29 Oct 2009

Prophet of Innovation -- The Review

Thomas McCraw's biography of Joseph Schumpeter is fluid, interesting, well paced, and evenly weighted between his private and professional lives.

Schumpeter is known for the phrase "creative destruction," and he lived a life with lots of both. His mother "married up" to give him access to a better education (and higher social status) in Vienna, and the boy genius made his mark there -- before failing as finance minister (politics!) in the post WWI chaos.

His life took many turns and he worked in many places. In one terrible fortnight, his life turned upside down: just as he rushed to his mother's deathbed, his [second] wife died in childbirth -- as did the child. At that moment, Schumepeter's goals (to be the world's greatest horseman, lover and economist) seemed trivial.

He plunged into his work, producing a massive book on Business Cycles (1939) that was too dense for most readers and overshadowed by the massive popularity of Keynes's General Theory (1936).

Convinced (rightly!) that Keynes had missed the importance of dynamics and innovation, Schumpeter wrote Capitalism, Socialism and Democracy (1942) -- a book that brought him great fame and recognition as the father of entrepreneurial studies, business strategy and innovation [I've read this one :)].* Schumpeter, like Hayek (another Austrian), understood that our world is not only in a constant state of DIS-equilibrium, but also that our prosperity is best advanced within a capitalistic system that rewards success and quickly disposes of failure.

It is in this sense that the theories and practices of Keynes (and other fans of managed economies) have been and will continue to be the greatest barriers to human achievement and the greatest friends to the status quo and those who would corrupt (and be corrupted) in the game of robbing Peter to pay Paul.

Luckily for Schumpeter, he remarried, and Elizabeth (an economist whose career was blocked by her gender and study area -- Japan) was able to help him stay sane (he never recovered from the death of his mother and second wife) while he wrote CS&D as well as the masterful -- in the eyes of economists -- History of Economic Analysis (1954).

Schumpeter was perhaps lucky to die, in his sleep, at the height of his popularity, leaving behind a massive legacy: numerous grateful students, appreciative colleagues (many of whom he rescued from Nazi Germany), and several new fields in business and economic studies.

As an intellectual and economist, he was rare in his overarching desire to understand and give credit to views that did not agree with his. Somewhat ironically, one of his star students (Paul Samuelson) became famous for pursuing the type of mathematical economics that has become a lodestone on the profession. Schumpeter would not have accepted the math-centric economics that leaves out the innovation, creativity, and conflict essential to capitalism but unwieldy within mathematical models incapable of including such "badly behaved" activities.**

He understood that economists' the most common model -- an economy with perfectly competitive markets -- is most uncommon in reality. And that's why economists often have very much textbook knowledge and very little useful knowledge. I should hope that Schumpeter's rising popularity is a sign that such autistic economics is falling out of fashion -- in less than a generation, I hope!

Bottom Line: This book gets five stars for its balance, insight and accessibility. It's one thing to be the man Schumpeter was; it's entirely another thing (a wonderful thing!) to have such a brilliant study of that man. We are twice lucky!

* The Economist ridicules management gurus whose "numeric" solutions improve nothing but their consulting income.
** Econ geeks will recognize the problem of using math to understand out of equilibrium (strategic) behavior among actors with varying degrees of market power in an environment of risk and uncertainty. No closed form solutions!


Eric said...

Very nice except that lodestone is a magnetized ore, the original compass, and is valuable because it points in the right direction. Millstone might have worked better.

Josh said...

Good post, although I'm not completely feeling you when it comes to your views on Keynes. I like to remember that folks like Schumpeter have humanity at the heart of their work, and never forget their underlying ethical assumptions.

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