No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Nine: P31W: Enter the Entrepreneur! 220 GREAT ECONOMISTS IN HISTORY JOSEPH SCHUMPETER 1883-1950 Joseph Schumpeter was born the same year as J.M. Keynes, and ironically, the same year that Karl Marx died. He was a student in the Austrian school of economics, studying under Friedrich Weiser (famous for opportunity cost) and Eugen Bohm-Bawerk (famous for capital and production), and was a contemporary of Ludwig Von Mises. Both Von Mises and Schumpeter published their first major works in 1912, with Schumpeter matching Von Mises’ Theory of Money and Credit with his own masterpiece, the Theory of Economic Development . In this work, Schumpeter gave the most attention heretofore as to the role of the entrepreneur in the market. Schumpeter coined the term “creative destruction” to describe the process where entrepreneurs would come up with new and better ways of doing business. He saw this entrepreneurial innovation as the driving force behind economic development and growth. Given an initial equilibrium, the entrepreneur would disturb that equilibrium with an innovation that would change the existing production process and ultimately lead to a new equilibrium. While the innovation led to higher standards of living for all, it would necessarily destroy old ways of doing things—hence the term creative destruction. So in Schumpeter’s world, the entrepreneur is a destabilizing (or disequilibrating) force, while in a Kirznerian (alert arbitrageur) world, the entrepreneur is always a stabilizing or equilibrating force. Schumpeter was also famous for two other major works. First, his History of Economic Analysis is considered by many as the definitive text for graduate courses in history of economic thought. Schumpeter worked on this for many years and never did finish it prior to his death, but his wife and colleagues stepped in to take his notes and finish the book for publication in 1954. In that work, Schumpeter fully evaluates historical economists’ contributions with his own—somewhat arrogant—assessment mixed in. Schumpeter was never humble, and it was his goal to be the world’s greatest economist. Perhaps he thought he succeeded in that goal. And perhaps he did! His other major (and most popular) work was Capitalism, Socialism, and Democracy , where he evaluated capitalism and socialism. Schumpeter was very pessimistic about capitalism, but not for the usual reasons. Schumpeter thought capitalism would be a victim of its own success as bureaucratic managers would replace innovative entrepreneurs, and that bourgeois society would come to resent capitalism. Perhaps this prediction is not too far off the mark, albeit a bit premature. Photograph of Joseph Schumpeter 3