[DEBATE] : There is no Schumpeterian school

[Sean Jacobs]

FT's John Kay: "To understand the role of K Street and Wall Street in 
Bush's America, we might more profitably turn to Galbraith than to 
Samuelson."

On a lighter note: "Schumpeter married three times, and declared an 
intention to be the world's greatest economist, lover and horseman - he 
acknowledged having to work at the horsemanship."

-- Sean


Financial Mail

Economists of scale

By John Kay

Published: September 8 2007 03:00 | Last updated: September 8 2007 03:00

Prophet of Innovation: Joseph Schumpeter and Creative Destruction by 
Thomas K. McCraw Harvard University Press $35, 736 pages

John Kenneth Galbraith: A 20th Century Life by Richard Parker Old 
Street Publishing £25, 840 pages FT bookshop price: £20

The Chicago School: How the University of Chicago Assembled the 
Thinkers Who Revolutionized Economics and Business by Johan Van 
Overtveldt Agate $35, 432 pages

John maynard Keynes 1883-1946: Economist, Philosopher, Statesman by 
Robert Skidelsky Pan £20, 1,056 pages FT bookshop price: £16

Joseph Schumpeter and John Maynard Keynes were two of the most admired 
economists of their time. Both men were born in 1883; Schumpeter died 
four years after his rival, in 1950. Both changed the way a generation 
thought. Why, then, did Keynes give his name to an influential school 
of economics, while Schumpeter, though still admired, is little read?

Of these two figures, Schumpeter was more conservative. When Forbes 
celebrated the centenary of both in 1983, it asserted "Schumpeter, not 
Keynes, provided the best guide to the... change engulfing the modern 
world"; Business Week acknowledged the 50th anniversary of Schumpeter's 
death by proclaiming him "America's hottest economist".

Both men were the product of vibrant intellectual communities: Keynes 
in Cambridge and Bloomsbury, Schumpeter in Vienna. Both gravitated 
early to the centre of political events. In 1919, Keynes was 
negotiating the Treaty of Versailles; Schumpeter was Austrian minister 
of finance. Both enjoyed success and failure in high finance. Keynes 
would trade from bed; Schumpeter spent a decade paying off debts 
incurred in the collapse of central European financial institutions. 
Keynes's academic life was in Cambridge, England; Schumpeter emigrated 
to Cambridge, Massachusetts, in 1932. Both enjoyed colourful personal 
lives: Keynes, actively homosexual, nevertheless married a Russian 
ballerina; Schumpeter married three times, and declared an intention to 
be the world's greatest economist, lover and horseman - he acknowledged 
having to work at the horsemanship.

And both have outstanding biographers. Robert Skidelsky's three- volume 
account of the life and work of Keynes now comes in an abridgment that 
can be lifted with one hand. Thomas McCraw, himself a distinguished 
business historian, has just published a 700-page history of Schumpeter 
which similarly combines the personal and intellectual.

Schumpeter's reputation rests principally on three books. The Theory of 
Economic Development (first published in 1908) set out the basic thesis 
with which he is associated: the success of a market economy rests not 
primarily on the accumulation of capital but on innovation, which was 
the product of (mostly unsuccessful) entrepreneurship.

Capitalism, Socialism and Democracy, published in 1942, explores the 
comparative performance of economic systems and their relationship to 
political structures. Schumpeter was pessimistic about the long-run 
prospects of capitalism, for prescient if unconventional reasons. He 
recognised that the innovative success of capitalism produced large 
inequalities of income and wealth. He believed that the resulting 
resentment, fuelled by the persistent hostility of an extensive 
intellectual class whose existence capitalist prosperity made possible, 
would ultimately destroy the dynamism itself.

Schumpeter's consideration of economic systems was wide-ranging. His 
History of Economic Analysis, which appeared posthumously in 1954, is a 
series of extended vignettes describing economic doctrines and thought 
from the time of the ancient Greeks.

Schumpeter rivalled Keynes in range of experience and subtlety of 
thought, and surpassed him in breadth of scholarship. But his impact on 
intellectual life and practical affairs was slight compared with that 
of his English rival. In Prophet of Innovation, McCraw claims his 
subject "has had an incalculable influence on business during the late 
twentieth century and the early twenty- first". But this is difficult 
to sustain.

Schumpeter is, McCraw suggests, the founder of modern business 
strategy. He is right to say that "Schumpeter's central preoccupations 
- innovation, entrepreneurship and credit creation - have played 
prominent roles in the formulation of these (business) strategies". But 
Schumpeter's ideas relate to the role these factors play in the 
evolution of economic systems, not the planning of individual 
businesses. Indeed, his emphasis on the foibles of the entrepreneur, 
the unpredictability of outcomes and the power of evolutionary 
processes directly contrasts with the high rationalism that modern 
business schools teach or consultants promote.

Schumpeter knew that his rival's work had far greater influence. His 
critical essay on Keynes in History of Economic Analysis both displays 
his bitterness and identifies the reasons for Keynes's greater success. 
Schumpeter expresses genuine admiration for the courageous publication 
of The Economic Consequences of the Peace. Keynes was, Schumpeter 
recognises, a natural leader who gave others confidence and 
inspiration.

Schumpeter would observe of himself: "I singularly lack the quality of 
leadership - with a fraction of my ideas a new economics could have 
been founded." That new economics did not happen. There would be a 
Keynesian school, a Keynesian economics, but no Schumpeterian school, 
and really no Schumpeterian economists. While Keynes set the direction 
of Britain's wartime finance, Schumpeter was under observation by inept 
agents of the FBI. They monitored his correspondence for clues, but 
appear not to have noticed that he published, in 1942, a book called 
Capitalism, Socialism and Democracy: bookshop visits were not, it would 
seem, part of their tradecraft. And Schumpeter's most brilliant 
student, Paul Samuelson, would lead the postwar development of 
economics in quite different directions.

