Economic Insights FEDERAL RESERVE BANK OF DALLAS VOLUME 6, NUMBER 3 SCHUMPETER In His Own Words This article illustrates the thought Born in Czechoslovakia in 1883, in 1942. All totaled, he penned more process and writing of the economist economist Joseph Schumpeter was far than 8,400 pages of insightful reading. ahead of his time. More clearly than No review short of a tome could possi- who probably best understood capital- any other economist past or present, bly give adequate credit to his life’s ism and its evolutionary development. Schumpeter understood and articulated work. And thus the following sampling Joseph Schumpeter is remembered the dynamics of the capitalist economic of quotes should be viewed as merely today for his concept of capitalism’s process. Although perhaps best known this author’s favorites, cut twice by half tendency for “creative destruction.” for his theory of “creative destruction,” to fit the space constraints of this pub- Schumpeter also offered many valuable lication. But as Mike Cox demonstrates with insights into other areas of economics: this collection of quotes, Schumpeter’s innovation, economic growth, business Capitalism writings tackled a number of com- cycles, unemployment, saving, income Capitalism is an economic system plex topics, many of which remain distribution, monopoly, political econ- based on private property rights, pur- omy and more. Only in the past two suit of self-interest, freedom to choose controversial. decades or so, as economists back away and ability to borrow. It is a method of Schumpeter was not an idle theo- from the teachings of John Maynard economic change guided by individual rist who wrote solely for his fellow Keynes and face the failure of macro- needs and wants and financed by credit economists. Rather, he was one of the economic theory to adequately explain (obtained through debt and equity). Far economic growth, has Schumpeter’s from the popular image of a haven for last grandly knowledgeable—and pro- genius received due recognition. “corporate fat cats,” a capitalist econ- foundly insightful—social theorists of Schumpeter graduated from the omy crowns the consumer as king, and the 20th century. And one certainly University of Vienna in 1904, began the system provides for the well-being can’t claim to understand capitalism teaching in 1909 at the University of of the masses. without having been introduced to Czernowitz and then moved to the University of Graz in Austria. He first We have to define that word which Schumpeter’s keen observations about visited the United States in 1924, re- good economists always try to avoid: the market process and ideas about its turning to Europe in 1925 as a profes- capitalism is that form of private probable future evolutionary path. We sor at the University of Bonn. With property economy in which innova- hope this introduction to his work will Hitler’s rise in 1932, Schumpeter left tions are carried out by means of bor- Europe to take a position at Harvard rowed money. BC, 223. not only enlighten you but perhaps University, where he remained until his also inspire you to seek out his many death in 1950. He was a founding We must always start from the satis- important contributions to economics. member of the Econometric Society in faction of wants, since they are the It will be time well spent. 1930 and later served as its president. end of all production. TED, 65. He was also president of the American — Bob McTeer Economic Association in 1948. Consumers’ satisfaction supplies the President Schumpeter was prolific, with 21 social meaning for all [capitalist] eco- Federal Reserve Bank of Dallas books and pamphlets, 127 articles and nomic activity. BC, 73. numerous other works to his name. He is best known for his book Capitalism, The fundamental impulse that sets Socialism, and Democracy, published and keeps the capitalist engine in areas, making whole new industries Capitalism possible or economically feasible. Tech- nology spillovers—unintended conse- “We have to define that word which good economists always try to avoid: quences—are the alchemy of the capi- talist macroeconomic system. Doom- capitalism is that form of private property economy in which innovations saying in the capitalist economy is a are carried out by means of borrowed money.” losing proposition. The essential point to grasp is that in dealing with capitalism we are deal- ing with an evolutionary process. motion comes from the new con- Capitalism…is by nature a form or CSD, 82. sumers’ goods, the new methods of method of economic change and not production or transportation, the new only never is but never can be sta- The changes in the economic process markets, the new forms of industrial tionary. CSD, 82. brought about by innovation, together organization that capitalist enterprise with all their effects, and the re- creates. CSD, 83. [Capitalism is]…the perennial gale of sponse to them by the economic sys- creative destruction. CSD, 84. tem, we shall designate by the term These spontaneous and discontinu- Economic Evolution. BC, 86. ous changes…appear in the sphere of Economic Growth industrial and commercial life, not in Economies don’t grow, they evolve. Economists are at long last emerging the sphere of the wants of the con- The dictionary defines growth as an from the stage in which price compe- sumers….Assume tastes as “given.” increase in quantity or size. If an econ- tition was all they saw.