Joseph Schumpeter

Joseph Aloïs Schumpeter (Triesch, Moravie, February 8th 1883 - Salisbury, Connecticut, January 8th 1950) is one of the most known economists of the 20th century, for its theories on the economic fluctuations, the creative destruction and the innovation. He is the author of a Histoire of the economic analysis , published in 1954 and which still refers.

Biography

Born in 1883 with Třešť (Triesch-Taconie) in Moravie, city Czech Austro-Hungarian today . His/her father is a textile manufacturer but the Joseph young person finds himself orphan as of the 4 years age. He enters in 1901 to the faculty of Droit of Vienna and is interested successively in the Sociologie. Graeco-latin antiquity was its first passion, and it nourished thought of sociologists like Werner Sombart and max Weber.

He discovers the economy, while in particular following the courses of the theorists of the Austrian École: Friedrich von Wieser, Eugen von Böhm-Bawerk and Carl Menger. At the beginning of the 20th century, Vienna was one of the intellectual and economic capitals world. The novel ideas abounded there in all the fields, with large intellectuals: Sigmund Freud in Psychoanalysis, Gustav Mahler and Arnold Schönberg in music, but also in literature and painting.

Doctor in 1906, it goes in England and there Marie in 1907. Its marriage is dislocated quickly, and it settles with the Cairo where it works as a lawyer for the international mixed court.

In 1908, it publishes its first work, become very quickly traditional of the economic Statistique, Nature and principal contents of the economic theory , which makes him obtain in 1909 a pulpit of professor of university in political economy at the university of Czernowitz, whereas it is only 26 years old. It publishes the first edition of its Théorie of the economic evolution in 1911, work which frees from the neo-classic framework and testifies to its interest for the dynamics and the laws of the economic change. Schumpeter particularly puts forward the importance of the Entrepreneur and the process of creative Destruction brought by the offer of new products on the market.

Between 1911 and 1919, he teaches at the university of Graz (in Austria). With the sociologists Werner Sombart and max Weber, it directs Archiv für Sozialwissenschaften (Files for social sciences). After the war, he is briefly Minister for Finance (1919-1920) of the Socialist government of Otto Bauer whereas the Empire Austro-Hungarian crumbles, then he directs during four years a Banque deprived, Biedermannbank of Vienna, until his bankruptcy (1920-1924).

He takes again his university career with the Université of Bonn. In 1926, it publishes the 2nd edition of the Théorie of the economic evolution ; the same year, his second wife dies tragically. It goes several times to the United States, then definitively settles with the Université Harvard in 1932 following the rise of the Nazisme in Central Europe. Among its students in Harvard appear Robert Heilbroner, Paul Samuelson, Wolfgang Stolper, Paul Sweezy and James Tobin.

Of 1937 with 1941, its reputation international is worth to him to chair the Company of econometrics of which it is one of the founders. While publishing in 1939 the Cycles of the businesses , it reconsiders the analysis of the growth. In 1942, its book Capitalism, socialism and democracy is worth a reputation of economist to him “heretic”. In 1950, whereas he becomes president of the International association of economy, he dies out at 67 years. His third wife publishes in 1954 monumental the Histoire of the economic analysis to which it devoted its last years.

Economic theory

Schumpeter is let with difficulty classify in an economic School. If it were well Autrichien, it forever belonged to the Austrian École. The economist whom he admired more was without question Leon Walras, but its analysis largely exceeds the neo-classic framework . And, if it shared certain conclusions with Karl Marx, its analysis was very far away from the Marxism. One makes in general of it the founder of the economic evolutionism. It is thus indexed in the circle of the economists known as “hétérodoxes”.

It estimates that the base and the spring of the dynamics of the economy are the innovation and technological advance. The history of capitalism is a permanent moult. Technology evolves/moves, changes pushing whole pieces of the economic activity étioler then to disappear itself after having been dominant. The change is structural before being quantitative.

The impulse of the economic system: the innovating contractor

Schumpeter proposes the important role of the innovations in the impulse, the actuation of the economy under the action of the contractor. It is by the manufacture of new products, the adoption of processes and techniques news, the use of new raw materials or the opening of new outlets which the structures end up changing.

