
      (pp. 222-244)

      During his early years at Harvard, Schumpeter tried to write two big books at the same time—one on money, the other on business cycles. He had begun both projects before coming to the United States, and in each he sought to achieve an unprecedented level of scientific exactitude. He aspired to this imposing goal by trying to fuse statistics, mathematics, economics, history, and other social sciences into a grand, all-encompassing synthesis of each of his two subjects. The money book ate up years of effort. And despite Schumpeter’s frequent assertions that he was almost finished, his chapter drafts never...

  6. PART III The Sage, 1939–1950:: Innovation, Capitalism, and History
    • PROLOGUE: How and Why He Embraced History
      (pp. 247-250)

      By the mid-1930s Schumpeter had already marked the way forward for his new approach to economics by integrating the discipline of sociology into it. Now, on the eve of World War II, history took center stage both in the world at large and in Schumpeter’s work. The new emphasis on history in his thinking was neither radical nor abrupt, nor did he forsake his earlier preoccupations. He had turned to other disciplines in order to extend the power of economics to comprehend the vast complexity of life. He now pushed that expansiveness even further by grounding the study of capitalism...

    • 15 Business Cycles, Business History
      (pp. 251-278)

      Throughout the five-year period before his marriage to Elizabeth, and for two years afterward, Schumpeter spent more time researching and writingBusiness Cyclesthan working on all his other duties combined. The job took twice as long as he had anticipated, and Elizabeth helped enormously in keeping him sane. In 1939 the huge treatise at last appeared—in two volumes totaling 1,095 pages.¹

      Measured by its professed aims and several other yardsticks as well,Business Cycleswas one of the least successful works of Schumpeter’s career. Yet this first foray of his historical period changed the way he thought about...

    • 16 Letters from Europe
      (pp. 279-301)

      Even before schumpeter wroteBusiness Cycles, he had begun to worry more and more about the deteriorating political situation in Germany. There was plenty to worry about, as his copious letters from Mia Stöckel show. Nor were the problems confined to Germany. Many of the other new democratic republics so hopefully established in the wake of World War I had begun to weaken and crumble. What had seemed to the planners at Versailles a universal blueprint for democratic pluralism became, in practice, a pattern of parliaments unable to govern.¹

      During the twenty years between the Treaty of Versailles in 1919...

    • 17 To Leave Harvard?
      (pp. 302-312)

      In august 1937, eight months after Mia had married Stojan but was still devoted to Schumpeter, he himself married Elizabeth Boody. At that time he was lodged in his modest rooms at Frank Taussig’s house six blocks from Harvard Yard, where he had taken up residence five years earlier. Elizabeth, meanwhile, had lived in a cottage on the opposite side of Harvard. For a few months after their marriage, the two rented a small house not far from Elizabeth’s former cottage. They then purchased a large shingled house at 7 Acacia Street, only a five-minute walk to Harvard Yard. Acacia...

    • 18 Against the Grain
      (pp. 313-325)

      At the time when Schumpeter was mulling over his decision about Harvard versus Yale, international affairs dominated the world’s attention. Here, as elsewhere, Schumpeter’s foresight and independence as a thinker set him apart from most of his American friends and colleagues. And he himself realized that his own thoughts about the looming crisis were sometimes paradoxical, inconsistent, or simply incorrect.

      As a Viennese, he had little affection for Germany, but he still chafed over the injustices wrought by the victors of 1918. As a close student of history, he tended to think in the very long term, within a framework...

    • 19 The Courage of Her Convictions
      (pp. 326-336)

      Joseph schumpeter felt anxious and isolated in his views about Europe and Germany. Elizabeth Schumpeter faced a similar predicament in her opinions about Asia and Japan. As the 1930s drew to a close, Elizabeth, like her husband, was extremely busy. For the academic year 1938–1939 she taught economics as a visiting professor at Wheaton College, a small school forty miles south of Boston. But her major intellectual effort of the decade was a book on Japan’s modern industrial history, a collaboration with three established experts on Japan that she had begun in 1934.

      By 1940, when the book appeared,...

    • 20 Alienation
      (pp. 337-346)

      The schumpeters’ views of America’s potential adversaries got them both in hot water as the nation moved closer to war. In April 1941 the FBI began an investigation of Elizabeth Schumpeter because of her writings on Japan. Later in the same year the inquiry expanded to include Joseph Schumpeter. Their cumulative FBI dossier grew to a thickness of about two inches, containing 330 pages. It is available under the Freedom of Information Act, but many passages—and a few entire pages, apparently containing the names of agents, informers, and others—are blacked out (in legal terminology, “redacted”). Many of the...

