Schumpeter’s Split Between “Pure” Economics and Institutional Economics: Why Methodological Individualism Was Not Fully Considered

While Joseph A. Schumpeter is classified as a pioneer of evolutionary economics in a wide sense and of entrepreneurship and innovation management in a narrower sense, Schumpeter is less known for his contributions in the area of scientific methodology and history of science. The paper deals with methodological premises in Schumpeter’s scientific positioning. In 1908, in his Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie, Schumpeter developed and pioneered his methodological individualism which is very much acknowledged. However, comparing these early positions with methodological writings in his History of Economic Analysis (1954) shows that he has not really shifted from methodological individualism to an institutional perspective that addresses the academic interplay and sees economic action rooted in historical predispositions, paths and social constraints.     

Emil Lederer and Joseph Schumpeter on Economic Growth,Technology and Business Cycles

This paper compares Joseph Schumpeter and Emil Lederer with respect to their visions concerning the notions of economic growth, technology and business cycles. Their theoretical investigations in a number of thematic areas seem to converge to similar views. More precisely, both Schumpeter and Lederer regard the capitalist economy as a dynamic system where the introduction of innovations is its distinctive characteristic. In such a system, static analysis based on the concept of equilibrium is useful as an expository device to describe the adjustment mechanisms of the economic system. They also paid attention to the emergence of large oligopolistic firms and considered this development as being interwoven with technological progress. Both economists used similar arguments to emphasize the link between economic development and technological change. In their analyses, Schumpeter and Lederer referred to psychological factors motivating the entrepreneur, in order to explain the forces that set in motion the process of innovation and thus economic development. The concept of technological unemployment is also described in a similar manner by both of them. Regarding the issue of business cycles, Schumpeter and Lederer considered them to be a result of endogenous processes within a capitalist economy. Lederer in his late works, argued in a way analogous to Schumpeter, that economic fluctuations are caused from the disruptions created by innovations, which are introduced discontinuously into the economic system. Conclusively, Schumpeter and Lederer delivered theses which are similar in scope and conclusions probably because they were developed in the same social, political, theoretical and ideological environment and were also well acquainted with each other’s ideas.     

Bill Waters on Schumpeter

Bill Waters’ dissertation “Entrepreneurship, Dualism, and Causality: An Appreciation of the Work of Joseph A. Schumpeter” completed at Georgetown University in 1952 is significant for two reasons. The first is clear enough from the very beginning: Schumpeter and the entrepreneur. The other comes to light through hindsight: Bill brings to bear an understanding of economic affairs which is personalist rather than individualist or collectivist in nature. In short, Bill sees as the main activating force in economic affairs not the impersonal forces of the market, not the central planning board, but the person who innovates, who acts bolding in economic affairs, the banker who creates credit, and the capitalist who supplies old funds. Thus the Waters’ dissertation says much not only about Schumpeter but also about Bill himself. His dissertation is his only book-length publication.     

Hans Singer's model of the severity of recessions

This paper draws attention to the innovative but neglected workof Hans Singer on the dynamics of unemployment. Influenced byKeynes, in the late 1930s Singer enquired into the relationshipbetween the inflow into unemployment—resulting primarilyfrom (involuntary) separations from employment—and thesize of the resultant fluctuations in the level of unemployment.His focus was on the determinants of the severity—measuredin terms of how far unemployment rises—of recessions.We illustrate his approach by looking at quarterly data forthe claimant count and its associated inflow and outflow inthe UK over the period 1989–2003, a period which includesone major recession episode. In addition to drawing attentionto Singer's ideas, the paper also extends his model by takinginto account recent empirical evidence on the behaviour of oneof the key variables in his model. We argue that, with thisextension, Singer's elegant and parsimonious model of unemploymentdynamics is a useful complement to Keynes's ideas on the fluctuationsin aggregate demand and output, and is of contemporary relevance.     

Hans Singer's debts to Schumpeter and Keynes

This essay discusses Hans Singer's intellectual formation andthe influences on his early writings and on his post-1947 developmenteconomics. It asks what impact the unusual experience of studyingwith both Schumpeter and Keynes had upon his subsequent economicthinking and practice. It argues that the influence of boththese mentors was surprisingly small, compared with that ofSpiethoff and Clark. Singer repaid his debts to Schumpeter andKeynes, but by working in the new currency of development economics,some of which was his own coinage. His motivation for this vasteffort was derived from the social egalitarianism of figuressuch as William Beveridge, Archbishop Temple and R. H. Tawney,rather than the liberalism of Schumpeter and Keynes.     

