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Prophet of Innovation: Joseph Schumpeter and Creative Destruction Paperback – October 26, 2009
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From The New Yorker
In 1939, the economist Joseph Schumpeter wrote that "the history of capitalism is studded with violent bursts and catastrophes" that, while ultimately bettering society, seem "like a series of explosions." He called this process "creative destruction," a phrase that, McCraw writes, aptly describes Schumpeters own course. After a series of dramatic turns (including stints as Austrian finance secretary and investment adviser to an Egyptian princess, and a tragic, arguably bigamous marriage), Schumpeter landed in the dubious sanctuary of Harvard ("despicable playground of despicable little tyrants," he wrote), where he turned out several key texts in twentieth-century political economics. McCraw doesnt get lost in the baroque details of Schumpeters storyhow many economists ever fought a duel?or in the arcana of his theories, achieving a balance that his brilliant and restless subject rarely did in life
Copyright © 2007 Click here to subscribe to The New Yorker --This text refers to an out of print or unavailable edition of this title.
This well-paced and beautifully written book explains not only Schumpeter's work but also the fast-changing phenomenon of modern capitalism. McCraw brings out Schumpeter's energy and charisma as well as the power of his ideas, quite skillfully linking the economist's colorful and adventurous personal life with the development of his views. This book is a fine tribute to a great thinker. (Harold James, Princeton University)
A welcome book―a truly penetrating biography of the most influential theorist of finance capitalism. (Edmund S. Phelps, 2006 Nobel Laureate in Economics)
A most compelling portrait of a complex man who has had a profound influence on how we think about entrepreneurship. (Amar Bhidé, Columbia University)
[Schumpeter's] private life was no less fascinating than his public message. In Prophet of Innovation, Thomas McCraw--emeritus professor of history at the Harvard Business School--artfully weaves the two together. (Dan Seligman Wall Street Journal 2007-04-05)
In this biography, Pulitzer Prize winner McCraw neatly divides his emphasis between Schumpeter's professional and personal life. He portrays his subject as a somewhat self-absorbed insatiable scholar not entirely comfortable with his contemporaries, which might explain marriages and affairs with much older and younger women, as well as his affinity with students and often-strained relations with colleagues of his own generation. McGraw lucidly addresses Schumpeter's economic theories through an examination of his letters, lectures, addresses, articles, and major works...[An] insightful and highly readable biography. (Lawrence R. Maxted Library Journal (starred review) 2007-04-01)
[A] persuasive and eloquent biography. (Jay Hancock Baltimore Sun 2007-04-22)
Much honored as an economic prophet, Joseph Schumpeter has had to wait half a century after his death for this splendid full-dress biography covering his ideas, life, and times...[This is] a fat, learned biography by Thomas McCraw, one of America's most respected business historians, the author of a Pulitzer prize-winning history of the rise of regulation. He has found the perfect subject in Schumpeter. He succeeds in getting inside the economist's head, explaining not just what he thought but why he thought it. Beyond this, he also succeeds in painting a portrait of his times. Fin de siècle Vienna, Weimar Germany, Harvard University before and after the first world war: all come to life on these pages. (The Economist 2007-04-28)
Prophet of Innovation: Joseph Schumpeter and Creative Destruction is a well-written and entrancing look at one of the twentieth century's most important economic and political thinkers. McCraw's book may rightly take its place as one of the two or three best biographies of an economist ever written...[It] is so splendid because it succeeds on so many different levels. If the book were simply an account of the Harvard economics department, it would stand as a lasting and significant contribution to the history of economic thought. Alternatively, it is one of the best treatments of what it was like for European intellectuals to migrate to the United States. Or are you interested in why Austria fell apart during the 1920s, and how someone with as little real world experience as Schumpeter became Minister of Finance? The book is also a love story, and an account of how a possibly dysfunctional man can nonetheless find romantic happiness after repeated failures and tragedies. Last but not least it is an intellectual history...Every year there are three or four non-fiction books that have to be read, and this is one of them. (Tyler Cowen American.com 2007-05-04)
McCraw...frames his narrative confidently and writes beautifully...Best of all, McCraw is an extremely good interpreter of Schumpeter's published work. (David Warsh economicprincipals.com 2007-04-01)
An extraordinary new biography. Prophet of Innovation by Thomas K. McCraw chronicles the life of one of the 20th century's most original and insightful scholars...Like his contemporary and frequent rival John Maynard Keynes, Schumpeter makes for a rich biographical subject. Keynes received the treatment he deserved from Lord Robert Skidelsky's magisterial multi-volume biography. McCraw's effort, similarly, is worthy of Schumpeter. (Nick Schulz National Review 2007-07-09)
McCraw's triumph is to tell...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...McCraw successfully passes off the life of a professor of economics as a story that fully complements its undoubted intellectual significance with a tantalizing human interest. (Peter Clarke London Review of Books 2007-07-19)
