The 'other' economist whom 'few would forget'

It would be a double irony if 1983 were to pass without adequate recognition of the other major economist who was born exactly 100 years ago. Much attention has been given to the centenary of the birth of John Maynard Keynes in 1883. But there has been little more than passing reference to his Austrian contemporary, Joseph A. Schumpeter, who brought a brilliant light to bear on some of the most distinctive features of capitalism, and notably of American entrepreneurship in its most creative phases.

Behind Schumpeter's vigorous published writings stood an individual few would forget. Short and stocky of build, reportedly the son of a general in the Austro-Hungarian Imperial Army, he moved with the confidence of one who had been recognized as a student of exceptional talent in pre-World War I Vienna, when Austrian economics led the world; who had published a major theoretical statement at the age of 28; analyzed the decisive monetarization of economies during World War I; and served as Austrian minister of finance while still in his 30s.

Schumpeter's lecturing style in his later years at Harvard was, characteristically, that of a compact, energetic man striding up and down a long platform in Emerson Hall, contemptuous of the trivial or routine, expounding on the importance of ''creative disequilibrium'' and the long view as conditions of economic growth. When a phrase particularly served his purpose, he would return to the central desk to write it down.

Impatient also with the multiple requirements and formal apparatus of American graduate education - required courses, term papers, periodic exams which he felt unnecessary to advanced learning and research - he responded to departmental grading practices by giving A's to most of his seminar students, of which more later.

Though Keynes's and Schumpeter's angles of approach and principal conclusions differed fundamentally, each respected the contributions of the other; their complementary analyses illuminated critical conditions for sustaining a prosperous capitalist economy. Both would also have appreciated the ironies, then and now, of the respective attention now given them in ''the capitalist press.''

In their own lifetimes the appearance of Keynes's ''General Theory'' so dominated professional discussion in following decades, especially in the United States, that much of Schumpeter's work received far less attention than it merited. (Indeed he once commented that such was the tide that parts of the second volume of his ''Business Cycles'' may have been read only by the proofreader and himself.)

Current discussion neglects how much Schumpeter has to teach us about the essential dynamics of entrepreneurial capitalism. It was his ''Theory of Economic Development'' (1911) that most sharply set forth the decisive role of the creative entrepreneur in the process of innovation and effective allocation of resources.

In a later book - ''Capitalism, Socialism, and Democracy'' (1942) - Schumpeter also foresaw more acutely than most some of the ways in which capitalism might be undone by its very successes. Turning Karl Marx (whom he admired for looking at the larger scene and asking important questions) on his head, Schumpeter came to opposite conclusions. He denied Marx's view that capitalism would lead to the impoverishment of the masses. On the contrary, its distinctive capacity is to produce and distribute an ever-increasing array of goods and services to ever larger numbers. But he warned that this capacity - combined with democracy - could generate inflationary pressures, tax policies, and political constraints that might smother the entrepreneurial incentives and processes on which a growing economy depends.

It was by perceiving and exploiting new possibilities - new markets, new technologies, new ways to combine the factors of production - that the entrepreneur created the more productive economy that could best generate wealth , jobs, and profits.

He did so - and this is crucial to Schumpeter's analysis - by breaking the use of capital, labor, and other resources out of a stagnating circular flow through the process of ''creative destruction,'' an essential displacement of less efficient methods and applications of resources with more productive techniques and combinations. And it was the prospect of entrepreneurial profits that drove the system, as Schumpeter saw things. It spurred entrepreneurs to seize new opportunities, to take risks, and to mobilize technology and resources for higher yields.

This in his view is what successively brought into being America's canals and railroads, built factories and utilities, produced and distributed the farm equipment, and developed the transportation and organization that brought the American granary to world markets. New England entrepreneurs illustrated the process by shifting their energies and growing capital from trade and shipping into textile manufacturing in Lowell and Lawrence, Mass., and then moved on to railroads and western mining. At each stage entrepreneurial initiative and creative destruction can be seen, reallocating resources to more productive fields and combinations.

This line of analysis seems especially pertinent to the world we face today, to the need to increase capital formation and shift resources from declining industries to more productive forms of investment. In Schumpeter's terms this calls for entrepreneurs of large imagination and long vision, to break out of the short horizons, the unproductive financial manipulations and management conventions which, incidentally, he felt business schools wrongly emphasized. (He is remembered at Harvard, in the oral examinations of PhD candidates, for the special edge with which he went after those who presented a field taken at the Business School.)

Schumpeter would thus seem closer to the declared values and goals of the Reagan administration than anything in the Keynesian canon. Yet we see little mention of Schumpeter while watching a Republican President pursue recovery (and reelection) through a more sweeping and extended program of deficit financing than earlier Keynesians ever envisioned.

Nor have corporate spokesmen evoked Schumpeter's eloquent defense of the intelligently run monopoly which can provide - as have AT&T and the Bell System - superior performance, adequate financing for technological innovation, and investment programs based on the long view.

To return to all those A's that Schumpeter gave his graduate students. When pressed by a conscientious departmental chairman, he explained that the superior students got A's because they earned them, the less good because they needed encouragement, those from overseas in recognition of language difficulties, etc. To understand this behavior, one must recall the nature of European graduate education and the elevated status of the distinguished academic in Vienna early in this century, a time when Herr Professor's attention, if given at all, focused on the exceptionally talented few.

One remarkable product of that academic system was Joseph A. Schumpeter, 1883 -1950. His analyses - both of the economics of capitalism and of the political context in which it now operates - offer acute insights for the 1980s.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.