En­tre­pre­neur­ial spirit

The Weekend Australian - Review - - Books - Stephen Mills Prophet of In­no­va­tion: Joseph Schum­peter and Creative De­struc­tion By Thomas K. McCraw Belk­nap Press, 736pp, $ 70

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.

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