creativedestruction

Creative destruction

Joe Schumpeter

Up from the Ashes

The Life and Thought of Joseph Schumpeter

Schumpeter

Illustration by Anita Kunz

Joseph Alois Schumpeter (1883–1950), an Austrian who taught at Harvard for twenty years, was “one of the greatest economists who ever lived, and an electrifying personality besides,” writes HBS professor emeritus Thomas K. McCraw in his new book, Prophet of Innovation: Joseph Schumpeter and Creative Destruction. With this graceful, authoritative biography, McCraw, a Pulitzer Prize–winning historian, has all but ensured that a seminal but relatively uncelebrated twentieth-century visionary will finally get his due.

The signal contribution made by Schumpeter (pronounced “SHOOMpayter”) to the study of economic behavior was to humanize it. In part because of his own turbulent life, he came to understand that mathematical certitude could not always prevail where “indeterminate human behavior,” in McCraw’s words, is involved. And time has served Schumpeter well. Perhaps more so than with any other economist, it is Schumpeter’s language, concepts, and intellectual architecture that business schools and businesspeople use today to define and understand what they do. Indeed, McCraw argues, Schumpeter “was to capitalism what Freud was to the mind: Someone whose ideas have become so ubiquitous and ingrained that we cannot separate his foundational thoughts from our own.”

Remarkably, Schumpeter, an only child with deep and conflicting emotions, produced his sweeping body of scholarship while grappling with Freudian shadows and darkness throughout a sometimes tragic personal life. “Light and chipper in public,” McCraw writes, the charming and generous Schumpeter “lived an altogether different life in private — a continuing, desperate internal struggle with melancholy.”

Excerpts from Prophet of Innovation follow.

On Harvard’s Dazzling Professor

As a teacher at Harvard, Schumpeter soon became a campus “character” — not an eccentric but certainly no conventional professor. As [Schumpeter’s former student and Nobel laureate] Paul Samuelson put it, “The America of Mickey Rooney and Coca-Cola he knew almost nothing about.” During his entire time at Harvard, he went to no football games. He had attended one in 1913, during his visit as an exchange professor at Columbia, and that was enough. He rode the subway that rumbles beneath Harvard Square exactly once. Incapable of driving a car, he traveled by taxi or with friends who drove. Even for very long trips, he preferred to go by rail. He did not board his first airplane until 1937, flying from an academic meeting in Chicago to Miami for a midwinter vacation. He wrote from Miami that he half-expected the plane to crash during his return to Boston.

His fellow economist John Kenneth Galbraith, who arrived at Harvard two years after Schumpeter, remembered him as “a slightly swarthy man of solid frame and a little less than average height.” At 5’8” he was actually about average, but to the 6’8” Galbraith almost everyone seemed short. Schumpeter had “an amused and expressive face and an unremitting love for company and conversation.… Given the choice between being right and being memorable, Schumpeter never hesitated.”…

Each morning, after the elaborate ritual of dressing himself, Schumpeter would walk the six blocks…to Harvard Yard. At precisely the appointed hour, he would make his entrance into the filled classroom, then remove his trademark topcoat, fedora, and gloves — “slowly, finger by finger, as everyone watched,” a student recalled. “It was all very dramatic.” Next, Schumpeter would write something on the blackboard, then whirl around and begin his lecture. Speaking in an aristocratic Viennese accent, he gave the impression of complete spontaneity, even though he prepared every class with meticulous care. Using no notes, he dazzled students with his erudition. “He never told jokes,” Samuelson remembered, “but somehow made the class itself seem witty.” Engaging in quick back-and-forth repartee, “He took you out of the flat dull textbook world and into the three dimensional world of living economics and economists.”

On Entrepreneurship and Continual Innovation

Schumpeter, of course, is the chief proponent and popularizer of the word “entrepreneur,” which appeared in the 1934 English edition of his Theory of Economic Development. (In the original German edition of 1911, he had used the German Unternehmer, which never caught on, partly because its literal meaning is “undertaker.”) Because of the importance of entrepreneurship, and because Schumpeter wrote about it with such insight and verve, his name will be forever linked to the idea.

Beginning in the late 1920s Schumpeter made it clear that entrepreneurship could occur within large and medium-sized firms as well as in small ones, despite bureaucratic obstacles. By the mid-twentieth century, he was arguing that innovation “within the shell of existing corporations offers a much more convenient access to the entrepreneurial functions than existed in the world of owner-managed firms. Many a would-be entrepreneur of today does not found a firm, not because he could not do so but simply because he prefers the other method.”

Thus, “new men” founding “new firms” were still vital, but they were no longer the only agents of innovation. The same economic role could be accomplished within older and larger companies. Entrepreneurs were still recognizable personal types, but innovation could also be — and, given the large size of some companies, sometimes had to be — performed by teams of people. Meanwhile, the continual infusion of energy by the kinds of startup companies Schumpeter himself preferred remained vital sources of economic creativity.

On the Life of the Masses and Creative Destruction

SCHUMPETER: Ambivalent about Harvard, uneasy about America, he wondered, “Why am I always so out of sympathy with my milieu?”

