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  • Prophet of Innovation: Joseph Schumpeter and Creative Destruction
  • Kenneth Lipartito
Prophet of Innovation: Joseph Schumpeter and Creative Destruction. By Thomas K. McCraw (Cambridge, Mass., Harvard University Press, 2007), 719 pp. $35.00

What can a long dead Austrian economist with only a marginal reputation in today's economics profession tell us about capitalism? Plenty, writes McCraw in this expansive new biography of Schumpeter's life and work.

Everybody loves the entrepreneur, but few understand what they so admire. Schumpeter's great achievement was to explain how entrepreneurship drove economic growth. Unifying all of his work was a vision of capitalism as a historical, evolutionary process. Contrary to Karl Marx, however, he did not view class struggle as responsible for moving history so much as the restless, innovative, heroic entrepreneur who created new products, opened new markets, promoted new industries, and destroyed old ones in the process. The entrepreneur was the agent provocateur of capitalism, pushing or sometimes forcing it in directions that it otherwise would not go.

With his immense learning—McCraw calls him the last polymath—Schumpeter drew from history, sociology, politics, and the classics as he composed his wide-ranging, sometimes ponderous, studies of the history of economic thought and the dynamics of business cycles. Although not especially gifted in mathematics, he supported the search for an "exact science" of economics and was a founder of the highly technical journal Econometrica.

Theory, history, and sozialökonomie came together in Schumpeter's most enduring work, Capitalism, Socialism and Democracy (New York, 1942), in which he characterized entrepreneurship as a social process as well as an economic one. Entrepreneurs' deep, hedonistic drives upset the established social order, the self-satisfied world of embedded capital. Schumpeter argued that capitalism needed such individuals, or else the natural tendency to complacency would choke the capitalist engine. A child of the dying Hapsburg Empire, he well understood how stultifying an established order could be.

McCraw masterfully demonstrates how Schumpeter's personal history—from his birthplace in the Czech city of Triesch to his professorships in Bonn and at Harvard—affected his economics. Personal calamities afflicted him with a pessimism that at times flowered into depression and left him insensitive to the pain caused by the dynamic capitalism that he championed. Any system, Schumpeter seemed to believe, was bound to be brutal in its own way, and many were far worse than capitalism. As McCraw argues, when Schumpeter wrote in apparent sympathy with socialism, he must be read as deeply ironic and at times blatantly sarcastic.

McCraw promotes Schumpeter as a visionary of capitalism as practiced in America today. He was practically alone in appreciating that all firms, no matter how large, must innovate or die. Now a truism, this was [End Page 151] much less obvious in the 1940s and 1950s when giant American corporations appeared unassailable and Keynsianism seemed to have ironed out the wrinkles of the business cycle.

Most startling, Schumpeter seems to have predicted both the limitless consumerism and the growing inequalities of the twenty-first century. Schumpeter understood that creative minds always seek social distance, ensuring that there be no limit to the demand for goods and distinctions. The "winner take all" nature of entrepreneurial competition meant that the successful few would grow enormously rich, which did not bother Schumpeter, given the social rewards that resulted. He had much less sympathy for the endless consumerism that logically went with this process. But it was another price paid for progress. He never seems to have considered the possibility that entrepreneurs would train their talents on the political system and seek to bend the rules in their favor. No rabid free marketeer like fellow Austrian Friedrich von Hayek, Schumpeter naively imagined that the state would operate like an idealized version of the independent civil service found in German-speaking nations.

As a theorist, Schumpeter devised a stripped-down model of entrepreneurship that emphasized the icon-smashing creativity of the individual. But he ignored much of the more mundane activity that is now commonly seen as entrepreneurial—starting a small business, being one's own boss, or running a well-established family enterprise. Arguably, if the entrepreneur is an agent of...

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