The evolutionary and non-Darwinian economics of Joseph Schumpeter

In a recent paper, Matthias Kelm (1997) accepts that `Schumpeter's definition of evolution does not contain any Darwinian mechanism such as natural selection or any other biological concept' and that Schumpeter `made no such attempt' to apply `Darwinian theory to economic evolution'. However, Kelm goes on to argue that Schumpeter would have been a Darwinian if circumstances were different. It is argued here that this contention is highly implausible because Schumpeter explicitly rejected biological metaphors and analogies in economics. Furthermore, Schumpeter misunderstood Darwinism. In his attempt to `interpret' Schumpeter as a Darwinian, Kelm himself misrepresents the three core principles of Darwinism. In addition Kelm's paper contains several misunderstandings and misrepresentations of the assessment of Schumpeter made by Hodgson (1993). This present response concludes that Schumpeter was indeed one of the greatest economists of the twentieth century and that he may legitimately be described as an `evolutionary economist'. However, he cautioned strongly against the use of biological metaphors in economics and there is no legitimate basis for describing his approach as Darwinian.     

The characteristics of a monetary economy: a Keynes-Schumpeter approach

Mainstream monetary theory considers money only as an instrumentmeant to facilitate trading without having any effect on incomeor on the evolution of the economic system. The aim of thispaper is to elaborate a monetary theory capable of supportingthe thesis of money non-neutrality based on the arguments developedby Keynes and Schumpeter. The synthesis of the theories of thesetwo great economists will be formulated starting from the twopoints which are common in the views of Keynes and Schumpeter.First, in contrast with mainstream theory, Keynes and Schumpeterstate that the diffusion of a fiat money induces a radical modificationinto the way in which the economic system works. Second, whenKeynes and Schumpeter describe the reasons why money and financialaggregates are not neutral, they highlight the fundamental roleof the credit market and of banks; in contrast with the mainstreamtheory, they do not consider the credit market as the mirrorimage of the goods market.     

Schumpeter on unemployment

Joseph Alois Schumpeter’s approach to the phenomenon of unemployment differs strongly from the traditional classification with its strict distinctions between frictional, cyclical and structural unemployment. By relating these three categories to his theory of creative destruction, Schumpeter collapsed them all into one: technological unemployment. In our paper, we provide a systematic overview and discussion of Schumpeter’s varied writings on unemployment, from 1908 to 1954. We compare his view with the positions of some of his contemporaries, such as Wicksell, Hicks, Beveridge and Keynes. Finally, we discuss to what extent recent writers, such as Aghion, Howitt and Caballero, have integrated Schumpeter’s approach into modern macroeconomics.     

Schumpeter and the end of Western Capitalism

Schumpeter’s forecast in his Capitalism, Socialism and Democracy (1942) that ‘a socialist form of society will inevitably emerge from an equally inevitable decomposition of capitalist society’ did great damage to his reputation. This was especially so after the fall of the Berlin wall, when the spectre of Communism seemed to have been finally exorcised. The current financial crisis, however, has vindicated him. For Schumpeter, capitalism rightly meant, not just individual property rights, but the ability to ‘create money from nothing.’ This is such an enormous and dangerous power that it obviously has to be subject to the strictest constraint, which was traditionally provided, however imperfectly, by denial of incorporation with limited liability to those who dealt in money. The decline of capitalism began when financiers were released from this discipline, and it ended with the catastrophe caused by belief that bureaucratic control could replace it. The cause of the change was the progressive capture of democratically elected politicians by interests. On this, Schumpeter’s The Crisis of the Tax State (1918) was almost as insightful as his later book. When Governments could not allow banks to fail, they signalled the definitive arrival of centralized financing, which is a fundamental characteristic of a socialist economy.     

Why Schumpeter has had so little influence on today’s main line economics, and why this may be changing

While Schumpeter’s broad theory of how capitalist economies worked articulated in his Theory of Economic Development received strong attention in his lifetime, it was neoclassical economic theory that took hold of the profession in the last half of the twentieth century, and today few economists even read Schumpeter. The first part of this essay considers the reasons why Schumpeter largely has been ignored. However, recent developments have increased the interests of economists in innovation and in innovation driven economic activity, and the time now may be ripe for a renaissance of Schumpeterian economics. The second part of this essay provides a sketch of what an economics text-book, written from a Schumpeterian perspective, might look like.     

