Was Schumpeter an Austrian?

In a recent post I referred to Schumpeter as an Austrian economist.  Why?  Because I wrote that as part of my notes for my undergraduate students in a multidisciplinary course called Capitalism, Socialism & Democracy (notice the title happens to come from Schumpeter's book, coincidentally).  They never heard of "Walrasian," "general equilibrium theory," and the like.  I just wanted to point out to them that he was from Austria.  Note I didn't say he was from the Austrian School.  The students did read my course notes  on Mises and Hayek (were I did explain the Austrian School).

That post launched a really nice debate, in part on whether or not Schump was Austrian.  His theoretical approach is grounded in Walrasian theory -- and we all know that.  Here below is a recent criticism of mine in my final draft of my paper on Minsky (a student of Schumpeter).  I've cut and pasted it, as it would be too lengthy to place in the comments section of my previous post:

Austrians are well aware of Schumpeter’s explanation.  The economy, he assumes, already enjoys complete coordination.  Enamored with Walrasian equilibrium theory, Schumpeter suggests that the economy can be considered to be in a state of general equilibrium.  Production plans repeat themselves; so do the plans of capitalists, workers, consumers. Prices do not change.  Entrepreneurs merely earn standard rates of return.  By the nature of the equilibrium, all economic profit opportunities are dried up, so something must change for the awareness of new economic profit opportunities, the appearance of new entrepreneurial knowledge, and the incentive to act upon that knowledge.

 

It’s an exogenous source of change.  Schumpeter finds a way to acknowledge the disequilibria and rough-and-tumble dynamics of capitalism by pushing the profit-seeking entrepreneur into the general equilibrium setting. He argues entrepreneurial innovation and the recombination of capital goods disturb equilibrium (1961, chap. IV).  Entrepreneurs will display bold “leadership” capacity, they will “blaze new trails,” they will innovate in ways that offer new and previously unforeseen capital combinations and, if their expectations that guide their decisions are correct, entrepreneurs will enjoy economic profit and set the economy into disequilibrium.  The entrepreneurial leap from equilibrium to disequilibrium represents modern capitalism’s “creative destruction”  (1950, chap. VII).  Other imitators might soon rush in.  We can’t determine, a priori, if entrepreneurial imitation will initially push markets further away from equilibrium, or if imitation provides an immediate process back toward a general equilibrium state. 

As a description of modern capitalism, Schumpeter’s ideal types (boldness, creativity, leadership, etc.) offer some clues about the systemic rationality encouraged and developed within the institutions of a modern monetary economy.  His “creative destruction” thesis, his metaphor that the entrepreneurial faculty, though rational and calculating, is “at the same time a child and a victim of economic development,” offers a provocative description of the unforeseen and unintended results of entrepreneurial re-combinations of capital and its role in long run growth (1961, p. 154).  The growth path itself is never stable.  Equilibrium disturbed, Schumpeter suggests, might very well represent a period of instability before the new equilibrium, itself potentially unstable, evolves.

Presumably.  But as a matter of pure theory, Schumpeter’s general equilibrium model does not satisfy. It’s ad hoc – the entrepreneurial disturbance is merely assumed.  His entrepreneurial innovator plays a strictly exogenous role, a kind of deus ex machina who comes from nowhere to get the dynamics, Schumpeter’s story, moving along.  The dynamic is the interesting part; indeed, the dynamic is the whole story.  But Schumpeter never bothers to explain how this process reverses itself.  Is there any kind of corresponding dynamic?  How does this bold entrepreneur, or his imitators, ever lead us back, if even unintentionally, toward general economic equilibrium?  Schumpeter doesn’t explain.[1]

[1]The Austrian School’s criticism is well known, which I don’t need to repeat here.  Israel Kirzner’s work on the equilibrating nature of entrepreneurial profit seeking – in the realm of pure theory -- offers the most well developed argument, although it has not been without Austrian School critics.  I’m tempted to offer a litany of citations to Kirzner’s work, but I shall simply suggest Kirzner (1999).  Boudreaux (1994) counters Kirzner’s previous arguments with an Austrian defense of Schumpeter. [end footnote]