The innovation: stationary economy with the economic evolution

Schumpeter highlights the determining role of the innovation in the impulse of the Economic system. It takes as starting point the modeling of a stationary economy named economic channel from which the various structural elements reproduce with the identical one. They are a simplified representation of the economic life and relations which are tied between the economic agents. The logic of this economic channel is that of the general stability: the adaptive movements of the prices ensure the adequacy between the various economic variables and each factor of production is remunerated at its price. This economic channel is characterized by the free competition, the Private property and the Division of the labor between the agents.

The latter, which act according to their experiment passed, do not introduce any fundamental rupture into their behaviors and the economic relations in place. The methods of production and the practices of consumption remain stable and the offer becomes equal to the request by the play of price, so that the allowance of the resources is efficient. The adaptive behaviors creatures of habit and mechanisms lead to the stationary state. This routine is broken, according to Schumpeter, by the contractor and his innovations. Thus the evolution cannot come from a quantitative modification (rise of the production or capital), the transformation of the system can be only of qualitative nature. Schumpeter shows that the determining factor of this evolution is the innovation. That Ci is in the middle not only process of growth but also of more important structural transformations. The innovations in two categories are in general gathered: innovations of product and innovations of Proceeded. The central actor of this evolution is the contractor.

The contractor: fundamental actor of the economic evolution

In the design of Schumpeter, the Entrepreneur incarnates the bet of the Innovation; its dynamism ensures the success of this one. The contractor, whom one should not confuse with the head of undertaking, simple administrative administrator or the shareholder-capitalist, simple owner of the means of production, is for him a true adventurer who does not hesitate to leave the paths beaten to innovate and involve the other men to make another thing only what the reason, fear or the practice dictate to them to make. It must overcome resistances which are opposed to any innovation are likely to call into question ambient conformism.

For example, Henry Ford is not a contractor when in 1906 he becomes an independent head of undertaking, but in 1909, when its factories start to manufacture famous the Ford T which made evolve the car to the statute of object of everyday consumption. He is also a contractor to have made adopt the system of the assembly line which at the same time makes it possible to lower the production costs and to increase the flow of the production, which opens the door with the mass production. One finds another example of true contractor with Alfred Krupp when it concentrates his companies vertically or when it into practice puts the new manufactoring process of the steel imagined by English Henry Bessemer (see here).

The contractor is certainly motivated by the realization of benefit generated by the risks taken and the success. But, the design of the profit defended by Schumpeter is original. The contractor creates value like the employee and as him it is also justified by a whole of irrational mobiles whose principal ones are undoubtedly the will for power, the sporting taste of the victory and the adventure, or the joy simple to create and give life to original designs and ideas. For Schumpeter, the Profit is the sanction of the creative initiative of the risks taken by the contractor. This design is contrary to the traditional economists who make Profit the counterpart of the productive efforts (capital and labor) of the contractor, which is rather that of the head of undertaking. It is also contrary with the Marxist design , which places the origin of the profit in the confiscation of the appreciation, i.e. the appropriation of part of the fruit of the work of the employees, there one finds the shareholder-capitalist rather.

The profit is all the more important and immediate that the contractor is able to eliminate any form from Concurrence direct and immediate. The innovation generally amounts holding a favorable position in its branch, and its diffusion allows obtaining commercial laws which technically make it possible the contractor to have a Monopole. Schumpeter regards the monopolies born of the innovation as necessary to the good walk of capitalism. In situation of monopoly, the contractor can fix a selling price higher than his marginal Coût, whereas they would be equal in situation of Pure competition and perfect. He can also reduce his marginal cost thanks to the fall of the production costs (by the rise of the Productivité) or thanks to the economies of scale (increase of the production and the size of the companies), and by increasing his profit there. It is this prospect which makes the risks of the innovation acceptable.