Joseph Schumpeter and Thorstein Veblen on technological determinism,individualism and institutions

This article investigates Joseph Schumpeter's affinities with Thorstein Veblen with respect to technological change and determinism, the future of capitalism, individualism and institutions. From a methodological point of view, a common point in their analysis is their anti-teleological view regarding economics as a discipline. Also, in the Schumpeterian system, technology is the cornerstone of economic evolution and appears as the making of new combinations. In the Veblenian theoretical framework, the bearer of change is to be found, inter alia, in technology, just like in Schumpeter's works, although not without differences. They also share the opinion that technology revolutionises capitalism and has serious implications for its future as a system. Furthermore, regarding individualism, in his work Schumpeter stresses the importance of the social milieu on individual action, a fact which bears strong resemblance to the Veblenian notion of evolution as ‘depersonalized evolution’. In this sense, Schumpeter is very close to Veblen, although Schumpeter's approach could be classified in what is called institutionalist individualism, whereas Veblen could be classified as holist. Undoubtedly, the role of institutions is of great importance in both Schumpeter and Veblen. Ιnstitutions in the Schumpeterian schema play a central role closely related to the future of capitalism. Institutional and non-institutional factors enter into complex forms of interaction just like in Veblen's approach. There, institutions are part of the social milieu and their underlying framework, much wider than mere economic and social. Of course, the theoretical analyses of Schumpeter and Veblen are not devoid of differences springing mainly from their methodological approach such as the role of the individual in the capitalist process which is probably the most significant difference regarding the importance attributed to it in Schumpeter's early works. Also, the way technical change appears constitutes another difference. However, his views are quite close to Veblen's. After all, Schumpeter began to write in a social, political, theoretical and ideological environment at a time when evolutionary ideas dominated social thought.     

Emil Lederer and Joseph Schumpeter on Economic Growth,Technology and Business Cycles

This paper compares Joseph Schumpeter and Emil Lederer with respect to their visions concerning the notions of economic growth, technology and business cycles. Their theoretical investigations in a number of thematic areas seem to converge to similar views. More precisely, both Schumpeter and Lederer regard the capitalist economy as a dynamic system where the introduction of innovations is its distinctive characteristic. In such a system, static analysis based on the concept of equilibrium is useful as an expository device to describe the adjustment mechanisms of the economic system. They also paid attention to the emergence of large oligopolistic firms and considered this development as being interwoven with technological progress. Both economists used similar arguments to emphasize the link between economic development and technological change. In their analyses, Schumpeter and Lederer referred to psychological factors motivating the entrepreneur, in order to explain the forces that set in motion the process of innovation and thus economic development. The concept of technological unemployment is also described in a similar manner by both of them. Regarding the issue of business cycles, Schumpeter and Lederer considered them to be a result of endogenous processes within a capitalist economy. Lederer in his late works, argued in a way analogous to Schumpeter, that economic fluctuations are caused from the disruptions created by innovations, which are introduced discontinuously into the economic system. Conclusively, Schumpeter and Lederer delivered theses which are similar in scope and conclusions probably because they were developed in the same social, political, theoretical and ideological environment and were also well acquainted with each other’s ideas.     

The equations unveiled: Sraffa's price equations in the making

In the first part of Production of Commodities by Means of Commodities,four equation systems are introduced: three are drawn up inorder to solve the problem of relative prices; the last oneis devised to define a suitable standard of prices. The bookwas published in 1960, but—as we are told in the preface—its‘central propositions’ and a first version of theprice equations had been originally conceived and written morethan 30 years before, when the author was still in his twenties.Having access now to the Sraffa Papers, preserved in the WrenLibrary, we can ascertain the intellectual origin of the equations.In this paper the analytical path that led to the final draftof the price equation is followed, step by step, and the linkbetween these equations and Sraffa's quest for an ‘invariablestandard of value’ is clarified.     

Association for Social Economics ASE newsletter

Bill Waters’ dissertation “Entrepreneurship, Dualism, and Causality: An Appreciation of the Work of Joseph A. Schumpeter” completed at Georgetown University in 1952 is significant for two reasons. The first is clear enough from the very beginning: Schumpeter and the entrepreneur. The other comes to light through hindsight: Bill brings to bear an understanding of economic affairs which is personalist rather than individualist or collectivist in nature. In short, Bill sees as the main activating force in economic affairs not the impersonal forces of the market, not the central planning board, but the person who innovates, who acts bolding in economic affairs, the banker who creates credit, and the capitalist who supplies old funds. Thus the Waters’ dissertation says much not only about Schumpeter but also about Bill himself. His dissertation is his only book-length publication.     

