Prophet of Innovation: Joseph Schumpeter and Creative Destruction 
by Thomas K. McCraw.
Harvard, 719 pp., £22.95, May 2007, 978 0 674 02523 3
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The two most influential economists of the 20th century must surely be Keynes and Schumpeter. Influential, at any rate, in the English-speaking world, where Keynes fine-tuned his rhetoric with a good ear for what would carry with his different audiences (though he sometimes lapsed in appearing to patronise Americans, from President Roosevelt down). It was, too, primarily among anglophones that the thinking of the polyglot polymath Schumpeter eventually made such an impression, especially when his posthumous History of Economic Analysis, weighing in at 800,000 words, deployed scholarship in a dozen languages, with his own English prose now as well honed as his native German. But when we consider the popular reception of their ideas, a rather obvious point is often overlooked: an intellectual version of Gresham’s law often operates, debasing the currency in ideas and traducing their concepts in the process.

By 1983, the centenary of the birth of both John Maynard Keynes (died 1946) and Joseph Alois Schumpeter (died 1950), it was the less dirigiste Schumpeter, so economists were saying, who spoke to the needs of the hour. The Age of Keynes thus gave way to the Age of Schumpeter, as can be confirmed by searching their respective names on electronic databases. In the long run, it seems, Schumpeter triumphed over his great contemporary and rival, whose fame had so often galled him in his lifetime.

This sort of narrative certainly gives both these intellectual giants their due. First, Keynes told us that macroeconomic policies are necessary and beneficial in managing the economy; that their effect must be symmetrical, notably in stimulating investment in slump conditions and restraining consumption in boom conditions; and that government needs to supply a pragmatic guidance we can’t rely on the market to find unaided. Then, Schumpeter (or his ghost) persuasively disclosed that the sheer energy of market forces had been underestimated, and that we needed to harness, though not to harass, the entrepreneurial spirit of innovation; that a process of ‘creative destruction’ was inherent in reshaping the material world; and that its consequential inequities were petty compared with its vast power to enrich the whole community.

What such a narrative does not capture, however, is what happened when the big ideas became the stuff of politics and policy. It was a problem that had, in different ways, fascinated both economists. Keynes talked about it in terms of the power of ideas as against vested interests; Schumpeter talked about it as the influence of ideology in science. Neither should therefore have been surprised that their own insights were subject to a process of reception which vulgarised and often distorted them, to this extent mocking their title to be the two economists who exerted most practical influence in the decades after their own demise. Instead the messages that successively hit the street had a demotic potency: the secret of prosperity is to spend, spend, spend; everything would be fine if only government got off our backs; greed is good; taxes can be cut while military spending is piled high, and those deficits – hey, who cares any more?

Totemic fame has its price. Eponymous labels can be misleading. Economists who have never actually read any of the works of Keynes and Schumpeter nonetheless confidently invoke their names in identifying stylised concepts; and it is pointless to complain about this sort of professional shorthand. For those who like longhand, however, there is more to be said; and more to be read. In Prophet of Innovation, Thomas McCraw has written a big book by almost anyone’s standards, except those of its subject, who would perhaps have regarded its five hundred pages of text as barely adequate for a full scholarly exposition of his life’s work.

McCraw’s triumph is to tell less exacting readers quite as much as we need to know about Schumpeter in a lucid and well-paced narrative, while also supplying, for more rigorous scholars, no fewer than two hundred pages of endnotes. These are not just references or indications of further bibliographical sources on technical matters, but sometimes amount to short essays in themselves. It is a rather unusual format for a book, but I have to report that my initial literary conservatism – all that fumbling at the back of the book for items that interested me – succumbed to the author’s method, which leaves his text uncluttered with the paraphernalia for which historians of economic doctrine have their own relish. McCraw successfully passes off the life of a professor of economics as a story that fully complements its undoubted intellectual significance with a tantalising human interest.

Yes, that does include sex. Charming and debonair as well as clever, Schumpeter made the most of his circumstances (which were rarely quite as grand as he made out). When he once drew up a list of seven distractions that had prevented him from accomplishing more work, ‘money (business)’ was in seventh place, just below ‘travel’ in sixth. In ascending order, ‘politics (public career)’ came next (he had briefly been state secretary of finance in the barely viable Austria carved out of the old Habsburg Empire after the First World War), but ‘science (and philosophy)’ had held him back even more, though not quite as much as ‘sport (and horses)’ which in turn were less culpable than ‘art (and architecture)’. But all other dalliances faded in comparison to ‘1. Women’.

