CZERNOWITZ, now called Chernivtsi, is about as unlikely a place as anywhere on Google Earth to launch an intellectual revolution whose implications reverberate today, nearly 100 years on.
But this minor provincial city on the far eastern edge of the then Austro- Hungarian Empire is where, in 1909, precocious 26- year- old economics professor Joseph Schumpeter published his Theory of Economic Development , which first outlined his thoughts about the entrepreneur’s central role in wealth creation.
He wrote: ‘‘ The typical entrepreneur is more self- centred than other types because his characteristic task — theoretically as well as historically — consists precisely in breaking up old and creating new tradition.’’
Schumpeter’s pioneering theories — identifying innovation and entrepreneurship as the drivers of capitalism, thus unleashing what he saw as capitalism’s incessant revolution of ‘‘ creative destruction’’ — have become the mainstream fare of MBA courses everywhere. Silicon Valley, with its dotcom bankrupts and Google Earth moguls, its restless inventors and feverish venture capitalists, could have been designed as a Schumpeterian laboratory where business leaders are ‘‘ standing on ground that is crumbling beneath their feet’’.
But California is a long way from Czernowitz and, even given Vienna’s vibrant intellectual life, the puzzle remains how this environment could have fostered Schumpeter’s remarkable insights. There were no real- life models of business innovation provided by the ageing Hapsburg monarch or his entrenched bureaucracy, incompetent parliament or dozy business system. The answer provided by Harvard economist Thomas McCraw in his biography of Schumpeter, Prophet of Innovation, is that Schumpeter was something of an entrepreneur himself.
Not your typical academic careerist, Schumpeter had a spell as a lawyer in Cairo ( profitable), a brief, disastrous term as Austro- Hungarian finance minister ( hyperinflation), a slightly longer and even more disastrous time as an investment banker ( bankrupt), three wives ( two simultaneously) and a constant stream of enthusiastic mistresses, including the women of Czernowitz whom he later boasted imparted ‘‘ lessons in advanced sexuality’’. He also fought a duel with the university librarian over student access to textbooks ( and won).
In 1932, having returned to the academy to repay his debts, he moved to Harvard where, ludicrously, during World War II he and his wife were investigated by the FBI at the personal insistence of J. Edgar Hoover for alleged sympathies to the Axis. Schumpeter spent the last 20 years of his life lecturing and writing at Harvard. His Capitalism, Socialism and Democracy ( 1942) and posthumous History of Economic Analysis ( 1954) became enduring classics.
With 186 pages of notes, McCraw lacks nothing in scholarly research. But he has taken care to write for a general, not specialist, readership. At a time of neo- con ascendancy, he has done a service by allowing us to see this brilliant scholar in his complete perspective.
Schumpeter’s Harvard colleague J. K. Galbraith described him in 1986 as ‘‘ the most sophisticated conservative of this century’’. He was certainly anti- Marxist and, although he held himself aloof from practical politics, there was a good deal of Schumpeter in Margaret Thatcher and Ronald Reagan.
But his real intellectual ‘‘ spectre’’, in McCraw’s word, was John Maynard Keynes, his exact contemporary and, as an economist, exact opposite. Where Schumpeter focused on the dynamic entrepreneur creating wealth in the long run through increasing supply, Keynes emphasised the need for the public sector to stimulate aggregate demand in the near term. Where Schumpeter pioneered business strategy, Keynes pioneered macro- economics.
Schumpeter eschewed politics and policy, and gave scant regard to the role of regulation in supporting the institutions of capitalism; Keynes successfully diagnosed the great ill of his time, the Depression, and was all about timely remedies that became the policy orthodoxy for decades. Where Schumpeter was a prolix intellectual synthesiser and boundary- crosser, Keynes was concise.
McCraw argues — one suspects this is why he has written the book — that with the passage of time it is Schumpeter’s vision of capitalism, not Keynes’s, that provides a more enduring explanation of economic activity. If true, then Schumpeter’s view of capitalism as fragile, in that its success carried the seeds of its destruction, needs careful thought.
He argued that capitalism, having replaced the feudal ties of reciprocal obligation with impersonal efficiency and social mobility, was in its modern form further substituting the freedom of property ownership with an employee relationship that did not command loyalty and was characterised by insecurity. However prosperous it made them, these employees lacked an emotional attachment to the system.
‘‘ Having destroyed the moral authority of so many other institutions, in the end ( capitalism) turns against its own,’’ Schumpeter warned. That was in 1942, but the warning carries a surprising vitality in the 21st century. Stephen Mills is the author of The Hawke Years: The Story From the Inside.