 Now Minsky tries to depart from Schumpeter with an endogenous explanation of the crisis.  He points to the financial innovations among already-in-the-system entrepreneurs (2008b, p. 319). His entrepreneurs, in other words, are not posited exogenously; they are not merely assumed – with contradiction and without explanation – to enter and disrupt a Walrasian equilibrium.  In this way, I believe Minsky tries to break out of the Walras-Schumpeter general equilibrium box, so much criticized in Rothbard’s (1987) paper.  Minsky  avoids starting the story within the box;  he wisely avoids Schumpeter’s equilibrium language, assumes a non-ergodic system, but allows for “good times” that characterize relatively tranquil periods.  So in this way his story doesn’t begin within the traps of Walrasian equilibrium, in the Schumpeterian sense, nor in the model of the neoclassical synthesis.

            Yet Minsky offers no discussion of how the period of tranquility itself emerges.  I suppose instead he correctly understands that market processes deliver incredibly full coordination of production and consumption plans, that this is indeed an empirical truth, but he neither offers nor cites any theory of entrepreneurship that explains this feature of the economy.  Here, then, Minsky faces the same charge levelled against Schumpeter.  Both of them assume what must in the first case be explained:  how any ordering of plans can occur at all in a decentralized monetary economy based upon exchanges of private property rights, before those very same entrepreneurs disrupt the spontaneously-evolved pattern.

            That lacuna has plagued much of modern economics for decades.

---

Comments

[Daniel Coelho]

Very intesting, I'd love to see this draft in full.

[amv]

1) If Schumpeter business cycle theory fails because of it general equilbrium setting, so does Hayek's business cycle theory for the same reason. Hayek's "Pure Theory of Capital", partly written after "Economics and Knowledge" and published in 1941, indeed contains an interesting approach to transitional dynamics (to dynamic equilibrium), simliar to Ramsey's "Mathematical Theory of Saving" (1928). The major difference between Hayek and Ramsey (and Wicksell in "Zur Zinstheorie" 1928) in their respective descriptions of the saving progress is that Hayek assumes the transition equation to determine the net rate of time preference, whereas Ramsey (and Wicksell) assumes that the marginal productivity of investment bears the burden of adjustment.

2) D. Prychitko: "The dynamic is the interesting part; indeed, the dynamic is the whole story. But Schumpeter never bothers to explain how this process reverses itself." - Schumpeter indeed explains how the process reverses. Once the followers imitate the entrepreneurs, competition intensifies and profits fall to zero. The economy returns to a new stationary state, yet at a higher output level, due to a technologically driven increase in productivity.

[Roger Koppl]

amv,

I don't think anyone said Schumpeter's cycle theory fails because of its general equilibrium setting. IMHO, Schumpeter's cycle theory is pretty similar to the "Austrian" theory. The initiating innovation induces over-investment in one sector. The bust comes when some of those investments fail. As far as I can tell, Schumpeter misses the time structure of production, so he can't point to a Wicksellian interest-rate mechanism as the cause of cycles. Thus, it must be the uncaused cause: entrepreneurial innovation. For the same reason, the bloated sector could be anything. Schumpeter's cycle theory is a kind of market process story. But it does not explain the Kirznerian process of equilibration. It is only in that 2nd sense that Schumpeter lacks a theory of the market process.

BTW, technological innovation is only one sort of innovation in Schumpeter.

[amv]

Dear Mr. Koppl,

let me just quote those of D. Prychitko's remarks that made me think that someone indeed said that Schumpeter's cycle theory fails because of its GE setting:

"That post launched a really nice debate, in part on whether or not Schump was Austrian. His theoretical approach is grounded in Walrasian theory -- and we all know that.[...] Austrians are well aware of Schumpeter’s explanation. The economy, he assumes, already enjoys complete coordination. Enamored with Walrasian equilibrium theory, Schumpeter suggests that the economy can be considered to be in a state of general equilibrium. Production plans repeat themselves; so do the plans of capitalists, workers, consumers. Prices do not change."

But, of course, I may err. I do myself believe that Schumpeter's theory is misleading, as I do agree with you and Prychtiko that the entrepreneur is imposed and not explained. And I agree that "Schumpeter's cycle theory is pretty similar to the "Austrian" theory."