There were a lot of women in his life, from his comfortable student days in turn-of-the-century Vienna, to his grand tour of France and Germany, and then England, where he stayed for more than a year. Indeed, in 1907, when he was 24, he actually married an Englishwoman some 12 years older than he was, and took the intrepid Gladys off to Egypt, though he subsequently – and rather carelessly, in more senses than one – left her in England during the First World War. They had effectively separated, but the marriage had not been legally terminated. Naturally, the rising professor of economics at Graz University now had all too much freedom to indulge in his number-one distraction; and his brief forays into politics and then banking after the war did not pass without a troublesome taint of scandal, to which rumours of sexual intrigue lent a frisson. In fact, Schumpeter’s main worry was financial, since, after making a splash as a risk-taker in high finance, he ended up with heavy debts which, it seems, his sense of honour did not allow him to repudiate, and which dogged him until the 1930s.

Meanwhile (in 1925) another wife: this time a beauty 20 years younger than he was. Annie was thus 32 years younger than Gladys, who promptly reappeared, if not in the flesh then in the form of a potential litigant who took a tediously pedantic view of the law on bigamy. Less than a year later, Schumpeter’s mother suffered a serious illness and he was summoned back to what proved to be her deathbed in Vienna. Only weeks after he returned to Bonn, where he had landed a prestigious professorship, death also claimed Annie and their newborn child.

McCraw has good reason to call these deaths in the summer of 1926 ‘the pivotal events of Schumpeter’s life’. It is understandable that they shook him, and that he mourned. What is more remarkable is that the pain was enshrined in acts of private commemoration of his mother and his wife that marked every important milestone in his academic career. In his diary he would implore ‘O Mother and Mistress, help me,’ and he started to refer to them as his Hasen (literally, ‘hares’), a familiar form of address which crops up repeatedly over the years. ‘Again, again, work, for my bread and for God in my heart and for the Hasen,’ he writes in 1931. Two years later, now settled at Harvard, things are going better, and he thanks the Hasen, of course: ‘We, Hasen, we stay the same, eh!’ And another 15 years on, by then at the peak of his profession, delivering a triumphant lecture to his massed colleagues as president of the American Economic Association, the story is the same; as he described it in his diary: ‘The might of the Hasen stood out gloriously. Thank you, Hasen, for supporting me and for one of the richest presents. Everyone rose for my presidential address. The whole of the Cleveland ballroom audience rose and gave me applause. That was not poor and that was not small. And yet so undeserved. Thank you, Hasen.’

By this time, Schumpeter was happily remarried, to Elizabeth Boody Firuski, a scholar herself but one prepared to subordinate her career to his. He kept a portrait of Annie on his bedside table throughout their marriage; Firuski later made his full diaries, with the repeated invocations of the Hasen, available for research. She was also responsible for the posthumous publication of the History of Economic Analysis, which could hardly have been reconstituted from his mountains of notes without her collaboration, and became the guardian of his life, his career and his legacy. ‘Given Schumpeter’s emotional state – his diaries suggest that he was very close to a breakdown – marrying for a third time was one of the hardest things he ever did,’ McCraw comments. ‘But it would prove to be one of the wisest.’

These words make a fitting conclusion to Part 2 of the book, ‘The Adult, 1926-39’, which followed Part 1, ‘L’Enfant Terrible, 1883-1926’. We thus seem duly prepared for a major transition as we begin Part 3, ‘The Sage, 1939-50’. For once, however, McCraw’s strategy of exposition fails him, as becomes evident some fifty pages later, when we are taken back to Schumpeter’s long-running affair with Mia Stöckel. The end of this story – we had indeed been told of its beginning when Stöckel kept house for the bereaved Schumpeter in Bonn – is handled awkwardly, with a series of excerpts from Stöckel’s letters from Europe filling many pages of a separate chapter. It is only when we get as far as the letters of October 1937 that we realise that he has not told her of his new marriage. On this showing, the Sage seems rather messily trapped in his terrible infancy.

