Now in Paperback:

Prophet of Innovation: Joseph Schumpeter and Creative Destruction

Thomas McCrawHarvard Belknap, 2007The Belknap Press of Harvard University Press published Thomas McCraw’s magnificent epic of a biography, Prophet of Innovation: Joseph Schumpeter and Creative Destruction in hardcover in 2007. Schumpeter was one of the major economists of the 20th century, and in 2007 and 2008 sizeable chunks of the world’s economy flew into turmoil and in some cases near-total collapse.It’s therefore fair to say the 2010 paperback release of McCraw’s book arrives in a much-changed economic climate – and the changes aren’t by any means sympathetic to major economists. In addition to being angry with predatory banks and deceitful management firms, many formerly prosperous people (now bankrupt) saved a little anger for economists, wondering how it is none of them (or least not more of them, more loudly) saw the collapse of 2007-2008 coming. This anger could also at times reveal a paucity of knowledge: few of those who’d been ruined by the world of finance could name any of its high priests. There’s Adam Smith, of course, with his invisible hand – and perhaps there’s Jim Cramer, with his wildly gesticulating hands … but aside from those two, your average irrational home investor would probably draw a blank.Schumpeter would doubtless have viewed such obscurity with his customary resigned aplomb. In the second half of his life, when he was an economics professor at Harvard, he was constantly being overshadowed by fellow economist John Maynard Keynes. And doubtless he would have been equally unsurprised about the financial crisis itself. He was a champion of the idea that financial markets are energetically awful places, where Darwinian forces are constantly tearing apart and re-shaping the corporate and institutional landscape. He called it “creative destruction,” and he characterized it as a fundamental aspect of capitalism, as McCraw lucidly explains:

One might think that the sound practices of saving, living frugally, and maintaining the company on a solid foundation would suffice. But Schumpeter argues that any company following these routines – however admirable they seem at first glance – will soon be overtaken by aggressive, risk-taking, competitive entrepreneurs. He is very emphatic on this point: “The introduction of new production methods, the opening up of new markets – indeed, the successful carrying through of new business combinations in general – all these imply risk, trial and error, the overcoming of resistance, factors lacking in the treadmill of routine.” He concludes by saying, “As to the question of why this is so, it is answered by the theory of entrepreneurial profit.” Newcomers to the industry will bring fresh ideas, earn much higher profits, and drive incumbents out of business – through the simple device of fixing on economic growth as their sole objective.

It’s perhaps understandable that Schumpeter would espouse a theory of barely-controlled chaos, since most of his own life followed such a pattern. He was born in Moravia (in what was then Austro-Hungaria) in 1883, attended the universities of Vienna and Czernowitz and was an economics professor at the University of Graz when World War I erupted. He served as Austrian Minister of Finance from 1918 to 1920 (during which period he bitterly protested the draconian economic provisions of the Treaty of Versailles), then took a position at one of the country’s most powerful banks. When that bank failed in 1924, it very nearly destroyed Schumpeter – he went bankrupt, but then gained a faculty position at the University of Bonn from 1925 to 1932, and it was during this interval that he first lectured at Harvard University, for a stretch in 1927-1928, and again in 1930. In 1932, with the rise of Nazism (“It is not much to my credit as a political analyst that I had no idea whatsoever of Hitler’s impending rise,” he said), he grimly emigrated to the United States and resumed his teaching at Harvard.Severe upheavals characterized his personal life as well, as could be divined from this terrifying passage from McCraw:

At last [in 1926], Schumpeter had settled on a stable identity. As Herr Professor Doktor Joseph Schumpeter of the University of Bonn, he held a splendid job with a life-long tenure. He was married to a beautiful young wife whom he adored. With his obsessive work habits intact, he had reason to anticipate high academic honors still to come. He also had a sensible plan for paying off his creditors. Deeply in debt but more deeply in love, he was happier than he had ever been before. The future seemed abundant with promise.

If you’re the subject of a long, scholarly biography, you never want somebody to write such a paragraph about you – there’s only ever one reason for it. And sure enough, McCraw’s next chapter is titled “Heartbreak.”In 1926 Schumpeter’s mother, beautiful wife, and newborn son all died within a span of days. (The mother had been ill, the wife died in childbirth, and the child couldn’t be saved). This unthinkable tragedy of course marked a turning point, as McCraw details:

The deaths of Annie, Johanna, and his newborn son were the pivotal events of Schumpeter’s life. They marked the belated onset of his adulthood. Now too old to be an enfant terrible, he was also too scarred to go back to his reckless existence as a bachelor bon vivant. “Everything now hangs on my ability to work,” he wrote … “If so, the engine will keep on running, even if my personal life is over.”

