Customer Reviews

Business Cycles: A Theoretical Historical and Statistical Analysis of the Capitalist Process

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Schumpeter published his own theory of business cycles three years after Keynes' General Theory (1936). In his review of Keynes' book in Journal of the American Statistical Association (1936) Schumpeter described Keynes' "Propensity to Consume" as nothing but a deus ex machina that is valueless if we do not understand the "mechanism" of changing situations in which consumers' expenditures fluctuate. And he adds that Keynes' "Inducement to Invest", his "Multiplier", and his "Liquidity Preference", are all an Olympus of such hypotheses, which should be replaced by concepts drawn from the economic processes that lie behind the surface phenomena. Schumpeter had his own business cycle theory describing the cycle as an interaction between the stable Walrasian system and disturbing revolutionary innovations.

In the opening chapter of his Theory of Economic Development (1934) Schumpeter says that any satisfactory explanation of economic factors must ultimately be in terms of noneconomic factors. In his book, Three Views on Method in Economics (1960), Henry W. Briefs reported a 1954 conversation with Jacob Marshak, econometrician and former Research Director for the Cowles Commission, about Schumpeter's book, Business Cycles (1939). In his review of Schumpeter's book in Journal of Political Economy (1940) Marshak criticized that he could not translate Schumpeter's business cycle theory into a complete system of equations, because he needed an equation for innovation. In subsequent personal correspondence Marshal asked Schumpeter what drives innovation, and in reply Schumpeter referred Marshak to Henri Bergson's elan vital. This is certainly a noneconomic factor!

However in his Business Cycles book, Schumpeter states that innovation is internal to the economy. It is not external like an earthquake, nor is it the same as invention. He maintains that innovations are made by the actions of entrepreneurs, who produce discontinuous structural changes in the production function, by making new combinations of input factors that increase marginal productivity. Each such change in turn propagates a damped cyclical oscillation in the levels of economic output, which trends to a stable equilibrium at a higher level. But Walrasian equilibrium is never actually achieved, because the cyclical phases of increased activity occasion further innovations, so innovations and business cycles are both endogenous.

Schumpeter's theory is closer to economic history than Keynes' theory, particularly the pre-Depression period of industrialization from which he drew his perspective. He has more to tell us about economic development than about business cycles, and his book Business Cycles is actually an extension of his earlier book, Theory of Economic Development. See my other reviews and my web site philsci.

Thomas J. Hickey, Econometrician

A thorough description of Schumpeter's ideas and theories with practical applications. His 'creative destruction' theory is well documented and explained. A wonderful read in an argument against government intervention in industry.

If you don't want to be swallowed with the Mathematics of the General Equilibrium Theory of Walras (and then Arrow and Debreu) read from chapter one to three of Schumpeter's Business Cycles.

I don't recommend the other chapters to reach a better comprehension of Schumpeter... I think it's too much out of context history. Very dificult to understand for engineers, economists and non historian people. Perhaps a best option is the reading of "The Human Web: A Bird's-Eye View of World History" by McNeill. This book has a mountains of unexpected links with Shumpeter's...but, of course, I know It wasn't Schumpeter's Aim to describe economy in a Human History Perspective.

Now that I've read most of Schumpeter's work, I can understand why he said this book nearly killed him. The amount of research and depth in every page is mindboggling. Schumpeter does have the tendency to overkill sentences and thoughts but seriously, every page is complex and deep and you must read this book if you are student of economics. If only his conclusions could predict business cycles more accurately for all we have is history.

One of the best books ve read in a long time....i read it because of Mr.Greenspan....wanted to learn about how the "MAN" thinks and am glad that i read it...a must for people really interested in economics......