Mr. Creative Destruction
Joseph Schumpeter and the truth about capitalism.
May 28, 2007, Vol. 12, No. 35 • By KEVIN R. KOSAR
Prophet of Innovation
Economics, Carlyle famously grumbled, is the "dismal science." With few exceptions (Adam Smith, Milton Friedman), its practitioners are little known to non-economists, and frequently mocked. Who can forget what Lyndon Johnson once said to John Kenneth Galbraith? "Did it ever occur to you, Ken, that making a speech on economics is a lot like pissin' down your leg. It seems hot to you, but it never does to anyone else."
So it's no small feat to make a jaunty read out of the life of an economist dead more than 50 years, and Thomas K. McCraw has done just that in his impressive new biography of Joseph Schumpeter. This is a result, in part, of McCraw's smooth prose and storytelling skills: The words just flow, and the reader can quickly gobble up the chapters, which seldom exceed 20 pages in length. Moreover, McCraw is well equipped for the topic, as the author of 10 volumes on business history and capitalism.
Without question, however, McCraw was aided by his subject, a flamboyant and complex figure whose life was marked with astonishing success and terrible sorrow. Joseph Alois Schumpeter was born in 1883 in Triesch, a small Moravian town in the Austro-Hungarian empire. His family was upper-middle class and prized stability; Schumpeters had resided there for four centuries and worked in the family textile business.
But a predictable life was not fated for Jozsi (pronounced YO-shee), as his parents called him. When he was four, his father died in a hunting accident. His mother turned this tragedy into an opportunity. She took her son 300 miles south to Graz, a city of 150,000, and within a few years had married a nobleman 33 years her senior, and then moved her family to an even bigger city, Vienna, which would serve as Jozsi's launch pad.
Now of a noble family, Schumpeter could enroll in the Theresianum, the empire's equivalent of Groton, where he studied mathematics, science, literature, history, and the classics, and was a top student. By graduation he had learned six languages. In 1901 he entered the University of Vienna, and made the most of it, hobnobbing with the upper social echelons and immersing himself in the study of law, history, and economics.
For all his efforts to project the persona of an old world aristocrat, young Schumpeter was a relentless striver. Both fop and grind, he dressed impeccably, bedded innumerable women, and was a tireless networker, all while studying to become the world's greatest economist. After graduating in 1905, Schumpeter exploded with activity. He traveled throughout Europe to meet eminent economists, married Gladys Seaver, the daughter of a Church of England official, started a law practice in Cairo, and wrote a 626-page book entitled The Nature and Content of Theoretical Economics. All in three years.
Then he bounced to a professorship at the University of Czernowitz, in what is now Ukraine, wrote another book (The Theory of Economic Development), wrangled a better job at the University of Graz, gave speeches at 17 American universities, and dashed off yet another volume (Economic Doctrine and Method: An Historical Sketch). By age 32 he had yielded more scholarship than most professors produce in their entire lives: Three books, 20 articles, and over 60 book reviews.
Throughout his life, Schumpeter would disapprove of academics who meddled in public policy. But after the collapse of the empire in 1918, he couldn't resist entering. His article, "The Crisis of the Tax State," prescribed a course for the economic recovery of the new state of Austria. The old state-directed economy should be replaced with an economy of competing firms, he wrote. Inflation ought to be kept low. Taxes should be set at a rate to generate sufficient revenues to repay debts, but not so high that they drive productive firms abroad. Critically, entrepreneurial dynamism must be fostered through the encouragement of credit and capital flows from abroad.
A few months later, thanks to his network of contacts, Schumpeter found himself Austria's first secretary of state for finance. He lasted less than a year, leaving the post in October 1919: His plans for rescuing Austria's economy were dead on arrival, the victim of internal politics and the victorious Entente Powers' desire to punish the Central Powers. Schumpeter's baptism in politics also commenced a largely disastrous period in his life. Rather than return to the University of Graz, Schumpeter went into banking. Initially he did well, but in 1924 Austria's stock market crashed, bankrupting Schumpeter. Meanwhile, his marriage had collapsed. In his early forties, the onetime wunderkind was reduced to giving speeches and writing articles to pay creditors.