McCraw doesn't get lost in the baroque details of Schumpeter's story--how many economists ever fought a duel?--or in the arcana of his theories, achieving a balance that his brilliant and restless subject rarely did in life. (New Yorker 2007-07-30)
A thinker as multifaceted as Schumpeter demands much of a biographer, and in Prophet of Innovation: Joseph Schumpeter and Creative Destruction, Thomas McCraw delivers...McCraw not only excels at conveying the innovation and excitement in Schumpeter's work, he keeps readers riveted to the story of the economist's life, and some of the twists are almost novelistic...[An] outstanding biography. (Daniel McCarthy American Conservative 2007-07-16)
It's no small feat to make a jaunty read out of the life of an economist dead more than 50 years, and Thomas K. McCraw has done just that in his impressive new biography of Joseph Schumpeter. (Kevin R. Kosar Weekly Standard 2007-05-28)
[Schumpeter] deserves more recognition and McCraw's book is to be welcomed on that account. (Pat McArdle Irish Times 2007-06-04)
Prophet of Innovation is an immensely entertaining read. (Marisa Morrison Washington Times 2007-07-08)
Although Schumpeter died in 1950, McCraw is right to insist that his contributions to our understanding of the economies in which we live are still vital today. (Peter Timlin Harvard Magazine 2007-07-01)
Books on the lives of the great economists might not, at first blush, set the blood coursing. Yet Robert Skidelsky's masterly three-volume biography of John Maynard Keynes proved how engrossing such a life could be. It is high praise to say that Thomas McCraw's biography of Joseph Schumpeter, Prophet of Innovation, has some of the same quality and appeal...McCraw, who has written the definitive biography of his subject, supplies many testimonials to Schumpeter's genius and influence from both his day and our own. (Robin Blackburn The Nation 2007-09-24)
[McCraw] has written an impressive and thoughtful biography of one of the most significant economists of the 20th century. Although widely regarded as a man of no small ego, Schumpeter can justifiably lay claim to effecting considerable scholarly debate in a wide range of academic backgrounds. Schumpeter’s analysis of economic development and business cycles, his notion of the process and significance of creative destruction, and his views on entrepreneurial activities continue to influence generations of economists and social scientists. McCraw’s thorough, insightful biography draws on an array of public and private papers to explain Schumpeter’s scholarly development and increasing sway, from his early years in Vienna to Bonn and later to his tenure at Harvard. This engaging scholarly work provides substance and context and is well worth a close read by both students and faculty. (T.E. Sullivan Choice 2007-09-01)
McCraw’s book on Schumpeter is an absorbing read, with short chapters, lots of personal detail and historical scene setting, and an important anti-Galbraithian economic theme. (Deirdre McCloskey Reason 2007-10-01)
An excellent, thorough and smoothly written biography of Joseph Schumpeter, the greatest economist of the 20th century. Too bad most politicos--and economists--don't fully grasp his insights. (Steve Forbes Forbes 2008-10-06)
Those seeking some escape from the deluge of "Keynes the Comeback Kid" will enjoy a refresher on that other brilliant economist of his generation, Joseph Schumpeter. Thomas K. McCraw's brilliant biography of the economist who best understood the turbulence of markets and "creative destruction" is all the more relevant as a credit crisis-induced recession unfolds. This biography is the clearest and most comprehensive guide to Schumpeter's life and work and the turbulence of his time which has, like the classic business cycle, come round again. (Bill Jamieson The Spectator 2008-12-01)
It's the lively and penetrating prose of the book itself that make its appearance in paperback a cause for rejoicing. Reading it is certainly time well-invested. (Abraham Benrubi openlettersmonthly.com 2010-05-04)
Although he died 60 years ago, Schumpeter's ideas about capitalism still resonate, including the belief that no business, no matter how successful, should assume it will be around forever. (Worth 2010-06-01)
As Thomas McCraw’s comprehensive and well-written biography convincingly shows, Schumpeter succeeded in becoming the ‘prophet of innovation’ by pioneering the vision of a superproductive world of continuing competitive struggle in a nexus of more or less open financial and economic markets. It’s never easy to make economics come alive on the page, particularly for readers not steeped in the discipline, but McCraw does his best to balance rigor and accessibility. He gives careful attention to the various elements of Schumpeter’s life, focusing, naturally, on his work… McCraw’s biography is a major step toward Schumpeter’s restoration in the pantheon of modern economists. (Victor Zarnowitz Conference Board Review 2007-07-01)
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Schumpeter especially emphasizes the role of new companies in making innovations that interrupt the circular flow. New firms "do not arise out of the old ones but start producing beside them". In transportation for example, "it is not the owner of stage coaches who builds railways". Schumpeter also argues that "the entrepreneur is never the risk bearer. The one who gives credit [that is, provides the necessary capital] comes to grief if the undertaking fails. ... Even though the entrepreneur may risk his reputation, the direct responsibility of failure never falls on him. [Page 74]
Part II begins with an analysis of why entrepreneurship was never widespread even if there were "early forerunners such as Venice, Florence and the Netherlands." It was even widely resisted for reasons which are "as much cultural and social as they are economic". (We are talking about an analysis over centuries from the middle ages until the industrial revolution.)