I disagree that Schumpeter "can't point to a Wicksellian interest-rate mechanism as the cause of cycles," because he "misses the time structure of production." The Wicksellian interest rates gap is not a concept that has to rest on Böhm-Bawerkian underpinnings. Leijonhufvud's "Wicksell Connection" is much broader than that and Schumpeter a part of it. Innovation, no matter if technological or whatever, boosts up the natural rate, the return on investment, the marginal productivity of waiting or rounaboutness, or however you may call it. Myrdal and Lindahl used the natural rate in a Keynesian way, as the marginal efficiency of capital, compatible with any level of output (not just the equilibrium level in final stationarity). Schumpeter declines Wicksell gap concept, not because his capital theory has no place for it, but because Schumpeter believes that the saving process quickly moves the economy the its technological frontiers, and he did so because he assumes that the (net) rate of time preference (Böhm's second cause) is zero (see Hayek, Interest and Utility Analysis, 1936). Taking the Ramsey's equation, which was independently elaborated by Wicksell to years before (in 1926) and which is implicit in Hayek's "The Pure Theory of Capital", with time preference being zero "bliss" is reached at zero interest, with all technological opportunities being exploited. The loan rate disappears because Schumpeter assumes that maintenance is financed out of gross receipts (in contrast to Mises!). Entrepreneurial activity creates profits and raises the natural rate above zero. Since "new combinations" are financed by the capitalist, who thereby bears the risk, the rise in the natural rate drives up the money rate. Of course, since the entrepreneurs only earn the difference between the return on their investments and the cost of finance, Wicksell's interest rates gap is well alive during Schumpeter's dynamics.

[Roger Koppl]

amv,

I completely take the point that "The Wicksellian interest rates gap is not a concept that has to rest on Böhm-Bawerkian underpinnings." Absolutely. I had in mind the Austrian story and I should have been clear. I"m not sure I follow your last paragraph. May I take it, however, that you agree Schumpeter's cycle theory doesn't have the "Austrian" lengthening of the structure of production?

As for what Dave meant in that passage, I guess we'll have to ask him. I didn't take him to mean what you did, but he's the expert on that point. Dave?

[Bogdan Enache]

If I may step in the discussion.

Yes, Schumpeter doesn't consider the Boehm Bawerk theory of capital in his theory because it wouldn't have made any difference for the analytical questions he was trying to grasp.

Schumpeter wanted to analyze this simple thing, change in economic life, or as it's the custom now process (though the "mechanistic" nature of the word might distorts the undertanding of Schumpeter's quest, so to speak). He realised that the neoclassical economics was based on the Newtonian paradigmed of equilibrium, but all this grand static or comparative statics theory couldn't capture the reality of extraordinary innovation and change he could see all around in the 19th and early 20th century. The Boehm Bawerkian theory of capital was only an explication of the production along the equilibrium comparative statics of the theory, not a substitute or a progress in truly "dynamic" direction. In a way, one can say he agreed avant la lettre with Leland Yeager that the "Austrian" capital theory was an embarrassing excrescence of some sort.

So, Schumpeter wants to explain change in the economic life. This is what he means by development. He is a development theorist, disguised in a business cycle theorist, disguised in a "market process theorist" and so on.

So he wants to explain change, but he wants to explain it endogenously, as we say today, but - big BUT - also to explain it non mechanically, evidently, because it was precisely the mechanistic character of neoclassical theory that created this void of explanation, the problem. What's the alternative left ? Biology? - But Schumpeter also rejects explicitly using analogies from biology to explain economic issues. So he's left with a hard problem to crack...

The key to understanding Schumpeter's understanding of the development and from this all economics, basically, is Chapter 7 of Theorie der Wirtschaftlichen Entwiklung, which was not included in the first English edition of The Theory of Economic Development and which discusses why "the method of pure theory" must be complemented by "the method of development".

Schumpeter, of course, never got far in this hard and esoteric task of forging a real theory of change. However, the comparatively easy "biological alternative" in formulating an economics which actually incorporates change in it's structure-theory was pursued by his student, the Romanian statistician and economist Nicolae/Nicholas Georgescu-Roegen, the father of bioeconomics and (at least a strand of) evolutionary economics.

