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Joseph Schumpeter

Life and Writings

Joseph Alois Schumpeter (1883-1950) is best known for his idea that the process of economic development is generated by a succession of innovations achieved by entrepreneurs with the purchasing power supplied to them by bankers. The attractiveness of this idea stems, at least in part, from its twofold political implications: it brings to the fore entrepreneurs and bankers, the leading actors of the development process; it opposes Keynesian-type policy activism and considers crises a necessary evil, needed to stimulate the very vitality of capitalism. Moreover, the view of a dynamic process endogenous to the economy and society and of the decay of capitalism seems to align Schumpeter with Marx against the traditional theorising of economic equilibrium.

Schumpeter was born in Moravia (then part of the Austro-Hungarian empire) in 1883. His father, a small entrepreneur in the textile sector, died when Joseph was only four years old. His mother found herself a widow when twenty-six years old; she married again in 1893 to a high- ranking officer in the Austrian army, already retired and much older than her, who sent the young Joseph to study in the Theresianum in Vienna, the school of the young aristocrats. There he received a humanistic education. He then attended the Faculty of Jurisprudence at Vienna University. Bohm-Bawerk was one of his professors; at his seminars Schumpeter came into heated debate with Otto Bauer and Rudolf Hilferding, two future leaders of Austrian socialism, and one of the champions of liberalism, Ludwig von Mises.

After a brief stay in England, in 1907 Schumpeter moved to Cairo, earning his living as a lawyer and writing the first of his books, The Essence and the Principles of Theoretical Economy, published (in German) in 1908. In 1909 he went back to Austria, to be appointed to a professorship at Czernowitz and then at Graz universities, where he remained up to 1921. In the years before the war he published (in German) The Theory of


Economic Development in 1912, the Epochs in the History of Doctrines and Methods in 1914; in 1913-14 he gave lecture courses and seminars at Columbia University at New York.

Decidedly a non-conformist, during the war Schumpeter displayed pacifist and pro-Western views; in 1918-19, notwithstanding his own conservative views, he took part in a committee chaired by Kautsky and instituted by the Austrian socialist government to organise the nationalisation of private firms. In 1919 he became Minister of Finance in the Austrian government led by Renner, a socialist, and supported by an alliance between socialists and conservatives, charged with the impossible task of solving the problem of the public debt inherited from the war (according to Shumpeter’s ideas, through an extraordinary wealth tax, incentives to the influx of foreign capitals and inflation with the aim of reducing the real value of the public debt). His experience as minister lasted only a few months, due also to his opposition to the nationalisation programme adopted by the government; the socialists accused him of having favoured acquisition of the biggest Austrian iron firm, the Alpine Montan-Gesellschaft, by foreign (Italian) interests and secured his resignation.

Schumpeter went back to the university, but by 1921 he had already resigned in order to become chairman of a small private bank, the Biedermann Bank, and headed it until bankruptcy struck in 1924. Many of its clients were hit by heavy losses; Schumpeter lost all his estate and something more, over the following years part of his income being used to pay back debts incurred in the bankruptcy.

Thus Schumpeter went back to university teaching, first at Bonn and then at Harvard. In the Bonn years he worked on a lengthy treatise on money; however, it remained incomplete and was published posthumously only in 1970. Schumpeter put it aside when, in 1930, Keynes’s Treatise on Money appeared - a contribution setting out a line of thinking completely different from his own. Most likely, Schumpeter believed that without further intensive research his work would pale in comparison with Keynes’s. After his move to the United States, the monumental work on Business Cycles appeared in 1939, followed by the provocative and successful Capitalism, Socialism, and Democracy in 1942, while at his death the great History of Economic Analysis was still incomplete.

Along with his impressive research activity, Schumpeter was quite influential as a teacher. Among his students we find many of the greatest economists of the twentieth century, from Leontiev to Samuelson, from Sweezy and Goodwin to Minsky, from Tsuru to Sylos Labini. He died in 1950.

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