I have just reviewed Schumpeter’s Market: Enterprise and Evolution by David Reisman (published on EH.Net). Reisman’s book focuses on “three irreducible constructs” of Joseph Schumpeter’s work: market, enterprise, and evolution. Schumpeterian economics has been experiencing a revival in the last decade or so; everyone now knows the notion of ‘creative destruction’ of course, and neo-schumpeterian economics has developed useful models pushing the growth debate in new directions (see for instance the work of Kenneth Carlaw at the University of Canterbury, NZ).
Aside from the debate over the contribution of Schumpeter to our understanding of the processes of social change, the most interesting feature of the book is the idea that while Schumpeter was a defender of capitalism in the days when the economics profession was indicting it, he also saw capitalism as doomed in the long run.
Schumpeter, like Mises, didn’t believe hampered markets could work well and would be sustainable in the long run. This in itself was quite an achievement for an economist in the interwar period. During that time, most intellectuals argued against capitalism, and most economists joined the chorus against free markets. In this context, Schumpeter stood fast arguing that there was no other way to allocate resources and improve the lot of the masses.
Schumpeter’s position is therefore somewhat puzzling. How could he see capitalism as both the only possible social system and, at the same time, unsustainable in the long run? The answer lies in the fact that Schumpeter was more than an economist: he was also a sociologist, an anthropologist, and above all a historian. Capitalism is doomed for sociological/cultural reasons he surmised. Schumpeter didn’t buy into Marxist economics (which also irremediably condemned capitalism in the long run), but he thought the cultural appeal of socialism would some day become irresistible.
Schumpeter’s multidisciplinary approach is extremely relevant to the future of economic science. The best work in economics today is by people who have a good idea of what lies outside the field of the discipline. For instance, many students at the Mercatus Center apply the laws of economics to the findings of sociology, cultural anthropology, law, and history.
Schumpeter’s economics was not as good as that of Mises (it is far too convoluted as Schumpeter was never able to make up his mind between Walras and Böhm-Bawerk), and (this is perhaps unfair to Schumpeter) his view of creative destruction does not carry the insights of Kirznerian entrepreneurial competition.
However, what I find interesting in Schumpeter’s work is that he focused on the political economy of sustained prosperity. His message is rather gloom but the questions he raised are the right ones. “What makes countries become prosperous?” and “What makes social systems robust?” are the two sides of the political economy coin as he saw it. Schumpeter offered an economic response to the first one (i.e. creative destruction) and a cultural and sociological response to the second one (i.e. the cultural appeal of socialism).
What Douglass North and the neo-institutionalists have argued in the last thirty years was already a major part of Schumpeter’s work (and let alone that of Mises’ as Pete explains in his post: APSA Report). Indeed, Schumpeter focused on ideology, behavioral codes, and shared beliefs about the world. He saw Western Europe crumble under bad economic policies driven by even worse ideologies and came to believe that the future of economics would lie in the understanding of beliefs and cultures.
Schumpeter’s challenge is still widely opened. My co-bloggers Pete Boettke and Pete Leeson have recently published a paper on the question of robustness. The work I am doing at the Mercatus Center focuses on the institutional and social condition for entrepreneurship (which I see at the center piece of the political economy of sustained prosperity). Political scientists, such as Barry Weingast from Stanford University and Hoover Institution, have extensively published on the question (e.g. his ideas on market federalism).
While I don’t think Schumpeter was right in predicting the inevitable demise of capitalism, he asked one of the most fundamental questions that economists can ask: how do we keep social systems that are successful from becoming failures? The political economy of sustained prosperity is one of the most exciting research programs in economics today. To paraphrase Robert Lucas, once you start thinking about it, it is hard to think of something else...
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