In the generation that followed Keynes and Schumpeter, John Kenneth 
Galbraith (born 1908) and Milton Friedman (born 1912), were the two 
most prominent public intellectuals among economists. If Schumpeter is 
more admired than read, Galbraith is more read than admired. The 
prevailing opinion is that Galbraith was a brilliant writer but 
mediocre economist. In his new book, Richard Parker challenges this 
view, with limited success. His argument relies too much on identifying 
almost every valid criticism of market fundamentalism or neoclassical 
economic theory to vindicate his subject.

Still, there is a case to be made for the partial rehabilitation of 
Galbraith's scholarly reputation. America's contrasting private 
affluence and public squalor was never more starkly revealed than in 
the aftermath of Hurricane Katrina in 2005, and never more cogently 
described than in Galbraith's 1958 work The Affluent Society. His 
elegantly written The Great Crash describes Wall Street in the late 
1920s; it proved almost a screenplay for the repetition of these events 
in the late 1990s.

Perhaps most importantly, Galbraith's The New Industrial State (1967) 
saw the developed economy not as a set of interlocking competitive 
markets, but in terms of the power relationships in, around and between 
businesses. This perspective is a necessary contrast to a standard 
economic theory which barely recognises that the large corporation is 
the dominant institution in modern society. To understand the role of K 
Street and Wall Street in Bush's America, we might more profitably turn 
to Galbraith than to Samuelson. But, as there is no Schumpeterian 
school, there is no Galbraithian school. Like Schumpeter, Galbraith 
never had time or inclination for the university and conference 
politics which that required.

Galbraith's early career involved the administration of wartime price 
control, and that experience had a formative, sustained, and somewhat 
eccentric influence on his thought. Galbraith remained interested in a 
political role. But his most important public appointment - as US 
ambassador to India - was primarily decorative. Ultimately, he would 
always be at the fringe rather than the centre of political and 
intellectual life. The gift for dry, academic observation which was his 
stock in trade was best deployed in perpetual opposition. If Schumpeter 
lacked qualities of leadership, Galbraith chose not to exercise them.

Keynes's popular achievement, Schumpeter had observed, was to project 
"his own personal view" through "an apparently general analysis". As 
Keynesian influence waned in the 1970s, Milton Friedman (himself the 
subject of a recent biography by Alan Ebenstein) would have influence 
comparable to Keynes on both economic policies and research directions. 
Like Keynes, he provided intellectual leadership for a school of 
economists. In another new book, Johan Van Overtveldt provides the 
first full-length account of the emergence of the modern Chicago school 
under Friedman.

Van Overtveldt presents potted intellectual and personal biographies of 
the main protagonists, fitted into a history of the University of 
Chicago economics department and School of Business. He provides a 
compendium of information. But Van Overtveldt is no Skidelsky - he does 
not explain how the school's success reflected a wider set of 
political, economic and social changes.

The method of dissemination of the Chicago school was similar to that 
of the Keynesians: a relatively simple ideological message for 
communication to the world outside; a new, difficult, yet extensive 
theoretical framework; and a dedicated band of supporters who would 
entrench the doctrine in other economics departments.

The Chicago school draws on a long conservative tradition befitting an 
institution founded by John D. Rockefeller. But from the 1960s, it 
displayed a self-confident imperialism, as its emphasis on rational 
choice and free markets was deployed in other areas of economics and 
social sciences. Indeed, Chicago professor Gary Becker's 1992 Nobel 
Prize was awarded explicitly for extending the scope of economics - as 
though this were an achievement of value for itself - rather than for 
the insights it generated. The most important extensions in practice 
were the economics of law, finance theory, and macroeconomics founded 
on individual rational choice.

Van Overtfeldt quotes Friedman's famous comments on Harry Markowitz's 
1955 doctoral thesis on portfolio theory: "This isn't a dissertation in 
economics... It's not math, it's not economics, it's not even business 
administration." In fact, it was all these things. As such it was also 
the foundation of modern finance theory, embraced within the Chicago 
School.

Keynes and the Keynesians, Friedman and the Chicago School... what now? 
The next generation of biographers of economists will tell the 
histories of Amartya Sen and Joseph Stiglitz. Sen is, in a natural 
sense, the Schumpeter of our times. He shows a breadth of erudition and 
subtlety of mind unparalleled among other economists. But, like 
Schumpeter, Sen is an isolated figure. There will be no Sen school. 
Nor, it would seem, will there be a school of Stiglitz: a generation of 
students looks for a counterweight to Chicago, but the school's 
potential leader has not found the application to develop a coherent 
and comprehensive critique that such a leadership role would today 
require, or the aptitude or inclination for academic politics. And the 
dissonance between Paul Krugman as polemical columnist at The New York 
Times, and his professional work at Princeton, seems too great.

To change the way a generation thinks is a measure of prodigious 
talent. In reviewing the work of two remarkable figures - Galbraith and 
Schumpeter - who might have, but did not, bring that about, we see all 
the more clearly the scale of achievement of two men - Keynes and 
Friedman - who did.

John Kay is an FT columnist and author of "The Hare and the Tortoise: 
An Informal Guide to Business Strategy" (Erasmus).

--------------------------------------------
Sean Jacobs
http://theleoafricanus.blogspot.com