…In capitalist TED, 65. omy were to literally grow, it would reality…it is not that kind of com- have more or bigger companies hiring petition which counts but the compe- The opening up of new markets, more of the same kinds of workers and tition from the new commodity, the foreign or domestic, and the organi- producing more of the same goods and new technology, the new source of zational development from the craft services. Evolution, in contrast, is a supply, the new type of organization… shop and factory to such concerns process of continuous change, leading competition which…strikes…existing as U.S. Steel illustrate the same to a higher, more complex and better firms…at their foundations and their process of industrial mutation—if I state. Capitalist economies evolve, and very lives. This kind of competition may use that biological term—that their evolution is endogenous, arising is…much more effective than the incessantly revolutionizes the eco- spontaneously from the ingredients of other…and [is]…the powerful lever nomic structure from within, in- the capitalist economic system. The that in the long run expands output. cessantly destroying the old one, competition to innovate (so as to gain CSD, 84 –85. incessantly creating a new one. This market share or simply survive) pushes process of Creative Destruction is living standards forever onward and Whenever…a given quantity of out- the essential fact about capitalism. upward like a perpetual-motion ma- put costs less to produce than… It is what capitalism consists in and chine. Moreover, there is no reason to before, we may be sure, if prices what every capitalist concern has got believe that progress will slow over have not fallen, that there has been to live in [Schumpeter’s emphasis]. time; indeed, it may even speed up as innovation somewhere. It need not CSD, 83. new technologies spill over into other necessarily have occurred in the industry under observation, which may only be applying, or benefitting from, an innovation that has occurred Economic Growth in another. BC, 88–89, footnote 1. The changes in the economic process brought about by innovation, We are just now in the downgrade of a wave of enterprise that created the together with all their effects, and the response to them by the economic electrical power plant, the electrical industry, the electrified farm and system, we shall designate by the term Economic Evolution. home and the motorcar. We find all that very marvelous, [yet]…we cannot for our lives see where opportunities lap of the gods may be more or less phenomena, difficulties, and prob- of comparable importance are to productive than any that have thus far lems of economic life in capitalist come from. As a matter of fact, how- come within our range of observa- society. BC, 87. ever,…the mere utilization of the tion….There is no reason to expect achievement of the age of electric- slackening of the rate of output Individual innovations imply, by ity…would suffice to provide invest- through exhaustion of technological virtue of their nature, a “big” step and ment opportunities for quite a time to possibilities. CSD, 118. a “big” change. A railroad through come. CSD, 117–18. new country, i.e., country not yet Innovation and the Business Cycle served by railroads, as soon as it gets Those writers [Thomas Malthus, Competition drives innovation, and into working order upsets all condi- James Mill, David Ricardo] lived at the innovation drives progress, but not tions of location, all cost calculations, threshold of the most spectacular without a corresponding economic all production functions within its economic developments ever wit- churn—out with the old and in with radius of influence; and hardly any nessed. Vast possibilities matured into the new. Schumpeter certainly under- “ways of doing things” which have realities under their very eyes. stood that progress, by nature, is un- been optimal before remain so after- Nevertheless, they saw nothing but settling, but he likely would have ward. BC, 101. cramped economies, struggling with laughed at the adage “I’m in favor of ever-decreasing success for their daily progress; it’s all the changes I don’t It is by no means farfetched or para- bread.