Schumpeter claims that "no company can ever retain a position at the top of its industry without doing very much more than this - without blazing new trails, without being devoted, heart and soul to the business alone". Any company [falling into routines] "will soon be overtaken by aggressive, risk-taking competitive entrepreneurs". "Entrepreneurs need extraordinary physical and nervous energy. The best of them can sustain their efforts on a high level only if they have that special kind of vision - ... concentration on business to the exclusion of other interests". [Page 162] That is why Schumpeter believes in "the Instability of Capitalism": the whole idea of a capitalist equilibrium is misleading. [...] The origins of broad expansions always come from innovations in specific industries, which then ramify into other parts of the economy ... such as in textiles, then in steam engines and iron, then in electricity and chemicals. Overall industry-specific innovation does not follow but creates expansion. [Page 163]
Part III - Business cycles - 1939, Capitalism, Socialism and Democracy - 1942, History of Economic Analysis - 1954. "Using theory, statistics and history" is a Schumpeter motto, you cannot just do one approach, you need to combine the three to make good analyses.
Business Cycles. Innovation propels the economy. New firms, entrepreneurs drive innovation. All companies must react, adapt. Meanwhile, powerful elements resist major innovations. Nobody ever is an entrepreneur all the time and nobody can ever be only an entrepreneur. The entrepreneur not only innovates but also carries day to day management. The entrepreneur may but need not be the person who furnishes capital. It is leadership rather than ownership. [Again] Risk bearing is no part of the entrepreneurial function. It is the capitalist who bears the risk. [Pages 254-255] A major theme: "the extreme difficulty of changing traditional ways of doing things". [Page 257]
Schumpeter also draws sharp distinctions between inventors and entrepreneurs and between inventions and innovations: "The making of an invention and the carrying out of the corresponding
Innovation are, economically and sociologically, two entirely different things." Often the two interact, but they are never the same, and innovations are usually more important than inventions. [page 259] "Necessity may be the mother of invention, but it does not automatically produce innovation" [page 260]. In conclusion of his book, "without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capitalist propulsion. [...] Stabilized capitalism is a contradiction in terms."
His first question was "Can capitalism survive? No I do not think that it can." Even if capitalism has produced the greatest per capita output of goods ever recorded, [...] in favor of the lower income groups, [...] by virtue of its mechanisms [...] thanks to businesses of grand size. Then Schumpeter introduces his famous term, "creative destruction". It is an essential fact of capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. He then criticizes the idea of perfect competition, which does not take business strategy into consideration. There is no perfect information. And there is a continued emergence of new products and new ways of doing things, which is the fundamental impulse that sets and keeps the capitalist engine in motion. Perfect competition and static assumptions are wrong. The economy is about oligopolies, which engage in mass production with very large capital investments. All this does not ease equilibrium analysis or mathematical modeling. [Pages 348-354]
His political analysis of capitalism, socialism and democracy may look dated even if it has interesting points. But I see bias as we all have when we talk about convictions or faith... [indeed see below!] Still, let me go on quoting. "Capitalism has developed the seeds of its own destruction. Persons of supernormal ability and ambition can reach a much higher standard of living, provided they would pursue business careers. Capitalism substituted impersonal efficiency to the feudal features. So that people have "the individualistic rope" to hang themselves. The bourgeoisie is politically helpless and unable not only to lead its nation, but even to take care of its particular class interest. Furthermore capitalism and in particular big business undercut not only the aristocracy, but also many small producers and merchants. A share of stock for tangible assets takes the life out of the property. And if this trend goes on long enough, there will be nobody left to defend the bourgeois values" [Page 357].
