Joseph Schumpeter

• 1. Introduction

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  Joseph Alois Schumpeter was born on the 8th of February, 1883, in Triesch, a small town in Habsburg Moravia, in what is now the Czech Republic. He died in his home in Taconic, Connecticut, on the night of the 8th of January, 1950. In between those two dates, he crossed empires, survived wars, lost a bank, buried two wives, and coined a phrase that would outlast all of it: creative destruction.

  His father, who owned a factory, died when Joseph was only four years old. His mother moved the family to Vienna in 1893, and from that city's elite Theresianum school, Schumpeter began an ascent that would carry him to the German parliament, the Austrian finance ministry, the lecture halls of Tokyo and Columbia, and finally to a permanent chair at Harvard University.

  He predicted that capitalism would eventually destroy itself, not through violent revolution but through its own success. He argued that the entrepreneur, not the market as a whole, was the true engine of economic change. And he insisted that democracy, stripped to its essentials, was nothing more than competitive elections between rival leaders. Each of these ideas generated fierce argument during his lifetime, and they continue to animate economic and political debate today.

• 2. The Making of an Economist

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  Eugen von Böhm-Bawerk, one of the founding theorists of the Austrian School, was Schumpeter's first great teacher at the University of Vienna. Schumpeter studied law there before specialising in economics, receiving his doctoral degree in 1906. Three years later, still in his twenties, he became a professor of economics and government at the University of Czernowitz, in what is now Ukraine.

  In 1913-1914, he taught at Columbia University as an invited professor. Wolfgang Stolper, who knew him well, called that Columbia invitation the "high point of his worldly success". He met Irving Fisher and Wesley Clair Mitchell there, and Columbia awarded him an honorary doctorate. Yet even at that peak, the intellectual influences shaping his work were plural and sometimes contradictory.

  Schumpeter drew deeply from the historical school of economics, particularly from Gustav von Schmoller and Werner Sombart. At the same time, he called Léon Walras the "greatest of all economists", describing other economists' theories as "like inadequate attempts to catch some particular aspects of Walrasian truth". He also absorbed Rudolf Goldscheid's concept of fiscal sociology, and a 2012 paper identified the influence of Francis Galton's work in his writings. The man who would later be associated with a single, famous phrase was in practice synthesising an unusually wide range of intellectual traditions.

  From 1925 until 1932, he held a chair at the University of Bonn, where he lectured at Harvard in 1927-1928 and 1930, and served as a visiting professor at the Tokyo College of Commerce in 1931.

• 3. Banker, Minister, Debtor

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  In March 1919, Schumpeter accepted an invitation to serve as Minister of Finance in the Republic of German-Austria. The appointment lasted only months, but it was consequential. He proposed a capital levy as a way to address the country's war debt and opposed the socialisation of the Alpine Mountain plant. His time in office ended, and he moved on to the private sector.

  In 1918, before taking that ministerial role, he had already been a member of the Socialisation Commission established by the Council of the People's Deputies in Germany. These were roles that placed him at the centre of post-World War I economic reconstruction, though they also exposed him to the instability of that era.

  In 1921, he became president of the private Biedermann Bank, and also served as a board member at the Kaufmann Bank. The venture went badly. Problems at both institutions left Schumpeter personally in debt. His resignation from the Biedermann Bank became a condition of the bank's takeover in September 1924. The man who had theorised about entrepreneurs and their relationship to credit had now experienced, firsthand, what it meant when that credit collapsed. He returned to academic life, arriving at the University of Bonn the following year.

• 4. Creative Destruction

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  The phrase "creative destruction" was not Schumpeter's own coinage. Werner Sombart coined it first. Schumpeter borrowed it, built an entire theory of capitalism around it, and carried it into the vocabulary of modern economics.

  For Schumpeter, the entrepreneur was the disruptive force at the heart of economic life. In his Mark I theory, innovation and technological change flow from entrepreneurs, whom he called "wild spirits". He coined the German word Unternehmergeist, meaning "entrepreneur-spirit", and argued that progress stemmed directly from "the doing of new things or the doing of things that are already being done in a new way".

  Later, while at Harvard, he developed what became known as Mark II. Contrary to prevailing opinion among social economists and popular authors of the day, Schumpeter argued that large companies, not small competitors, were the primary drivers of innovation. He wrote in Capitalism, Socialism and Democracy that the trail of major progress leads "not to the doors of those firms that work under conditions of comparatively free competition but precisely to the door of the large concerns". Large firms had the capital to invest in research and development, and they delivered new products and services to customers more cheaply, raising living standards in the process.

  He saw technological innovation as the cause of both economic growth and cyclical instability. Fluctuations in innovation produce fluctuations in investment, which in turn produce cycles in growth. His business cycles model incorporated four overlapping cycles: the Kondratiev cycle of roughly 54 years, the Kuznets cycle of 18 years, the Juglar cycle of 9 years, and the Kitchin cycle of about 4 years. When the downward phases of these cycles coincided, Schumpeter argued, the result was a disastrous slump.

• 5. Capitalism's Self-Undoing

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  Capitalism, Socialism and Democracy, published in 1942, became the most widely read of all Schumpeter's works. It was reprinted many times and in many languages in the following decades, and cited thousands of times.

