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links for 2007-05-05

Tyler Cowen Praises Tom McCraw's Biography of Schumpeter

Tyler writes:

Schumpeter Revealed: Prophet of Innovation is so splendid because it succeeds on so many different levels... an account of the Harvard economics department... what it was like for European intellectuals to migrate to the United States... why Austria fell apart during the 1920s, and how someone with as little real world experience as Schumpeter became Minister of Finance... a love story... an account of how a possibly dysfunctional man can nonetheless find romantic happiness after repeated failures and tragedies.... Last but not least it is an intellectual history....

The treatment is occasionally odd. Schumpeter has a reputation for having been an arrogant snob and McCraw overreacts by going to great lengths to show Schumpeter’s benevolence.... [N]obody’s treatment of Schumpeter’s career-closing History of Economic Analysis is satisfactory, including McCraw’s, if only because no commentator knows the topic of the History as well as Schumpeter did....

I am personally most interested in Schumpeter as a turning point in European intellectual thought. “Creative destruction” returns over 700,000 hits on Google... the creativity of an economy—or a business—stems from allowing the shift of resources away from old patterns and toward more valuable ends. Surely it is better that the automobile has put so many horse and buggy makers out of work. Schumpeter coined the phrase in his Capitalism, Socialism, and Democracy (1942): “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.”

The question is why creative destruction is so unpopular in Western Europe these days, among both policymakers and intellectuals. Job losses are considered anathema by politicians and voters, no matter what long-run opportunities are opened up. Denmark has labor markets about as flexible as the United States’s, but in part that is because the national government spends so much on retraining workers to keep down unemployment.

McCraw tries to explain why Schumpeter was so enamored of the idea of creative destruction. He suggests that Schumpeter was inspired by the entrepreneurial activities of his mother, who supported the family and engineered a series of moves from the small town of Triesch to Graz and then to Vienna. Once Schumpeter was in Vienna, he saw the city undergo rapid and sometimes disruptive progress. Nonetheless the city was arguably the intellectual capital of Europe at the time. Schumpeter’s own experience as a businessman involved some repeated failures, and only later significant wealth. He had a direct and personal understanding of the benefits of volatility.

Western Europe lost that love of change with the two World Wars, but according to McCraw, Schumpeter remained a partisan of creative destruction throughout his life. Why did he fail to make the intellectual shift with the bulk of his Continental homeland? Had his time at Harvard changed him so much, or was he intellectually schizophrenic in the first place?

McCraw doesn’t answer every question about Schumpeter but he comes closer than I would have thought possible. Every year there are three or four non-fiction books that have to be read, and this is one of them.