But if anything, his life after his triple tragedy displays the resilience of that engine; he threw himself into teaching and writing articles, and once he was installed at Harvard he volunteered for a large classroom schedule and was always available to his students. When it came to teaching, he was a natural (he was “never a beginner,” one colleague said), coming to class without notes but meticulously prepared, endlessly articulate and diverting, with a “playful intellectual temperament” McCraw characterizes as “typically Viennese.” His classroom lectures were often perfect simulations of spontaneity, and he was always the center attraction, wearing his perfectly tailored clothes and speaking in his gentle Austrian accent. His Harvard colleague John Kenneth Galbraith (one of the many academic heavyweights on a faculty that also boasted Samuel Eliot Morison, George Lyman Kittredge, Pitrim Sorokin, and Arthur Schlesinger, Sr.) said he had “unremitting love for company and conversation,” and his students were the prime beneficiaries of both those loves.Harvard in the 1930s was a very different institution than it is today. In 1932 the university accepted 1000 out of every 1200 applicants, 83 percent as opposed to today’s 9 percent, and all of those accepted were white males, mostly of local origins. As McCraw writes, it was “a college for the scions of rich local Brahmin families.” Those scions were sent to college far more to acquire social polish and connections than to acquire practical knowledge (that part largely hasn’t changed), and they found the perfect professor in Schumpeter, with his love of culture, good food, and classical music. McCraw’s book is filled with glowing testimonials from those students, who prized Schumpeter’s intellectual generosity, which he displayed not only in his classes (he didn’t care whether or not you agreed with him as long as you’d thought about your position, and he was glad-handed with high grades) but in his free time. Quick student requests for a tip about some recalcitrant problem were often met with an hour of extremely specific, extremely delightful dissertation; his energy seemed limitless.These endless rounds of academic endeavor might have furnished the rest of Schumpeter’s life, but the very fates which had been so cruel to him in the late ‘20s decided to give him a gift beyond all estimation in the late ‘30s.That gift’s name was Elizabeth Boody Firuski. The former wife of a Cambridge bookseller, in 1928 she’d been the first woman ever awarded a summa cum laude in economics by Radcliffe. Throughout the 1930s, she’d written a steady stream of books and articles, including a December 1941 warning about the threat posed by Japan:

If we are to defeat the Japanese and the Germans we must become a great deal more realistic and we must stop underestimating them. If,for example, Japan should take Singapore it would probably solve her raw material problems.

(Two months later, to the astonishment and mortification of the British, the Japanese took Singapore).In 1937, after a good deal of her typically blunt persuasion (“I really think you should” was about as mushy as she got), Schumpeter married her. As McCraw summarizes it:

Elizabeth came closer to being Schumpeter’s intellectual peer than any other woman in his romantic life ever. She had a superb analytical mind, a graceful writing style, and mathematical skills in some ways superior to his own.

Elizabeth was diabetic, and the medical science of the time warned her against pregnancy. Talking about one of Schumpeter’s later books, she said, “since we cannot have a child, let’s have this book together,” and that’s exactly the kind of warm commitment she brought to everything he wrote during their marriage. For five years before their marriage, Schumpeter had been laboring on his massive two-volume breakthrough synthesis, Business Cycles, and with her superb organizational (and motivational) help, he continued that work for a further two years, finally publishing in 1939. The book’s uncompromising complexity and ungainly length (McCraw is not the first to suggest how much this particular Thomas Wolfe would have benefitted from a Maxwell Perkins) made it a ponderous counterpart to John Maynard Keynes’ General Theory of Employment, Interest, and Money, which upstaged Business Cycles by seeming to offer a prescription for the Great Depression. Keynes wanted to turn things around through deficit financing for public investment, inviting the government to step in and fix what was broken; Schumpeter favored credit incentives and a vigorous private sector, to let the market fix itself, as he argued it would always do, however brutally.That brutal picture – again, not surprising in a man who’d seen not only his whole domestic bliss but his home country get summarily swept away by events beyond his control – formed a marked contrast with the more placid, reassuring picture painted by Keynes, whose General Theory caught on with the public imagination. As McCraw puts it, there was a specter haunting Schumpeter’s professional life, and that specter was John Maynard Keynes – and the irony was that Schumpeter’s fairly ruthless economic theories should be espoused by such a gentle, lovable man. Schumpeter’s pronouncements could only heighten the contrast, as when he complained that one of the most commonly held economic fallacies was that the majority of people were poor because a minority were rich. McCraw handles this irony with his usual anecdote-worthy eloquence:

Schumpeter regretted that capitalism distributed its fruits so disproportionately – but in much the same way that he regretted that everyone has to die. He simply thought it an inevitable concurrent of capitalism’s efficiency over the long run.