The part on World War II shows that the combination of high public investment (military spending) and individual entrepreneurship & large scale business may be the winning recipe, a combination of Keynes and Schumpeter, even if they were academic adversaries... [Pages 383-389]. What makes the book really interesting is indeed noticed by the author himself: "by comparison with other major theorists stretching from Adam Smith to Keynes, he insisted on giving opposing arguments not only their due, but far more." And this will be confirmed by his History of Economic Analysis published posthumously in 1952.
Schumpeter represents advances in economy reasoning as nonlinear. History of Economic Analysis succeeds where much economic writing of our own time fails, having sacrificed the messy humanity of its subject on the altar of mathematical rigor. Above all else, Schumpeter's History is an epic analytical narrative. It is about real human beings, moored in their own time, struggling like characters in a novel to resolve difficult problems. [Page 461]. Compared to Keynes, Schumpeter had no reason to think that life was something a person could be expected to enjoy automatically. It was one thing to grow up in Britain - stable, prosperous and ever-victorious - and quite another to be a child of vanquished and vanished Austria. No wonder his vision differed so thoroughly from that of sedentary Keynes as well as those of Smith, Ricardo or Mill. Unlike any of them, Schumpeter had to reinvent himself multiple times. For every episode of destruction, he tried to convert his experience intro a recreation or reinvention of some aspect of economics. [Page 468]
As an intermediate conclusion, again his famous quote in Business Cycles: "Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capital propulsion. The atmosphere of industrial revolutions - of "progress" - is the only one in which capitalism can survive"
In the last years of his life, he analyzed again what economics is about. The combination of narrative, numbers and theory could exercise a power that none of the three could do alone. Theories are stylized stories; but without real stories and statistics to back them up, they lose much of their force. He also emphasized a "principle of indeterminateness", contrasting it with Marx economic determinism and one-size-fits-all fiscal Keynesian prescriptions. Time and chance made most economic predictions risky and all determinism futile. Wars and natural disasters disrupted even the most sophisticated forecasts. Equally important for this principle, is the human element of leadership. "Without committing ourselves either to hero worship or to its hardly less absurd opposite, we have got to realize that, since the emergence of exceptional individuals does not lend itself to scientific generalization, there is here an element that, together with the element of random occurrences with which it may be amalgamated, seriously limits our ability to forecast the future." Schumpeter quest for exact economics had finally ended. [Pages 475-476].
Finally McCraw summarizes Schumpeter contributions: "Innovation in the form of creative destruction is the driving force not only of capitalism but of material progress in general. Almost all businesses ultimately fail and almost always because they fail to innovate. Only through innovation and entrepreneurship can any business except a government-sponsored monopoly survive over the long term." Schumpeter finally thought that entrepreneurship could occur within large and medium-sized firms as well as in small ones, despite bureaucratic obstacles. Thus "new men" founding "new firms" were still vital but they were no longer they only agents of innovation. "The history of the information technology industry confirms his thinking especially well - both the scrappy young firms in Silicon Valley that either perished or remained small-to-medium-sized and others that grew to be giants (Hewlett-Packard, Intel, Oracle, Cisco Systems, Amazon [sic], Google, Yahoo). Outside of Silicon Valley, the same pattern obviously holds for Microsoft and Dell Computer, founded by the teenagers Bill Gates in 1975 and Michael Dell in 1984".
Not until the late twentieth century, long after Schumpeter's death, did the significance of his emphasis on innovation, entrepreneurship, business strategy, creative destruction, and ample credit as the wellsprings for economic growth become fully clear.
Post-Scriptum: McCraw's provides also many and interesting comments about Schumpeter views on the academic world.
About universities [page 416]: "the layman thinks he knows what a professor is. However, this term denotes a group of people who differ widely in type, function, and mentality. There is the academic administrator; the university politician; the teacher in the sense of a man who imparts current knowledge; the teacher in the sense of a man who imparts distinctive doctrines or methods; the scholar in the sense implied by "learnedness"; the organizer of research; the research worker whose strong point I ideas; the research worker whose strong point is skillful technique, experimentation and its counterparts in the social sciences. And all these - and others - are very different chaps and hardly ever fully understand and appreciate one another. Yet it takes all of them to make a modern university and it takes recognition of all these types and the way they cooperate or fail to cooperate in order to understand what a university is and how it works. And he who insists on merging them into a unitary professorial type and leaves it at that will obliterate not only secondary details, but essentials."
