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The Essential Joseph Schumpeter
Joseph Schumpeter is one of the most accomplished economists of the twentieth century. Included among his many contributions is his path-breaking work on entrepreneurship—one of the quintessential characteristics of all market economies. His timeless phrase describing the entrepreneurial process as one of “creative destruction” is likely second only to Adam Smith’s “invisible hand” in its daily use in popular tweets, blog posts, speeches, and articles. Renowned Chicago economist Jacob Viner praised Schumpeter’s History of Economic Analysis as “by a wide margin … the most brilliant contribution to the history of analytical phases of our discipline which has ever been made”. However, it is Schumpeter’s Capitalism, Socialism and Democracy, in which Schumpeter describes the mechanisms—entrepreneurs, innovation, and capital reallocation—that drive the “incessant” recreation of capitalism that is by far his most popular and successful work.
- GenresEconomicsPhilosophy
47 pages, Kindle Edition
Published April 22, 2020
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Displaying 1 - 5 of 5 reviews
November 11, 2024
Joseph Schumpeter (1883 - 1950) was one of the most accomplished economists, yet is little known outside of academic circles. Some quick facts about him: born in a small town south of Prague in what is today the Czech Republic; often associated with many economists of the “Austrian School of Economics” though Schumpeter did not consider himself a member; served as the finance minister of Austria; and immigrated to the United States and became a professor at Harvard. His best known works are Business Cycles (1939), Capitalism, Socialism and Democracy (1942), and History of Economic Analysis (posthumously 1954).
The term “Creative Destruction” is often attributed to Schumpeter (though the term was coined by a German economist, Werner Sombart, in 1913), which he believed was an integral component of entrepreneurship and capitalism by replacing old methods and products with new and/improved ones (think of the automobile replacing the horse and buggy). An underlying premise in Schumpeter’s work is the important role of profit and losses in an economy. Profit provides strong incentive for entrepreneurs to go through the trial and error processes of innovation. Moreover, it is profit and losses that discard bad ideas in favor of good ones. This is the upside of business failure in a capitalist economy - not only does the system promote efficiency but the elimination of bad companies frees up resources and labor to be used in endeavors that the market desires. As such, a vibrant economy will have both a large number of successful business start-ups and a large number of business failures. The more important aspect of competition is not how many existing firms are in the industry, but rather the ability of new firms to enter (i.e., what barriers to entry exist) and compete with existing firms, thus potentially displacing them. This forces existing firms to try to adapt by offering a better product or lower prices. Government policies which prevent the entry and exit from the market are counterproductive.
Schumpeter’s main concern was government interference in the economy, particularly through tax policy which would stunt innovation and progress. While today Arthur Laffer gets credit for the curve of his name (i.e., the Laffer Curve) which states that high tax rates will disincentivize productivity and result in less tax revenue, Schumpeter pointed this out decades earlier.
Although Schumpeter is known best for his work in economics, his insights also extend into issues of democracy and government. He disagreed with John Maynard Keynes over the assumption of a wise and benevolent government; Schumpeter believed that individuals in public service remained self-interested actors. An inherent weakness of democracy is that if a large proportion of voters are not motivated to be informed or meaningfully participate, this gives well organized subsets of voters and special interest groups the upper hand in the political process.
In Capitalism, Socialism and Democracy Schumpeter agreed with Marx that socialism will ultimately prevail over capitalism, though for different reasons than Marx. Such would not come about through a worker’s revolution, but rather through insidious subversion by an intellectual class and government bureaucrats. Such “democratic socialism” would, in the long run, result in less personal freedom and lower levels of economic prosperity.
On a lighter note, supposedly Schumpeter set three goals for himself in life, to be the greatest economist in the world, the best horseman in Austria, and the greatest lover in Vienna. He claimed to have reached two of those goals but would not say which.
The term “Creative Destruction” is often attributed to Schumpeter (though the term was coined by a German economist, Werner Sombart, in 1913), which he believed was an integral component of entrepreneurship and capitalism by replacing old methods and products with new and/improved ones (think of the automobile replacing the horse and buggy). An underlying premise in Schumpeter’s work is the important role of profit and losses in an economy. Profit provides strong incentive for entrepreneurs to go through the trial and error processes of innovation. Moreover, it is profit and losses that discard bad ideas in favor of good ones. This is the upside of business failure in a capitalist economy - not only does the system promote efficiency but the elimination of bad companies frees up resources and labor to be used in endeavors that the market desires. As such, a vibrant economy will have both a large number of successful business start-ups and a large number of business failures. The more important aspect of competition is not how many existing firms are in the industry, but rather the ability of new firms to enter (i.e., what barriers to entry exist) and compete with existing firms, thus potentially displacing them. This forces existing firms to try to adapt by offering a better product or lower prices. Government policies which prevent the entry and exit from the market are counterproductive.
Schumpeter’s main concern was government interference in the economy, particularly through tax policy which would stunt innovation and progress. While today Arthur Laffer gets credit for the curve of his name (i.e., the Laffer Curve) which states that high tax rates will disincentivize productivity and result in less tax revenue, Schumpeter pointed this out decades earlier.
Although Schumpeter is known best for his work in economics, his insights also extend into issues of democracy and government. He disagreed with John Maynard Keynes over the assumption of a wise and benevolent government; Schumpeter believed that individuals in public service remained self-interested actors. An inherent weakness of democracy is that if a large proportion of voters are not motivated to be informed or meaningfully participate, this gives well organized subsets of voters and special interest groups the upper hand in the political process.
In Capitalism, Socialism and Democracy Schumpeter agreed with Marx that socialism will ultimately prevail over capitalism, though for different reasons than Marx. Such would not come about through a worker’s revolution, but rather through insidious subversion by an intellectual class and government bureaucrats. Such “democratic socialism” would, in the long run, result in less personal freedom and lower levels of economic prosperity.
On a lighter note, supposedly Schumpeter set three goals for himself in life, to be the greatest economist in the world, the best horseman in Austria, and the greatest lover in Vienna. He claimed to have reached two of those goals but would not say which.
March 28, 2026
Quick Overview and Introduction to Schumpeter’s Major Works
This short book serves as an excellent overview and introduction to Joseph Schumpeter’s major works. Each chapter reviews a particular work or theme in his writing, including more recent examples demonstrating the validity of his arguments and accuracy of his predictions.
This short book serves as an excellent overview and introduction to Joseph Schumpeter’s major works. Each chapter reviews a particular work or theme in his writing, including more recent examples demonstrating the validity of his arguments and accuracy of his predictions.
April 27, 2022
Schumpeter has been declared a heretic and excommunicated from the Austrian School. The long view is that he excommunicated them. He is a brilliant original economist who gave us creative/destruction and a curious, valuable construct of swarms of entrepreneurs.
This entire review has been hidden because of spoilers.
August 1, 2026
Marx comparison was interesting. I think Schumpeter had a good head on his shoulders. Was surprised by this. I, up to this point, thought he was a pure capitalism guy considering his influence and fame in the industry of entrepreneurship and its academic study.
June 30, 2024
Goes over much of Schumpeter's work and thought. Good summary.
Displaying 1 - 5 of 5 reviews