Schumpeter's original thinking was hidden under so many Russian doles (Mengerian, Walrasian, historicist etc) that none of his direct or later students could actually grasp it and progress it a something that could approximate the unity it hand under its master, as it were.

[amv]

@Prof. Koeppl:

Yap, there is no lengthening of the period of production in Schumpeter's cycle theory. To describe forced saving, however, Schumpeter thinks of pioneers who create new investments opportunities and who therefore change the investment-schedule. They shift the production possibility forntier. What is relevant is an incrase in the scale of production, not a wage-induced shift to more capitalisitc processes. As Wicksell points out in his review of Mises's Theorie des Geldes (in 1914), as long as prices increase faster than wages (as they have to in the case of forced saving) it is profit-maximizing to enlarge the firm, or the add to capacitiy, but there is no reason for a switch in techniue towards longer processes. Only if wages increase and prices do not, that is, if effective demand is constant, it becomes profitable to switch to more capitalistic processes. The Austrians, however, want to discuss the impact of monetary expansion, of rising nominal income. In this case, the focus should be on the scale of production rather than on the choice of technique. Böhm-Bawerk's vertical processes hide the circularity of production and provides a poor framework for such intersectoral shifts as they are described by the concept of forced saving.

[Roger Koppl]

Bogdan,

I think I follow your logic and it seems about right to me. I wonder if Schumpeter succeeded, however, in producing a theory of endogenous change. It always seemed to me that the Schumpeterian entrepreneur was completely exogenous. His innovation comes from nowhere as an uncaused cause. It always sounded like pop Nietzsche, too. The superhuman entrepreneur sees what no one else sees. He intuits the solution that is revealed to be correct only later. He leaps tall buildings in a single bound. Am I being, perhaps, unfair to Joseph Alois?

amv,

Ah hah! So you're kind of down on the Austrian cycle theory? I confess that I am still an adherent and likely to remain one. The big plus in the theory IMHO is precisely the use of capital theory. In the usual version of ABCT it is not the "rising of nominal income" that creates the sectoral shift. It is the fact that that new money enters the system via the credit market. We refer to "Cantillon effects" because Richard Cantillon had a cycle theory that depended on a broadly similar relative-price distortion. In Cantillon's case the price was the exchange rate. In ABTC it is the interest rate. In both cases the relative-price distortion creates sectoral shifts. To capture the typical 19th century cycle you kind of have to have a capital theory because you need to explain why the output of capital goods is so volatile. When Hayek visited the NBER in 1922 or so he confronted the facts Mitchell and others had uncovered about things like the pig iron series. As I understand the story, that told him that he needed to account for the apparent fact that capital goods have more pro-cyclical volatility than other goods, which kind of forces you to the time structure of production.

[Dave Prychitko]

Folks:

My main point in the beginning of that paper was to compare Minsky to his dissertation advisor, Schumpeter. But I only cut and pasted Schumpeter's view on general equilibrium and the exogenous entrepreneurial force.

Minsky tries to avoid the trap of Walrasian GE. He instead starts his story with an economy enjoying "good times" (borrowing that phrase from Joan Robinson). He seeks a non-equilibrium-based business cycle theory. But, as I discuss in my paper, he offers no clarity as to what he means by "good times." For Minsky, there is a psychological change that leads entrepreneurs to disrupt the "good times" by taking on more speculative and Ponzi-financed investment, as ex post profits that exist during the "good times" validate the current risks and encourage, now, an even greater sense of optimism (though he doesn't really use that term), and propel the economy onto the brink of collapse. Minsky argues, then, that the instability of the capitalist economy is "upward," that is, during the period of what amounts to unsustained growth.

So here, and unlike Schumpeter, he tries not to start his story in a general equilibrium setting, nor does he believe that there is a convergence toward GE. If anything, GE would be globally unstable.

But these developing comments aren't about Minsky, they're justifiably about Schumpeter and whether or not he offers an Austrian School theory.

If the Austrian School sees entrepreneurship as one of the defining features of an economy in disequibrium -- an endogenous source of change -- then Schumpeter's theory is outside that of the Austrian theory of entrepreneurial change.

I hope that clarifies, at least in part, my criticism of Schumpeter's GE approach to explaining entrepreneurial change.

