Books on the lives of the great economists might not, at first blush, set the blood coursing. Yet Robert Skidelsky’s masterly three-volume biography of John Maynard Keynes proved how engrossing such a life could be. It is high praise to say that Thomas McCraw’s biography of Joseph Schumpeter, Prophet of Innovation, has some of the same quality and appeal. But is Schumpeter really a figure who deserves to be numbered among the great economists?
Leading economists are a bit like academic royalty: They are counselors to our rulers, they have Nobel Prizes to themselves and in Britain the most influential sit in the House of Lords. Keynes and Schumpeter died before either could win a Nobel, but they made up for this by having a far larger impact than most who win the prize. While Keynes’s approach shaped the global postwar economy, Schumpeter’s explained why capitalism could never be tamed by Keynesian regulation. Keynes rarely spoke of capitalism. Schumpeter believed the concept to be essential to true economic understanding. His two most important books were The Theory of Economic Development (1911) and Capitalism, Socialism and Democracy (1942). Schumpeter’s claim to greatness is that he had great insight into capitalism. Despite living and working in Depression-era America, he was utterly convinced that the great crisis was simply a ground-clearing interlude that would usher in the most prodigious wave of growth in human history.
For much of the twentieth century, mainstream social scientists believed the term “capitalism” was unduly loaded and ideological. They spoke instead of “industrial society” and the “mixed economy”–or they saw no need for any label at all. I can still remember the frisson I felt in the late 1970s when I saw a neon sign turning in the Boston night sky reading Capitalism Works. In Europe at this time only the radical left talked about capitalism. Though far from a leftist, Schumpeter shared with the Marxists and the laissez-faire right an interest in capitalism–and a refreshing candor about naming the system. Indeed, influential exponents of these opposed philosophies learned from Schumpeter, with his focus on the importance of the entrepreneur and on a restless, ruthless accumulation process fostering insatiable appetites and limitless capacities. Like those who erected that sign in Boston, Schumpeter believed that capitalism works, or would work if only politicians gave it a chance.
Schumpeter was born in 1883–the same year as Keynes–and lived only four years longer, dying in 1950. He had a Czech mother and German-speaking father but was raised by his mother in Graz and Vienna. Among the latter city’s galaxy of intellectual stars, several–Ludwig von Mises, who would become the co-founder of the free-market school, and the “Austro-Marxists,” headed by Otto Bauer, leader of the Social Democratic Party–were preoccupied by the workings of the market, seen as either a rival or a complement to state bureaucracy. Fear of German power, and of the growing strength of a Marxist labor movement, prompted this Austrian interest in capitalism. A sequence of photographs reproduced in McCraw’s book show the members of the famous Marx seminar at the University of Vienna led by professor Eugen Böhm-Bawerk, a former imperial finance minister and author of Karl Marx and the Close of His System (1899). Schumpeter is flanked by Mises, Bauer and Rudolf Hilferding, the Marxist economist and future German finance minister.