  Schumpeter agreed with Karl Marx that capitalism would eventually be replaced by socialism, but he envisioned a completely different mechanism. Where Marx predicted a violent proletarian revolution, Schumpeter argued that capitalism would weaken itself through its own success. The rise of large corporations would produce a class of salaried managers with no stake in ownership. More critically, capitalism's expansion of higher education would generate a growing class of intellectuals.

  Schumpeter defined intellectuals as a social class in a position to critique societal matters for which they are not directly responsible. They tend toward a negative outlook on capitalism, even while relying on it for their own prestige, because their professions depend on antagonism toward it. Unemployment and a lack of fulfilling work would intensify this critique. Parliaments would increasingly elect social democratic parties, entrepreneurship would face growing democratic restrictions, and "creative destruction" would ultimately undermine and destroy the capitalist structure.

  William Fellner, writing in Schumpeter's Vision: Capitalism, Socialism and Democracy After 40 Years, noted that Schumpeter saw any political system in which power was fully monopolised as fascist. Schumpeter himself was careful throughout the book to emphasise that he was analysing trends, not offering political advocacy.

• 6. A Theory of Democracy

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  In Capitalism, Socialism and Democracy, Schumpeter also challenged what he called the "classical doctrine" of democracy. He disputed the idea that democracy was a process by which voters identified the common good and politicians carried it out. People's ignorance and superficiality, he argued, meant they were largely manipulated by politicians who set the agenda.

  Even if a common good could be identified, Schumpeter claimed, citizens lacked the knowledge to design government policy to achieve it. He was substantially influenced by Max Weber, and he proposed a minimalist model in which democracy is the mechanism for competition between leaders, much as a market is a mechanism for competition between firms. His definition: democracy is the method by which people elect representatives in competitive elections to carry out their will.

  Robert Dahl was among the democratic theorists who pushed back, arguing that there is more to democracy than simply forming a government through competitive elections. Schumpeter's view was widely described as "elitist". Studies by Natasha Piano of the University of Chicago, however, emphasised that Schumpeter held substantial disdain for elites as well. His definition has also been described as simple, elegant, and parsimonious, since it makes it straightforward to distinguish political systems that fulfill or fail its criteria. Under his framework, governments are not democratic on the basis of what decisions they take, but solely on the basis of how they were formed.

• 7. Harvard and Personal Loss

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  Schumpeter married three times. His first wife was Gladys Ricarde Seaver, an Englishwoman nearly twelve years his senior; they married in 1907, with the Austrian jurist Hans Kelsen serving as best man. They separated in 1913 and divorced in 1925. That same year, he married Anna Reisinger, twenty years his junior and the daughter of the concierge of the apartment where he had grown up. Because Schumpeter was a divorced man, the couple converted to Lutheranism to marry. Anna died in childbirth the year after the wedding. The loss of his wife and their newborn son came only weeks after Schumpeter's mother had also died.

  He arrived at Harvard in 1932, and in 1937, at the age of 54, he married the American economic historian Dr. Elizabeth Boody, who had been born in 1898. She edited and helped popularise his work, and assisted him with his research and English writing until his death. At the start of World War II, the FBI investigated both Schumpeter and Elizabeth for Nazi sympathies, given her prominence as a scholar of Japanese economics; the investigation found no evidence of such leanings.

  At Harvard, Schumpeter was seen as a memorable figure in the classroom, described as erudite and even showy. He carried a heavy teaching load and took a personal and painstaking interest in his students. He organised private seminars and served as faculty advisor of the Graduate Economics Club. His massive two-volume Business Cycles received comparatively little recognition during this period, but his students included Future Nobel Laureate Robert Solow, economist Nicholas Georgescu-Roegen, Hyman Minsky, John Kenneth Galbraith, and future Federal Reserve chairman Alan Greenspan.

• 8. Legacy

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  On the 17th of September, 2009, The Economist inaugurated a column on business and management named "Schumpeter". The publication has a tradition of naming columns after significant figures in a field, placing him alongside Walter Bagehot and Charlemagne as naming inspirations. The inaugural column called him a "champion of innovation and entrepreneurship" whose writing showed an understanding of the benefits and dangers of business that proved far ahead of its time.

  The Schumpeter School of Business and Economics opened at the University of Wuppertal in October 2008. The International Joseph A. Schumpeter Society awards the Schumpeter Prize. The European Union's Lisbon Strategy, its main development plan, drew on his ideas, as did the World Bank's "Doing Business" report.

  Among his students, Paul Sweezy, one of the leading Marxist economists in the United States, was a graduate assistant of Schumpeter's at Harvard. John Bellamy Foster wrote in Monthly Review that Schumpeter "played a formative role" in Sweezy's development as a thinker. Robert Heilbroner, another of his students, wrote extensively about him in The Worldly Philosophers.

  Two of the 2025 Economics Nobel Prize winners, Philippe Aghion and Peter Howitt, used creative destruction as the basis for their work. The phrase Schumpeter borrowed from Sombart has become one of the most widely invoked concepts in economics. His posthumously published History of Economic Analysis, edited by Elizabeth Boody Schumpeter from a manuscript he left behind, stands as testimony to the breadth of a mind that spent its life trying to explain why economies never simply stay still.