About scientific bias: During a famous conference in 1948, he accused his fellow professionals in blindness to their own subjective prejudices. In economic analysis, the outcome of "science" depended in large part on the social situation of the individual thinker. "Logic, mathematics, physics and so on deal with experience that is largely invariant to the observer's social location and practically invariant to historical change: for capitalist and proletarian, a falling stone looks alike. The social sciences do not share this advantage. It is possible, or so it seems, to challenge their findings not only on all the grounds on which the propositions of all sciences may be challenged but also on the additional one that they cannot convey more than a writer's class affiliations and that, without reference to such class affiliations, there is no room for the categories of true or false. He adds "Model building consists in picking out certain facts rather than others". [Page 477]
Schumpeter argues that economics was linked to politics at its origins and virtually all economic statements are political statements. Only in communist Russia, where dissents were persecuted and eliminated, was there a singularity of expressed economic and political beliefs without contradiction.
Schumpeter takes the reader on an historical journey separating economic idealism from economic fact from Marx to Keynes, from pre-war Vienna to post-war America, Germany and Russia. He proffers that economics is more like sociology than physics and lacks the methodology to be predictive.
Schumpeter is a unique personage of this period and little remembered outside of academic economists. After this excellent biography the importance his contributions to modern economic thought will more widely known.
I am not an economist, but I was first exposed to the ideas of Schumpeter in my one year general ed Economics course. This course was taught by one of only two conservative instructors in my whole college education and he was influenced by Schumpeter. (I did take economics in high school which was taught from the Keynesian model.)
That was in 1968, the year the New Deal-Cold War Liberal Democratic Party coalition was itself undergoing creative destruction. Of course, that year, the Vietnam War and the protests were the central focus. But, the Schumpeter seed had been planted in my mind and I began to see the relationships.
My Father, foolishly, as he admitted to me much later, had gotten his old job back after he left the army post World War II. He was entitled to it under the Selective Service Act of 1940. He thought he would be secure as rural passenger train depot agent. But, the railroad passenger service was about to get a creative destruction death blow. In 1954, the Boeing 707 made its maiden flight. In 1958, the Boeing 707 made its first flight for Pan Am. In 1959, he was out of a job. He was a member in good standing of the Order of Railroad Telegraphers, AFL-CIO, but that didn't matter. If you had no customers, then no business, no jobs, and no union. When the business traveler ditched the trains for the planes, that was the end of the railroad passenger service along with 110 jobs per train. (He floundered around for awhile and took a few community college classes and got a better job afterwards.)
Later, I encountered Schumpeter again in political sociology, one of my areas of study in graduate school. As the author notes, Schumpeter attacks Marx on the static nature of his theories of class structure.
For me, McCraw makes two very impressive points about Schumpeter the teacher and scholar. As Teacher, McCraw quotes his student, Paul Sweezy writing that Schumpeter never judged students and colleagues on their agreement with his views. Sweezy called it "the rarest of all qualities in a teacher." I would say its even rarer today.
As a scholar, he mostly stayed out of policy advocacy. He did not seek to found a Schumpeterian school. Many of his best students were Keynesians. It takes a great deal of courage, character, and humility to forego such ego feeding ventures. Perhaps his experience as Finance Minister in the rump Austrian socialist government post World War I cured him.
On a more somber note, it is really staggering the amount of personal tragedy this man suffered in his life. He lost his father at age four. World War I destroyed his country. He lost his mother, wife, and son all within one month. He lost one of his best graduate students at the University of Bonn, Clare Tisch, to the holocaust. He also lost his companion, driver, and caretaker, Mia Stockel to the holocaust along with her husband and sister. His third wife Elizabeth, who had rescued him from deep depression, got breast cancer in the last year of his life.
McCraw does a fine job of weaving Schumpeter's life and writings together into a great biography of Joseph Schumpeter and history of the first half of the Twentieth Century
Schumpeter's views on socialism, to say the least, are complex. Most writers on Schumpeter stumble badly covering this terrain, but McCraw avoids any misstep by following the sure path set down by Jerry Muller.
This is by far the best book on Schumpeter. Highest recommendation.