    • 21 Capitalism, Socialism and Democracy
      (pp. 347-374)

      Only three years after the relative failure of Business Cycles, Schumpeter made a spectacular recovery, publishing in 1942 the most popular of all his works,Capitalism, Socialism and Democracy.He wrote most of this book in thirty months, during which he faced many other demands on his time. He composed it more or less from his personal intellectual storehouse, fusing all the learning and passion of forty years of scholarship into one brilliant synthesis. At 381 pages,Capitalism, Socialism and Democracyis only one third the length ofBusiness Cyclesand unencumbered by the academic minutiae of the earlier work....

    • 22 War and Perplexity
      (pp. 375-398)

      Schumpeter had been out of step with American opinion in the run-up to World War II. During the war, when he wrote most ofCapitalism, Socialism and Democracy, he found himself perplexed by the conduct of combatants on both sides and extremely conflicted in his thoughts. The war years were torturous for Schumpeter emotionally, and he had great difficulty in deciding what to wish for. In many of his diary entries he would argue first one position, then its opposite. No coffeehouse cleverness here but rather an earnest effort to work through a chaotic mixture of feelings.

      During the seven...

    • 23 Introspection
      (pp. 399-408)

      The years of world war ii were a time of intense personal reflection for Schumpeter. When he submitted the manuscript ofCapitalism, Socialism and Democracyin 1942, he had fewer hopes for the book than for any of his other major works. He had learned, as all authors do, that books have unpredictable lives of their own. So he took little joy in its publication. His overall mood continued as it had been while he was writing the book: anxiety about his health, nostalgia for happier times, and despondency about the war.

      In his copious diary entries of 1939–1945,...

    • 24 Honors and Crises
      (pp. 409-421)

      The postwar years proved Schumpeter wrong: his influence and prestige on the world stage far surpassed his own estimation. But his newfound acclaim did not come without pains elsewhere in his life. The two relationships that structured his existence—his marriage to Elizabeth and his position at Harvard—both underwent dramatic changes.

      In 1947 the second edition ofCapitalism, Socialism and Democracymade a splash, and by then Schumpeter had hit another stride of high productivity in his writing. In addition to almost constant work on hisHistory of Economic Analysis,he had begun to compose important articles on a...

    • 25 Toward the Mixed Economy
      (pp. 422-441)

      In 1943, shortly after the appearance ofCapitalism, Socialism and Democracy, Schumpeter wrote a brief essay for a book entitledPostwar Economic Problems,edited by Seymour Harris. He began his essay with a historical survey, then speculated about the future. He noted that even during periods of presumed laissez-faire, “law, custom, public opinion and public administration enforced a certain amount of public planning . . . our question concerning the immediate future should not be couched in terms of ‘capitalism or socialism’: there is a great variety of intermediate possibilities.”¹

      Here, in his typically pioneering way, Schumpeter almost perfectly anticipated...

    • 26 History of Economic Analysis
      (pp. 442-468)

      Throughout the 1940s Schumpeter was hard at work on his longest and most ambitious book,History of Economic Analysis. More than any other project he ever started, this one depended for its success on the selflessness and support of Elizabeth, in both sickness and health. For an entire decade, the Schumpeters were to spend most of their days together holed up in Taconic or secluded at Harvard Business School’s Kress Library. Elizabeth very much wanted to work with her husband: “Since we cannot have a child, let’s have this book together,” he quotes her in his diary. “Why can’t we...

    • 27 A Principle of Indeterminateness
      (pp. 469-484)

      Despite all his pioneering work of integrating other disciplines into economics, Schumpeter in the mid-1940s was still looking for a key to “exact economics” in the sense of a determinate and predictive science. His diary makes frequent mention of “PV”—his preliminary volume on theory and the overture to a full-length book. But he made little progress. He spent the majority of his time onHistory of Economic Analysis,and he strove to use that project, along with mathematics, as a springboard to more rigorous theory.

      As Elizabeth recalled,

      He envisaged a theory which might some day synthesize dynamic economics...

    • 28 L’Envoi
      (pp. 485-494)

      By voluntary death, Schumpeter probably did not mean an act of suicide. Nothing in his usual way of thinking pointed in that direction, not even the sobering prospect of life without Elizabeth. He seems instead to have meant a spirit of resignation, concurrence, acquiescence. When the time came, he would not rage against the dying of the light. He seldom felt well, and in January 1949 he wrote a friend who had urged him to vacation abroad that “I have simply not the moral courage to go to Europe because everything . . . would keep me in a transport...

  7. Epilogue: The Legacy
    (pp. 495-506)

    When schumpeter died in 1950, many of his friends believed that he had worked himself to death. Certainly there was no question of his compulsive devotion to the labor of learning. For almost five decades, never letting up, he had pursued every aspect of capitalism—its strengths and weaknesses, its social, cultural, economic, and personal aspects. And despite his deep commitment to scientific objectivity, he had wished to ensure that people would understand how to keep its “engine” running well. To do that, he believed, they would have to look beyond what they saw immediately in front of them—venality,...

  8. NOTES
    (pp. 507-694)
    (pp. 695-698)
    (pp. 699-702)
  11. Index
    (pp. 703-719)