Schumpeter shows that a nonatomic universe (great number of companies) is not inevitably negative for the Consommateur because the monopoly always does not lead to the rise of the prices or the fall of the Production. The giant company perceiving an excessive profit can carry out important investments. In addition, the innovations generate effects of synergy on the level of the economy. They have positive Externalité S in term of drive on economic sectors and creations of new activities. They seem the spearhead of the Economic growth, then justifying the existence of these new actors contributing to the rise of the Capitalisme. However, these situations of monopoly do not last. It is the play of competition which standardizes them by making battle for the excessive profit the engine of economic progress, but also the explanatory factor of the cyclic movements of the economy.

Economic fluctuations with the social change: creative destruction

The innovation is at the same time source of growth and factor of crisis. It is what Schumpeter summarizes by the formula “creative Destruction”. The crises are not simple failures of the economic machine; they are inherent in the internal logic of capitalism. They are salutary and necessary to economic progress. The innovations almost always arrive in bunches at rock bottom depressionnist, because the crisis hustles the acquired positions and makes possible the exploration of novel ideas and opens opportunities. On the contrary, during one high period of not-crisis, the economic order and social blocks the initiatives, which slows down the flow of the innovations and prepares the ground for a phase of recession, then of crisis.

Economic rates/rhythms and technological rates/rhythms

The observation Empirique of the economic system shows the existence, with regular intervals, of business cycles where phases of prosperity alternate with phases of depression.

The economists highlighted mechanisms of regulation allowing the Capitalisme to develop beyond the crises, and sought to give an account of the existence of these rates/rhythms. Schumpeter proposes an interpretation of the economic rates/rhythms in the light of the rates/rhythms or waves technological: the innovations are at the origin of business cycles. It shows that the phenomenon of bunches of innovations is at the origin at the same time of the expansion as of the recession which succeeds to him. Schumpeter provided a coherent analysis of the long cycles known as of the Soviet economist Nikolai Kondratieff.

In fact, Schumpeter also took as a starting point the work of the French economist Clément Juglar which it first had highlighted as of 1856, the cyclic phenomena over one period of ten years, whereas Kondratieff especially worked on the causes of these long cycles: the wear and renewal of the great infrastructures (railroads, channels, great improvements of land) whose construction requires exceptional investments. But these explanations seemed to him insufficient, preferring to speak about massive waves of innovations grouped around a central discovery, as the steam engine which opened the way with the industrial revolution between 1790 and 1850 and the railroad which instigated the economy of the Années 1890 until the Second world war.

Schumpeter claims that three cycles essentially superimpose and explain the evolution of the economic situation:

the short cycles, or cycles Kitchin, which lasts on average 40 months and is explained according to him by inventory changes,
the cycles average, known as cycles Juglar, which last, them enters 6 and 11 years,
the long cycles, or cycles Kondratieff which is spread out over 40 to 60 years. They would be the result of major innovations: steam engine, cars.

The monopolies put the economy on the track of progress but they are only temporary. The excessive profits will lead contractors imitateurs to propose similar goods or nearby processes obliging the companies in place to be different unceasingly or to lower their prices. This phenomenon of imitation involves innovations by bunches, i.e. an aggregation of the innovations caused by the success of the innovating contractor whose position is only temporarily dominant.

The application and the diffusion of the innovations depend upstream on the propensity of the contractor to take risks, research in the emergence of inventions likely to be exploited, and of the credit. They depend downstream from propensity on the individuals to receive the innovation (for the new products), therefore their tastes and practices. These conditions give an account of the realization, the speed and of extended of the diffusion. It is thus the temporary play innovation-imitation-monopoly which ensure the Economic growth and the perpetual upheaval of the established positions.

The cyclic activity proceeds in the following way: the phase of expansion is explained by the profits which generate a rise of the investments and request, under the effect of the bunches of innovation. Initially, the granted appropriations will cause an inflation of the goods of production then of Consommation. Then, the additional quantity of goods generates the deflation, accentuated by the refunding of the appropriations announcing the depression. The possibilities of profit rarefy, the bankruptcies appear. The phenomenon of imitation involves a saturation of the markets and a fall of the monopolistic revenue, therefore a reduction of the investment followed by a fall of the activity. The crisis could be exceeded only by other waves of innovations. It is the decisive mechanism of the cyclic activity which implies a process of creative Destruction.

