Rediscovering Schumpeter: The power of capitalism

Rediscovering Schumpeter: The power of capitalism

Thomas McCraw, author of a biography on economist Joseph Schumpeter, discusses his thoughts on his legacy in this interview

Sean Silverthorne

If capitalism was the most influential single economic and social force of the 20th century (and continuing today), there is no better guide to understanding its power and complexity than famed economist Joseph Schumpeter, says Harvard Business School’s Thomas K McCraw. McCraw, Isidor Straus Professor of Business History Emeritus and a past winner of Pulitzer Prize for History, has written a new biography,
Prophet of Innovation: Joseph Schumpeter and Creative Destruction, which weaves together threads of social, business and economic histories to illuminate Schumpeter’s life and work.
Q: What attracted you to research and write about Schumpeter? And why the title Prophet of Innovation?
A: I think Schumpeter is the most penetrating analyst of capitalism who ever lived. He saw things other people didn’t see, partly because he lived in seven different countries. He also served as Austria’s finance minister and worked for three years as an investment banker, where he made a fortune that he promptly lost in a stock market crash. So he wasn’t a typical academic, even though he spent most of his career as a professor, including almost 20 years at Harvard.
As for my title, here’s the quotation that inspired it: “Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capitalist propulsion.” Schumpeter wrote this during the Great Depression of the 1930s. Many smart people of that time believed that technology had reached its limits and capitalism had passed its peak. Schumpeter believed the exact opposite, and of course he was right.
Q: Schumpeter introduced the term “creative destruction” and championed the role of the entrepreneur in both start-ups and in established firms. What can business leaders take away from these ideas? A: The main takeaway is the absolute relentlessness of creative destruction and entrepreneurship. In a free economy, they never stop. Schumpeter wrote that all firms must try, all the time, “to keep on their feet, on ground that is slipping away from under them”. So, no serious businessperson can ever completely relax. Someone, somewhere, is always trying to think of a way to do the job better. Whatever has been built is going to be destroyed by a better product, method, organisation or strategy.
The creative destruction can occur within a large innovative company (Toyota, GE, Microsoft), but it’s much more likely to happen with start-ups.
Q: Capitalism, Socialism and Democracy
is perhaps Schumpeter’s best-known work. What makes it so provocative even half a century later?
A: Chapter 7, “The Process of Creative Destruction," is only 6 pages long, but it captures the essence of capitalism. The two chapters preceding and the two following it flesh out the argument. So in the space of a little over 40 pages, we have probably the richest material ever written on the broad subject of capitalism. The rest of the book is full of provocative ideas on politics, economics, and society, from ancient times to the present.
Q: You compare reading his books with listening to Beethoven’s symphonies. What powers did he command as a writer?
A: I made this comparison for two reasons. First, Beethoven’s music is not always easy to understand — in contrast, for example, to Mozart’s. You have to be patient with Beethoven, and listen carefully, sometimes over and over, to get the full message.
Another reason for the comparison is that Beethoven’s music is grandiose and extremely romantic, and the same can be said of Schumpeter’s writing — very unusual for an economist. But because capitalism is much more than just an economic system, Schumpeter made himself more than an economist. He was the most erudite economic scholar of his time.
Q: Today, what would he tell us about the evolution of capitalism in 21st century? A: Several economists have said that the 21st century is going to be “the century of Schumpeter,” and I agree. Innovation and entrepreneurship are flowering all over the world in unprecedented fashion — not only in the well-publicised cases of China and India. The word ‘globalisation’ is accurate enough, but it understates the case, in part because of the information revolution wrought by the internet. This makes management more challenging.