COURTESY HARVARD UNIVERSITY ARCHIVES, HUGB S276.90

[In his 1942 book Capitalism, Socialism and Democracy, Schumpeter] begins his argument by demonstrating that modern industrial capitalism has produced the greatest per capita output of goods ever recorded. And, in direct contravention of the Marxian forecast that workers’ share of income will steadily fall, Schumpeter repeats that “relative shares have substantially changed in favor of the lower income groups.” Regardless of subjective assessments by popular writers and literary intellectuals, statistics show that the average worker, under “an avalanche of consumers’ goods,” has a better material existence than ever before. In other words, “the capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.”

As James Tobin, one of Schumpeter’s best Harvard students and himself a Nobel laureate, later wrote, “I have always thought that Schumpeter’s ambition was to develop a theory of history of the same sweep and scope as Marx’s, while at the same time turning Marxism upside down.” And one major way in which Schumpeter upended Marx was in his treatment of the controversial question of monopoly. Writing in the 1930s and early 1940s — a time of mounting public anger over industrial concentration — Schumpeter emphasized that enormous improvements in the lives of common people had “evolved during the period of relatively unfettered ‘big business.’ ” Far from diminishing the benefits consumers derived from the workings of the capitalist engine, businesses of grand size had increased them.

In explaining how this happened, Schumpeter introduces his famous term “creative destruction”: “The opening up of new markets, foreign or domestic, and the organized development from the craft shop and factory to [giant] concerns…illustrate the same process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

Since creative destruction is an evolutionary process, the performance of capitalism must be judged “over time, as it unfolds through decades or centuries.” Here, Schumpeter criticizes the approach of his fellow economists to the study of big business. It is useless, he says, to analyze a large company’s behavior at a single point in time — that is, to “accept the data of the momentary situation as if there were no past or future to it.” Yet this is the customary method. The typical economic theorist or government commission does not see the behavior of the major firm, “on the one hand, as a piece of past history, and, on the other hand, as an attempt to deal with a situation that is sure to change presently — as an attempt by those firms to keep on their feet, on ground that is slipping away from under them. In other words, the problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them.”

Creative destruction constantly sweeps out old products, old enterprises, and old organizational forms, replacing them with new ones. “Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it.” Strategy, he goes on to say, “must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull.” Any investigator who does not recognize these essential characteristics, Schumpeter concludes, “does a meaningless job.”

In using the term “business strategy” [which he did not coin but did popularize] and likening corporate initiatives to military behavior, Schumpeter helped set off a revolution in the analysis of business that is still thriving today. “Business strategy” and “corporate strategy” have gained extremely wide currency not only in the business press but in popular media as well. Numerous consulting firms specialize in strategy, and all business schools teach courses in it. Most of these schools have an entire department with the word “strategy” or “strategic” in its name. Hundreds of business books and thousands of articles published over the last six decades include “strategy” in their titles. It has been one of the most significant new ideas in business thinking since the 1940s.

Contact the author at gemmons@hbs.edu.

THE SEVENTH LESSON by Peter Drucker

Taught by Schumpeter

One more experience, and then I am through with the story of my

personal development. At Christmas 1949, when I had just begun to

teach management at New York University, my father, then 73 years old,

came to visit us from California. Right after New Year's, on January

3, 1950, he and I went to visit an old friend of his, the famous

economist Joseph Schumpeter. My father had already retired, but

Schumpeter, then 66 and world famous, was still teaching at Harvard

and was very active as the president of the American Economic

Association.

In 1902 my father was a very young civil servant in the Austrian

Ministry of Finance, but he also did some teaching in economics at the

university. Thus he had come to know Schumpeter, who was then, at age

19, the most brilliant of the young students. Two more-different

people are hard to imagine: Schumpeter was flamboyant, arrogant,

abrasive, and vain; my father was quiet, the soul of courtesy, and

modest to the point of being self-effacing. Still, the two became fast

friends and remained fast friends.

By 1949 Schumpeter had become a very different person. In his last

year of teaching at Harvard, he was at the peak of his fame. The two

old men had a wonderful time together, reminiscing about the old days.

Suddenly, my father asked with a chuckle, "Joseph, do you still talk

about what you want to be remembered for?" Schumpeter broke out in

loud laughter. For Schumpeter was notorious for having said, when he

was 30 or so and had published the first two of his great economics

books, that what he really wanted to be remembered for was having been

"Europe's greatest lover of beautiful women and Europe's greatest

horseman--and perhaps also the world's greatest economist." Schumpeter

said, "Yes, this question is still important to me, but I now answer

it differently. I want to be remembered as having been the teacher who

converted half a dozen brilliant students into first-rate economists."

He must have seen an amazed look on my father's face, because he

continued, "You know, Adolph, I have now reached the age where I know

that being remembered for books and theories is not enough. One does

not make a difference unless it is a difference in the lives of

people." One reason my father had gone to see Schumpeter was that it

was known that the economist was very sick and would not live long.

Schumpeter died five days after we visited him.

I have never forgotten that conversation. I learned from it three

things: First, one has to ask oneself what one wants to be remembered

for. Second, that should change. It should change both with one's own

maturity and with changes in the world. Finally, one thing worth being

remembered for is the difference one makes in the lives of people.

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