Weber, Schumpeter and Knight on entrepreneurship and economic development

This paper interprets the discussion on entrepreneurship and economic development that started off with Weber's papers on the Protestant Ethic. Weber sought the reason for the relatively rapid growth of the Occident in the rational, Calvinist attitude to life. Calvinism – in his view – exactly suited a society of free labourers, who were not tied to master and soil by extra-economic considerations as in tribal and feudal societies. Schumpeter gave an alternative explanation, emphasizing the importance of innovation and entrepreneurship. Knight, who stressed neither rationality nor innovation but uncertainty and perceptiveness as the sole source of progress and profits, followed up German language writing on this subject. Only the investor who can detect hitherto hidden qualities in people can gain. The paper demonstrates how these three authors influenced each other. The debate between these three authors has raised many issues of governance and organization that feature contemporary thinking.     

Industry innovativeness,firm size,and entrepreneurship: Schumpeter Mark III?

Emphasizing the dynamics in economies and industries, Schumpeter points to entrepreneurs carrying out ‘new combinations’. His work, and in particular the Theory of Economic Development, is often interpreted as praising individual entrepreneurs setting up new firms to contribute to an industry’s innovativeness. This has come to be referred to as the Schumpeter Mark I perspective. Later, however, in his Capitalism, Socialism, and Democracy, Schumpeter has rather suggested that large incumbents are best positioned to contribute to an industry’s innovativeness (Schumpeter Mark II). In this discussion, however, the possibly different effects of structural as opposed to dynamic industry competitiveness is often not taken into account. In addition, the contribution of new and small firms to industry innovativeness are often conflated. Using New Product Announcements as a measure of innovation, we find that industries dominated by small firms prove consistently and significantly more innovative than industries where large firms dominate. Taking account of industries’ structural and dynamic levels of competition, we find that high existing and increasing levels of new firms entering an industry, exercising what Schumpeter called the ‘entrepreneurial function’, actually decrease industry innovativeness. We conclude that the contribution of small firms in terms of industry innovativeness is different from that of large as well as new firms, suggesting a Schumpeter Mark III perspective.     

Schumpeter’s new combinations

The paper focuses attention on Schumpeter’s achievements in his classic contribution and how these relate to the contributions of other major authors. While deeply indebted to Marx’s vision of capitalism as a system incessantly in travail, Schumpeter was no ‘Marxist’. He shared B?hm’s view that profits are not due to ‘exploitation’, but thought that the latter’s attack on Marx was a failure. There are remarkable differences, but also similarities between the analyses of Schumpeter and Keynes. Marx, Schumpeter and Keynes rejected Say’s law and other basic ideas constituting the marginalist doctrine. They saw capitalism as a restless, crisis-prone system.     

The Schumpeterian role of financial innovations in the New Economy's business cycle

Alan Greenspan claims that modern financial innovations, especiallyfinancial derivatives, were major contributors to a Schumpeterianprocess of ‘creative destruction’ which produceda high-growth ‘New Economy’ and opposes their regulation.A different perspective emerges when it is recognised that the‘New Economy’ followed the general contours of aSchumpeterian business cycle, and the role of modern financialinnovations is examined in that context. The authors argue thatthe primary role of financial derivatives has been in contributingto ‘reckless finance’ and speculative excesses inthe second phase of that cycle, and that Schumpeter would favoursubjecting the use of derivatives to more regulation.     

Capitalism and democracy at a crossroads: the civilizational dimension

This paper evaluates Schumpeter's grand vision as reflected in his Capitalism, Socialism and Democracy, and elaborates it in conjunction with the so-called “globalization” trends characteristic of the wake of the twenty-first century. In addition to the evolutionary nature of his methodology, the institutionalist dimension of Schumpeter's definitions are brought to light. A case is made for a fundamental process of “uncreative destruction” as far as the institutional setup of the economy is concerned. The contention of this paper is that there is ample support in Schumpeterian analysis for a counterpoint to the liberal thesis that envisages the worldwide spread of individualism, market economies, and democratic forms of government.