The expansion depends on the diffusion and the assimilation of the new conditions of activity. The depression corresponds to one period of disappearance of the productive structures in excess and the debts, and to the gestation of new innovations. for Schumpeter, the duration of each cycle corresponds to the importance of the innovations and their domino effects.

The Technological advance is not a continuous flow and the cycles obey autolevelling mechanisms. It is diffused in a periodic way by waves starting from certain sectors and certain places.

Technological advance and social change

The introduction of the Technological advance has an effect on the behaviors and the practices of the various economic agents. The innovating contractor trains many imitateurs, which involves a radical change of their function of production (reorganization of the Travail). The innovations which are diffused in the economy will upset the modes of Consommation while meeting nonsatisfied needs, even while creating some of new. The markets are thus modified. The Technological advance acts on the structures of the very whole economy: the combination of the factors of production (work and capital) changes because there is replacement of the old structures by new structures, and thus mobility of the means of production. The impact on the nature of the qualifications and the Employment, as on their space distribution is considerable. Lastly, technological advance ensures of the dominant positions and upsets the state of the power struggles between the countries with the international level.

End of capitalism

In its work Capitalism, socialism and democracy , Schumpeter seems to join the conclusion of Karl Marx on the inevitability of the collapse of capitalism, but thinks that it will be replaced by socialism for reasons non-marxiennes. He recognizes that Marx raised the good questions but that did not prevent it from being mistaken heavily on the answers. The economy is a universe in perpetual change, and the neo-classic theories provide an excellent analysis of the economic interdependences, but they are unable to give an account of the evolution of the economic system and its fluctuations, because the central problem of the economy, is not the research of balance but the management of the change.

For Schumpeter, the success of capitalism inevitably leads to the creation of large companies, managed by heads of undertakings, simple administrators and pertaining to shareholder-capitalists, true owners of the companies. This concentration ends in the advent of a feeling of hostility on behalf of the Intellectuel S and of the populations. Schumpeter does not think that a change Révolution naire is plausible, but estimates that capitalism scleroses interior gradually, for sociological and cultural reasons, as democratically elected majorities choose to set up a planned economy accompanied by a system of État-providence and restriction of the contractors. The intellectual and social climate necessary for the company spirit and to innovation, and thus to the appearance of contractors, evolves/moves and ends up being replaced by a form or another of socialism, even more sclerosing. The governments then have in particular tendency, to be popular, to develop the “tax State” and with tranférer the income of the producers towards the not-producers, discouraging the saving and the investment with the profit of consumption, which creates an increasing inflationary pressure. In all decisions, the democratically elected governments have tendency then, to guarantee their re-election, to privilege the short term with the detriment of the long run, Keynes said “ In the long run we will be all died ”.

Schumpeter is convinced that the capitalist free competition is the best economic system, it thus does not recommend this evolution, but it does not know how to avoid it. Capitalism can continue its walk ahead only provided that perdure the spirit of the contractors which only makes his force, but capitalism secret the large company and the latter chokes any inclination of imagination. It is the reign of the administrative executives, the experts anonymous and the bureaucrats, more concerned to secure a stable career, an regular income and an advantageous social position to take risks.

Major works of Joseph Schumpeter

Natural and principal contents of the economic theory ( Das Wesen und der Hauptinhalt DER theoretischen Nationalökonomie ), 1908
Theory of the economic evolution ( Theory DER wirtschaftlichen Entwicklung ) - first edition, 1911; 2nd edition, 1926 to read in line
the cycles of the businesses ( Business Cycles: has Theoretical, Historical and Statistical Analysis off the Capitalist Process ) 1939
Capitalisme, socialism and democracy ( Capitalism, Socialism, and Democracy ), 1942 to read in line
Histoire of the economic analysis ( History off Economic Analysis ), published after its death in 1954

Quotations

“Like Marx, it is possible to admire Keynes while considering nevertheless that its social vision is false and that each concern is fallacious”.

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