Schumpeter’s move from Bonn to Harvard in 1932 had been a decisive step in his career. He had decided then, McCraw tells us, against marrying Mia, despite her own continuing hopes. She was 26, he was nearly fifty; her social origins were inferior to his; but then Annie had been much younger than him and was the daughter of a Viennese concierge (though they hushed this up nicely in Bonn). So Stöckel’s expectations had not been unreasonable; and she and Schumpeter continued to live together on his annual summer trips to Europe. It was not until 1936 that these ceased – to her distress – and she consoled herself by accepting a proposal of marriage from Stojan Bicanski, a Yugoslav citizen. ‘You were always too good for me,’ she wrote to Schumpeter at this point, which let him off lightly. ‘I have betrayed you.’

Their relationship, in short, was a complex one; and it overlapped Schumpeter’s third marriage, just as Gladys had haunted the second. Schumpeter wrote more letters to Stöckel than to anyone else; but it is her letters that survive, safe at Harvard, whereas his disappeared during the war. In 1937, the gap of six weeks in his correspondence, following his marriage, seems to have given the game away – ‘there is a woman behind this!’ – and she tells him that she imagines him ‘with a girl on your tail’ (as McCraw translates Schwanz, though alerting us to the word’s ribald connotation). ‘Do you know,’ she writes again in November 1937, ‘that the other day I dreamed that you had remarried with a young and beautiful girl and that I collapsed in grief.’ It was presumably in response to this missive that Schumpeter belatedly came out with the news of his marriage. And then the two of them, each recently married, busily continue their frank correspondence. Eighteen months later, Schumpeter is ready to provide the detailed advice on sexual technique for Stojan and Mia that she has solicited. The curtailment of these exchanges followed all too soon. Mia and Stojan Bicanski were shot in 1942, when Novi Sad was overrun by the Nazis, their chief crime apparently membership of the English Club.

Only by comparison could it be said that the Schumpeters had a good war. Elizabeth’s academic work on Japan stereotyped her as an apologist, a sympathiser, or worse, especially after Pearl Harbor. Joseph’s background as a former Austrian minister of finance also created grounds for suspicion, as the FBI files that exist from 1941 onward confirm. These files are better evidence of the heavy-handed nature of the investigation than of any wrongdoing; the Schumpeters’ retreat into a more reclusive existence, with more time spent writing at Elizabeth’s country house in Taconic, Connecticut, was an obvious response.

Moreover, Schumpeter’s natural sympathy for the suffering of his former compatriots, and his revulsion from the Allied policy of demanding unconditional surrender, made him ambivalent about the war. His feelings were also fed by his political prejudices. He had long distrusted Franklin Roosevelt as a demagogue and a potential dictator. From the first, he had hated the New Deal, with its provocative affronts to the wealthy, its suspicion of entrepreneurial profit-taking, its delusive promises of work and social reform. Schumpeter increasingly suspected that a president ready to manoeuvre himself into an unprecedented third term in office would, sooner or later, manoeuvre the US into Europe’s war: ‘Is it the last card of the New Deal?’ Little wonder that the course of the war fulfilled his fears about Roosevelt’s role as ‘but a cat’s-paw for Churchill and Stalin’. The rise of the Soviet Union, once it had thrown back Hitler’s armies, was an obvious menace, but the British Empire was apparently hardly less so. ‘Oh these English,’ he wrote in his diary, ‘they fought with American soldiers and now they will rule with American money!’

Most people think that Schumpeter’s greatest book is Capitalism, Socialism and Democracy (1942). It is still eminently readable, still capable of jolting the reader with its ostensibly favourable view of socialism and its prospects: ‘Can socialism work? Of course it can.’ This rhetoric simply inverted the form in which he had earlier asked: ‘Can capitalism survive? No. I do not think it can.’ If we are tempted to describe the format of the book as a tease, it is a tease of classic proportions, carrying off the effrontery of Swift with the straight-faced disingenuousness of Voltaire. No small-minded jibes at FDR here, no failure to credit Schumpeter’s ideological opponents with the best of intentions; but no quarter to them as he pursues the logic of their misunderstandings of market forces to the absurdities to which these can be reduced. ‘I have pushed hard on that socialism book,’ his diary tells us, ‘and the situation simply teaches me once again that any achievement, however small, requires desperate concentration and neglect of all other plans.’ As though for the avoidance of doubt, he adds: ‘God what suffering “writing” means!’