[Current]

I'm not happy with this exogenous business. I'm not sure if I agree or disagree that Schumpeter is Austrian in this sense. But I think he probably is.

The entrepreneur looks at available capital goods and labour. He speculates about demand for some good or service.

A similar sort of "entrepreneurship" may be done with any combination of capital goods and labour.

I think the real problem is scales.

For example. Suppose this evening I solve the worlds energy problem. I think of some bafflingly clever combination of capital and labour that will do the job (involving no new science). Clearly I'm an entrepreneur in Schumpeter's sense (and everyone else's sense).

Alternatively suppose this evening I cook beef in red wine. But, instead of putting in Red wine I put in pomegrante juice. I find this tastes just as nice and saves me 3 euros. I decide to sell this in my restaurant. To Schumpeter perhaps I'm not an entrepreneur. But why not? What is the difference.

Does the above mean that general walrasian equilibrium is broken whenever some bloke invents a new recipe for stew? If yes then what's the good of the concept? If no then what exactly is general equilibrium?

Despite all this I think that this sort of thing is so disputed that its difficult to say that Schumpeter isn't Austrian. He isn't a post-Mises sort of Austrian certainly.

[liberty]

"Does the above mean that general walrasian equilibrium is broken whenever some bloke invents a new recipe for stew? If yes then what's the good of the concept? If no then what exactly is general equilibrium?"

Indeed!!

[Dave Prychitko]

Those who have gotten through a PhD know what general equilibrium is in terms of its pure theory. Now, Roger might very well disagree with me here, but I don't see much use of the concept outside of an interesting thought experiment that helps shed light on, for example, what an economy isn't.

[Roger Koppl]

Dave,

I remember a conversation with you in 1985 or so in which I was defending general equilibrium theory and was somewhat disparaging it. It seems neither of us has budged 24 years later! I have the advantage in this dispute that our hero Mises had the "evenly rotating economy," which sure looks like Walrasian general equilibrium to me. And he got it right, I think, when he saw it as an "imaginary construction" useful in helping us think about change rather than some sort of real resting place upon which the economy somehow really settles. OTOH, I fully recognize that interactions in general equilibrium can be pretty complicated so that you can't rule out "perverse" effects such as a tax inducing and increase in sales of the taxed good. Hotelling wrote a great paper on this and the issue was revisited years later in connection with "green taxes." In spite of all that, I still think the tool is helpful and worth learning.

[Roger Koppl]

Oops. I meant "and you [Dave] were somewhat disparaging of it." Sorry.

[Current]

This is my point....

AFAIK Most of the details and problems of GE came after Schumpeter was writing. Economists didn't fully recognize the problem I point to above until later. So I don't think it makes sense to say Schumpeter wasn't an Austrian School economist.

[liberty]

"Those who have gotten through a PhD know what general equilibrium is in terms of its pure theory."

I suspect that this isn't entirely true, considering the amount of different definitions I have read by well known and respected economists. There is a three-liner definition, and then there is being able to answer questions about what is actually allowed to occur in general equilibrium. [In the purest sense, I suspect nothing, because it exists outside of time.]

DSGE models do not make many of those assumptions of the purest GE, and many economists seem to believe that some sort of approximation of GE exists most of the time, or that solving for it is good enough since we are always converging toward GE on any market.

Yet, it is these economists who can least define what constitutes this GE that they describe. It isn't perfect competition, complete information and markets, and an infinitesimally small point of time during which all transactions can take place simultaneously and everyone can feel satiated.

They use a more relaxed set of assumptions to do with profit maximization and/or market clearing..but then they don't define what this GE is that these assumption correlate to, theoretically.

[Dave Prychitko]

It seems like we can go on and on over this. I take GE to be that model first launched by Walras then refined by Arrow-Hahn-Debreu. I suppose we can define GE any which way they please, but I'm thinking in terms of A-H-D.

On Schump as an Austrian School economist, I suppose we should agree to disagree.

On Roger and I in 1985. I recall the conversation vividly -- and it continued as a group of us went to eat at Ruby Tuesdays, near, by the way, where Pete now lives. Roger had much more hair then. Me, it's the same amount... only more grey.

[Dave Prychitko]

Ah, I just can't stop. Sorry.

