[DEBATE] : There is no Schumpeterian school
tintinyana at gmail.com
Mon Sep 10 17:32:57 BST 2007
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
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."
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
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
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
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
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).
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