“Schumpeter, at heart,” McCraw tells us, and he’s surely right, “was a scholar in the purest sense – a contemplative – but one who also happened to be a magnificent showman.” And the books and articles kept appearing, each more comprehensive than the last. 1942’s Capitalism, Socialism and Democracy was hailed by critics as a masterpiece that “radiates profound erudition,” and his 1946 Encyclopedia Britainnica entry on “Capitalism” was as witty and wide-ranging a primer on the subject as had ever been written. Schumpeter was uncompromising on the intricacies of his subject matter; both his historical research and his theorizing were unapologetically in-depth. “The reader will find the structure of the argument complex,” he wrote in warning about one of his books (but it could apply to any of them). “To his justifiable groan I have nothing to oppose but the question of whether he expected to find it easy.”His History of Economic Analysis (published posthumously in 1954) was met by reviewers with, as McCraw aptly puts it, “a sense of wonder.” One such critic wrote that the book was “by a wide margin, the most constructive, the most original, the most learned, and the most brilliant contribution to the history of the analytical phases of our discipline which has ever been made.” To which McGraw adds his own quietly emphatic “It remains so to this day.”The Schumpeters would often retreat to the sanctuary of their cozy country house Windy Hill in Taconic, Connecticut and the convivial company of friends, visiting colleagues, and their beloved Irish setter Peter (when the dog was a puppy, Schumpeter thought she was male – he was wrong, but the name stuck). But a comfortable country home didn’t protect Schumpeter from one last bitter turn of fate: Elizabeth developed breast cancer, and both of them had to live through the radiation and long recovery that followed her mastectomy. She regained sufficient strength to return to teaching at Wheaton and helping her husband with the ongoing work of the History of Economic Analysis; McCraw’s greatest triumph in this book full of them is that he, more so than any previous Schumpeter biographer, perfectly conveys to the reader the sheer indefatigable strength of this woman.The ending, when it came, was about as perfect as anybody could request: In 1950, after a day of productive writing, and after an evening peacefully reading Euripides in Greek, he went to bed and died in his sleep of a massive cerebral hemorrhage, one month shy of his 67th birthday. Elizabeth saw his final gigantic work through the presses.What to make of that work? It’s of course unfair to judge an economist who died half a century ago against the tumultuous events of our own past two years, and McCraw mercifully refrains from entirely doing so. But speed and reach of the 2007-2008 financial collapse were so savage in their short and longer term effects that some comparisons are inevitable between Schumpeter’s scenario – red in tooth and claw – and the more benevolent forecastings of his specter. His biographer puts it in vigorous terms the economist would have liked:

[Schumpeter] believed, as is evident from hundreds of comments he made throughout his life, that capitalism is a continuous evolutionary process without an end-point. Neither entrepreneurs nor consumers will ever be satisfied with their material lot. They will forever want more. Aspiration and desire are hard-wired into human beings, and the reasons for their striving are not based on what Schumpeter often called “hedonistic” motives alone. Entrepreneurs wish to excel for the sake of excelling; to fulfill their own expectations of themselves; to achieve “social distance” for the sake of recognition. And under capitalism, comparative wealth and income are the chief means of keeping score. Capitalist societies would never evolve into the cultural paradise of Keynes’s imagination.

Prophet of Innovation has 100 pages of micro-typed notes that follow the text, testament to the unbelievable amount of research and work that went into this book (indeed, an amount of sheer industry worthy of its subject), and that will no doubt make it a landmark for future scholars. But it’s the lively and penetrating prose of the book itself that make its appearance in paperback a cause for rejoicing. Reading it is certainly time well-invested.____Abraham Benrubi is an avid softball fan and an intermittent freelance writer based in Philadelphia. This is his first full-length piece for Open Letters.