Saturday, February 7, 2015

Joseph Schumpeter - Biography and Contribution

Joseph Schumpeter - Biography

Joseph Alois Schumpeter (8 February 1883 – 8 January 1950) was an Austrian-American economist and political scientist. He briefly served as Finance Minister of Austria in 1919. In 1932 he became a professor at Harvard University where he remained until the end of his career.

Schumpeter was born in Třešť, Habsburg Moravia (now Czech Republic, then part of Austria-Hungary) in 1883 to Catholic German-speaking parents. When Joseph was only four years old, Joseph and his mother moved to Vienna.

Schumpeter studied under the Austrian capital theorist Eugen von Böhm-Bawerk and did  his PhD in 1906. In 1909,  he became a professor of economics and government at the University of Czernowitz. In 1911, he joined the University of Graz, where he remained until World War I.

In 1918, Schumpeter was a member of the Socialization Commission established by the Council of the People's Deputies in Germany. In March 1919, he was invited to take office as Minister of Finance in the Republic of German-Austria. In 1921, he became president of the private Biedermann Bank. He was also a board a member at the Kaufmann Bank.

From 1925 to 1932, Schumpeter held a chair at the University of Bonn, Germany. He lectured at Harvard in 1927–1928 and 1930. In 1931, he was a visiting professor at The Tokyo College of Commerce. In 1932, Schumpeter moved to the United States, to Harvard In 1939, Schumpeter became a US citizen.

At Harvard, Schumpeter took heavy teaching load and he showed his personal and painstaking interest in his students. He served as the faculty advisor of the Graduate Economics Club and organized private seminars and discussion groups.Schumpeter in 1942 published what became the most popular of all his works, Capitalism, Socialism and Democracy. It was  reprinted many times and in many languages in the following decades, as well as cited thousands of times.

Schumpeter died in his home in Taconic, Connecticut, at the age of 66, on the night of 7 January 1950. Schumpeter's  posthumous publication was History of Economic Analysis.

Economic Ideas and Analysis of Schumpeter

The source of Joseph Schumpeter's dynamic, change-oriented, and innovation-based economics was the Historical School of economics. Schumpeter's work on the role of innovation and entrepreneurship can be seen as a continuation of ideas originated by the Historical School, especially the work of Gustav von Schmoller and Werner Sombart.

According to Schumpeter circular flow excluding any innovations and innovative activities, leads to a stationary state. The stationary state was, according to Schumpeter, described by Walrasian equilibrium. The entrepreneur disturbs this equilibrium and is the prime cause of economic development, which proceeds in cyclic fashion along several time scales. In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the Russian Nikolai Kondratiev's ideas on 50-year cycles, Kondratiev waves. Schumpeter suggested a model in which the four main cycles, Kondratiev (54 years), Kuznets (18 years), Juglar (9 years) and Kitchin (about 4 years) can be added together to form a composite waveform.

Lecture on Capitalism of Schumpeter

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Schumpeter also thought that the institution enabling the entrepreneur to buy the resources needed to realize his or her vision was a well-developed capitalist financial system, including a whole range of institutions for granting credit.

Schumpeter believed that the success of capitalism would lead to corporatism and to values hostile to capitalism, especially among intellectuals. Unemployment and a lack of fulfilling work will cause intellectual critique, discontent and protests. Parliaments will increasingly elect social democratic parties, and democratic majorities will vote for restrictions on entrepreneurship. Increasing workers' self-management, industrial democracy and regulatory institutions would evolve non-politically into "liberal capitalism". Thus, the intellectual and social climate needed for thriving entrepreneurship will be replaced by some form of "laborism". This will restrict "creative destruction" and so will burden and destroy the capitalist structure.

Schumpeter's democracy is the mechanism for competition between leaders.  Although periodic votes by the general public legitimize governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role for individuals is usually severely limited.

His fundamental theories are often referred to as Mark I and Mark II. In the first, Schumpeter argued that the innovation and technological change of a nation come from the entrepreneurs, or wild spirits. He and asserted that "... the doing of new things or the doing of things that are already being done in a new way" stemmed directly from the efforts of entrepreneurs.

Mark II was developed when Schumpeter was a professor at Harvard. Contrary to the prevailing opinion, Schumpeter argued that the agents that drive innovation and the economy are large companies which have the capital to invest in research and development of new products and services and to deliver them to customers cheaper, thus raising their standard of living. In one of his seminal works, "Capitalism, Socialism and Democracy", Schumpeter wrote:

... large concerns--which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector--and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down.

Schumpeter sees innovations as clustering around certain points in time periods that he refers to as "neighborhoods of equilibrium", when entrepreneurs perceive that risk and returns warrant innovative commitments. These clusters lead to long cycles by generating periods of acceleration in aggregate growth.  New inventions are typically primitive, their performance is usually poorer than existing technologies and the cost of their production is high. A production technology may not yet exist, as is often the case in major chemical inventions, pharmaceutical inventions. The speed with which inventions are transformed into innovations and diffused depends on actual and expected trajectory of performance improvement and cost reduction.

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