It was in Capitalism, Socialism and Democracy that Schumpeter introduced the concept for which he remains best known: creative destruction. The essential point for Schumpeter was that ‘in dealing with capitalism we are dealing with an evolutionary process.’ It was an insight he attributed to Marx, whose vision indeed comprehended the raw power of capitalism, fuelled by its contradictory impulses and its clash of interests in a brutal struggle for survival. Little wonder that Marx himself had sought to co-opt Darwin in extending the theory of natural selection to economics.

For the mature Schumpeter, this evolutionary character meant that capitalism was never stationary but was driven by a process of innovation, which was itself driven by the pursuit of profit, with profit-hungry entrepreneurs in the driving seat. It was not perhaps an attractive spectacle, yet it was the way that mankind had released a surge of plenty by rewarding innovation. For it was innovation that provided the incentive of super-profits, generated by the temporary monopolies that could be exploited by possession of a new product or a revolutionary process. Perfect competition was thus a pipe-dream in this Schumpeterian analysis, and the attack on monopolies a threat to that endangered species, the goose that lays the golden eggs. Instead, big business needed to be left unhampered, to be allowed to destroy the comfortable arrangements of the status quo in the same process that created new sources of wealth. ‘This process of Creative Destruction is the essential fact about capitalism,’ ran the claim in Capitalism, Socialism and Democracy, in the chapter that enshrined the phrase in its title.

McCraw is right to hail the significance of this concept and to give the moment of its proclamation due prominence. Indeed this is perfectly consistent with what he repeatedly says earlier in his biography about the stages by which distinctively Schumpeterian ideas took shape in the economist’s own mind, from his first book onward. This was a 628-page volume, published in 1908 and called in English The Nature and Content of Theoretical Economics, which, as McCraw comments, ‘communicates little sense of a capitalist economy as an engine of creative destruction’. It is odd, then, that a couple of chapters earlier the matter is put so differently when McCraw describes the alleged influence of his early environment in shaping the economist’s vision: ‘Because the maturing Schumpeter sensed that creative destruction in the economic sphere could be violently disruptive, he began to place a high premium on political order.’ This is question-begging of a high order: assuming prior awareness of exactly what needs to be explained in terms of intellectual biography, and offering instead the rather tired conceit about the precocious boy prefiguring the great man. Readers who skip one or two of these over prescient early pages will profit all the more from McCraw’s account of the mature thinker.

It was, in fact, during the Second World War that the Schumpeterian synthesis really came together in the mind of a man who was driven to reflect on the folly and wickedness of the world around him. The Big Three – Stalin, Roosevelt and Churchill – were each of them stage villains, posing rebarbative political choices for a sophisticated conservative, formed by his own European experiences, no doubt, but projecting his vision onto the possibilities of the New World. And whether the huge surge of wartime production validated the milk-and-water socialism of Keynesian New Dealers or revealed the vast pent-up forces released by creative destruction, it certainly signalled the return of economic vitality after the searing experience of the interwar slump.

Schumpeter had really had no answer to the slump. What riled him was that Keynes did have an answer, or was credited with having one by so many impressionable people, so much less learned in their economics, less versed in their history, and less perceptive in their politics than the Sage of Taconic. McCraw is admirable in keeping Keynes in the picture throughout and in suggesting many instructive comparisons and contrasts between the two men. One is that Keynes had a great talent for simplification, focusing his theoretical analysis on a few points that seemed to him at once intellectually pivotal and vital for economic wellbeing. To Schumpeter, this seemed all very well up to a point, but lacking the real depth and diversity that he could so readily bring to bear himself. For him, Keynes’s best work was in A Treatise on Money (1930), perhaps because he suspected that Keynes’s magpie mind had picked up some of his own unpublished insights. But Keynes notoriously had got tired of his own book while it was still being reviewed by other economists, and, surrounded and supported by clever acolytes, went off on what he claimed was a new tack altogether.