Recall Hayek's criticism of Schumpeter in the last several paragraphs of The Use of Knowledge in Society, on the nature of prices and knowledge. The whole ipso facto argument of Schumpeter. Mises goes so far (Human Action, Blue edition, p. 357) to say of Schumpeter that "it is hardly possible to construe the market process in such an erroneous way." Which he then continues in the next paragraph:

"Economics is not about goods and services, it is about the actions of living men. Its goal is not to dwell upon imaginary constructions such as equilibrium. These constructions are only tools of reasoning. The sole task of economics is analysis of actions of living men, is the analysis of processes."

For better or worse, I agree with the Mises-Hayek case here, and that's why I don't consider Schumpeter to be engaging in same work work of his contemporaries.

[Roger Koppl]

In the comments section of the thread Dave was picking up on I gave my take on what counts as "Austrian." My scholarly practice is not going to change based on what is or is not "Austrian." Thus, I think the only way to go is to think of it in terms of the history of economic thought. From that angle, I think there is a pretty clean line of demarcation with the Mises Circle. Everything coming down from that should count as "Austrian" IMHO and everything else should not. (I hope it's okay if I assume we all know what the Mises Circle was.) If that's the right dividing line, Schumpeter is out, even though he is obviously a close cousin to the "real" Austrians. That judgment to exclude tells us precisely ZERO about whether his ideas are any good, of course.

[Bogdan Enache]

Dear professor Koppl,

It may well be that Schumpeter's entrepreneur is an exogeneous Ubermensch of some sort, although I think Schumpeter personally explains it as partially emerging in connexion to the social/historical context. In any case, wanting to capture - univocally and definitively - in a mental device that can be manipulated thereof what actually drives change, even if only in "economic matters", sort of sounds to me like not very different to the efforts of the old alchimists to find the mythical philosopher stone (which, by the way, is not as an undeserving quest as it may seem).

[Ivan Pongracic, Jr.]

I personally think that Schumpeter gets a bit of a raw deal from most modern Austrians. Check out what he wrote in the 1937 preface to the Japanese edition of Theory Of Economic Development:

“…I was trying to construct a theoretic model of the process of economic change in time, or perhaps more clearly, to answer the question how the economic system generates the force which incessantly transforms it. …when in my beginnings I studied the Walrasian conception and the Walrasian technique… I discovered… that it is applicable only to a stationary process. …A stationary process… is a process which actually does not change of its own initiative, but merely reproduces constant rates of real income as it flows along in time. If it changes at all, it does so under the influence of events which are external to itself, such as natural catastrophes, wars and so on. Walras would have admitted this. He would have said (and, as a matter of fact, he did say it to me the only time that I had the opportunity to converse with him) that of course economic life is essentially passive and merely adapts itself to the natural and social influences which may be acting on it, so that the theory of a stationary process constitutes really the whole of theoretical economics and that as economic theorists we cannot say much about the factors that account for historical change, but must simply register them. …I felt very strongly that this was wrong, and that there was a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained. If this is so, then there must be a purely economic theory of economic change which does not merely rely on external factors propelling the economic system from one equilibrium to another. It is such a theory that I have tried to build.” (p. 166)

It seems like this quote should cast some doubt on any descriptions of Schumpeter as a ‘Walrasian’ economist – his research program was intended to show Walras, if not wrong, certainly irrelevant. I think it also shows that Schumpeter would take issue with Dave's above description of his work.

[Ivan Pongracic, Jr.]

I personally think that Schumpeter gets a bit of a raw deal from most modern Austrians. Check out what he wrote in the 1937 preface to the Japanese edition of Theory Of Economic Development:

“…I was trying to construct a theoretic model of the process of economic change in time, or perhaps more clearly, to answer the question how the economic system generates the force which incessantly transforms it. …when in my beginnings I studied the Walrasian conception and the Walrasian technique… I discovered… that it is applicable only to a stationary process. …A stationary process… is a process which actually does not change of its own initiative, but merely reproduces constant rates of real income as it flows along in time. If it changes at all, it does so under the influence of events which are external to itself, such as natural catastrophes, wars and so on. Walras would have admitted this. He would have said (and, as a matter of fact, he did say it to me the only time that I had the opportunity to converse with him) that of course economic life is essentially passive and merely adapts itself to the natural and social influences which may be acting on it, so that the theory of a stationary process constitutes really the whole of theoretical economics and that as economic theorists we cannot say much about the factors that account for historical change, but must simply register them. …I felt very strongly that this was wrong, and that there was a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained. If this is so, then there must be a purely economic theory of economic change which does not merely rely on external factors propelling the economic system from one equilibrium to another. It is such a theory that I have tried to build.” (p. 166)

