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Economist Joseph Schumpeter: Theories & Books

Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson you will learn about Joseph Schumpeter's most notable economic theories and his most widely read books. Explore what influenced his ideas and how these ideas shaped the science of economics.

The Great Schumpeter

Joseph Schumpeter was an Austrian-born American economist and political scientist. He earned a PhD. in 1906, becoming a professor of economics and government while still in Europe. In 1932 he moved to the United States, and he became a naturalized citizen in 1939. He joined the faculty of Harvard University, remaining there until the end of his career. His students at Harvard often referred to him as ''the Great Schumpeter'' because of his brilliant work in economics. Schumpeter opposed Marxism and socialism, believing that either could lead to dictatorship. He was accused of being a Nazi sympathizer but those accusations were never substantiated.

Early Influences

Imagine yourself in pre-World War I Europe. Political instability and social unrest were rampant. War would soon erupt, rearranging the map of Europe and shifting the fate of empires and kingdoms. Schumpeter, a young man at the time, was influenced by the growing unrest. He recognized the need to learn from history in order to achieve stability and economic growth. As a result, he was heavily influenced by the historical school of economics, relying on lessons from history not mathematical theorems to predict future economic behavior. This school of thought believed economics is culture-specific and could not be applied to different places with varying circumstances. Historical economists believed empirical data and historical analysis were more reliable indicators of future economic performance than mathematical modeling.

Major Theories

Creative Destruction Theory

During his time at Harvard, Schumpeter wrote extensively and proposed several ground-breaking economic theories. The Creative Destruction Theory, discussed in his famous 1942 book Capitalism, Socialism and Democracy, is one of his best-known contributions. Partially derived from the earlier works of Karl Marx, Schumpeter's theory of creative destruction offered a less hostile world-view than Marx's prediction that capitalism would eventually contribute to its own overthrow.

Schumpeter defined creative destruction as a ''process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.'' He reasoned that fundamental change in any economy was principally due to innovation and adoption of new technology. Production processes and corporate operations change to adopt new innovations and technology, and the demand for new products resulting from innovation also becomes a driver of change.

According to Schumpeter, creative destruction caused by innovation results in new products and processes replacing the previous products and ways of doing things. The latter are abandoned to make room for the former. This theory is particularly appealing today as technology is evolving and innovation is a constant factor in our lives. Our technology has evolved a great deal in the past thirty years--the typical 1980's business professional could not have anticipated the demand for cell phones, home computers and the internet, all of which have had a dramatic impact on our lives.

Theory of Economic Development

Schumpeter's Theory of Economic Development postulates that an economic system in equilibrium is a static environment where little ever changes until a disruption occurs. Innovation is one of those disruptions. It is a major change agent driving economic development. Schumpeter defined development as a ''spontaneous and discontinuous change in the channels of flow, disturbance of equilibrium which forever alters and displaces the equilibrium state previously existing.'' Unplanned or unexpected development such as innovation occurs, disrupting the status quo and creating space for economic development. Entrepreneurs with a drive to innovate are essential to economic development as well. This theory is also very appealing in the modern world, where so much of the job growth and technological innovation comes from entrepreneurs.

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