The contrast with Schumpeter is clear. Even before leaving Bonn, he was open in declaring that ‘I never felt the urge to create something like a Schumpeter school.’ While Keynes started giving his annual course of lectures at Cambridge on the most interesting subject he could think of – his own work-in-progress – Schumpeter amazed his eager graduate students at Harvard by refusing to do anything comparable. And while Keynes passed round his drafts for discussion by a ‘circus’ of hand-picked younger economists, Schumpeter wrote his massive drafts by himself, without aid or criticism (at least until Elizabeth joined him). One result was that the publication of Keynes’s General Theory in 1936 was already an event before the event, not least in the other Cambridge, where Schumpeter’s own students were among those queuing up for copies, often ready to embrace the new doctrines.

Hence the tragic moment in 1939, when Schumpeter had finally published his two volumes on Business Cycles, adding up to 1095 pages. At Harvard, a special seminar on it was organised by his loyal students. But when it met, the realisation dawned that nobody had read the text; worse, that they had all read the General Theory; worse still, that everyone was talking about Keynes and not about Schumpeter. That Schumpeter became angry is hardly surprising; but he well appreciated that there was no answer, or none that he could give. After an earlier discussion of the General Theory by students and faculty, he told a Harvard colleague: ‘I did not take any part, precisely because I did not wish to give myself the opportunity of displaying what may look like and perhaps is ungenerosity and bad temper.’

The nub of Schumpeter’s criticism, as he wrote in his review of the book, was that in the General Theory Keynes ‘pleads for a definite policy, and on every page the ghost of that policy looks over the shoulder of the analyst, frames his assumptions, guides his pen’. And this remained his view, doubtless reinforced by the kind of Keynesianism that became current by the 1940s, especially in the US. This emphasised a fiscal revolution in which deficit finance (sometimes called functional finance) dethroned the old-fashioned idea of balancing the budget, and did so by stressing the need to boost effective demand through manipulating levels of consumption. None of this was particularly close to what was actually said in the General Theory, with its emphasis on investment as the motor of the economy and its separation of capital projects from ordinary budgets. But it was what American Keynesians often preached, and Schumpeter was not alone in his reading of Keynes’s message.

Nor was Schumpeter egregious in seizing on the famous observation about being dead in the long run. It obviously showed him, and demonstrated for the benefit of others, Keynes’s short-term irresponsibility. Yet the point that Keynes had originally made (back in 1924) was that this ‘long run’, of which economists had made so much, was a misleading guide to current policy, and that it was no use relying complacently on a theory which simply told us that, after the storm, the ocean would no doubt subside. Remedial short-term action might also be necessary – and prudent. And here, surely, it is Schumpeter himself who looks rather vulnerable in hindsight. Whatever the general pertinence of his maxims about creative destruction, these did not guide him to any constructive policy initiatives when the capitalist economies in which he had such faith encountered a novel kind of market failure between the wars. He may have been right to say that Keynes was over-attentive to the problems thereby highlighted, though even this ignores the theoretical symmetry of what Keynes was saying. Dismissing the General Theory as depression economics acknowledges its focus on the observed insufficiency of effective demand to sustain employment, but it ignores the capacity of the analysis to address potential over-sufficiency. In short, Keynes invented a sort of macro-economic way of thinking about the economy that we all use today: fiscalists, monetarists or whatever.

What Schumpeter seized on as Keynes’s worst flaw was not, in the end, a matter of economic analysis. When the president of the American Economic Association gave that address in the Cleveland ballroom in December 1948, he was at last the most famous economist in the world, if only because Keynes was dead. Schumpeter chose to talk about science and ideology, and did so with grace and insight. He paid tribute to Marx for discovering ideology (though only in other people, of course). Yet Schumpeter went on to do virtually the same when he turned to discuss Keynes, allegedly driven by a vision of the stagnation of capitalism. This highly public statement reflected a private view that the General Theory was such a dangerous book because it helped to undermine faith in capitalism at just the time when capitalism indeed seemed vulnerable. But nobody in the packed, appreciative audience seems to have asked Schumpeter exactly how such value judgments, when internalised by himself, failed to exert just such an ideological effect on his own scientific procedures. Rightly, this was his day, long anticipated and long deserved. ‘We, Hasen, we stay the same, eh!’

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