It seems like this quote should cast some doubt on any descriptions of Schumpeter as a ‘Walrasian’ economist – his research program was intended to show Walras, if not wrong, certainly irrelevant. I think it also shows that Schumpeter would take issue with Dave's above description of his work.

[Bogdan Enache]

This Schumpeter quote is really great. Note : Preface for Japanese edition 1937

[Ivan Pongracic, Jr.]

BTW, Dave, I understand your criticisms that Schumpeter never explains how we get into the general equilibrium in the first place. I agree that's a big problem with Schumpeter's theory. But I think the important question in Schumpeter's work is the one of the role of creativity in an economy. Creativity by definition is introduction of something new and previously non-existent and I'm sure we all recognize that it's all around us. It seems to me that above you are asking for a theory of 'endogenous creativity,' and that is ultimately a contradiction in terms.

[liberty]

" It seems to me that above you are asking for a theory of 'endogenous creativity,' and that is ultimately a contradiction in terms. "

I don't mean to jump in without invite (as an exogenous influence) but I will..

The reason that an economic theory ought, in my opinion, to have some kind of endogenous explanation for entrepreneurship, and creativity, is that the institutional structure will influence at least the ability, and probably the willingness, of the creative person to take action and/or succeed in actions taken.

Yes, in some sense the entrepreneur is entering the system from outside, in that his creativity is not created by the system; but he needs to be able to enter, he needs not to be prevented from entering the system, and the number of new creative minds joining will depend as well on their chance of profiting by entry.

Also, the system could finance creativity based on political rather than economic considerations.

So, creativity and entrepreneurship must have an endogenous component.

[Current]

liberty: "Yes, in some sense the entrepreneur is entering the system from outside, in that his creativity is not created by the system; but he needs to be able to enter, he needs not to be prevented from entering the system, and the number of new creative minds joining will depend as well on their chance of profiting by entry."

It's not just that. The availability of capital goods, the availability of labour, the whole structure of the world. These things suggest courses of action to people.

Those courses of action are created by the entrepreneur. But they are suggested by the surrounding world. The economist ought not to just be interested in whether entrepreneurial entry will occur and how. Another important aspect is what information the world gives that entrepreneurs can use.

[Dave Prychitko]

Ivan -- finally a counter-quote from Schumpeter himself! I appreciate that greatly.

Now, to challenge it a bit. Notice that the external forces that Schumpeter mentions are war,
catastrophe, and so on. Schumpeter knows better than Walras onthis (and in many ways those catastrophes etc could be used as examples of the Broken Window Fallacy). Anyway, Schumpeter is arguing -- which I agree to all along -- that it is the entrepreneur and his recombinations of capital that drive the economy and promote growth.

On that he seems Austrian. But he nevertheless sees the entrepreneur as disrupting GE. He does depart from Walras's model because Walras sees the disturbances from non-entrepreneurial sources.

Let's not forget the side he took on the socialist calculation debate. He, like Lange and others, misunderstood the Austrian position as arguing in a neoclassical model. For an Austrian School economist, were Schumpeter one, it's incredible that he would completely misunderstand the Austrian argument.

On just that point, see Lavoie's classic study of the debate:

"Schumpeter is not considered an Austrian for the purposes of this study, despite the Austrian flavor of much of his work, since on the issue of the calculation debate he adopts what I call a "neoclassical" view. Similarly the "flaws" in the neoclassical perspective cannot be attributed to every contemporary theorist who considers himself an heir to Walras and Marshall and indeed may not be contained in the original neoclassical theorists themselves either. Rather, I am referring to a tendency of many economists, notably the market socialists themselves, to, in a sense, take the formal equilibrium theory too seriously. Those neoclassical economists who see this formal theory as providing only heuristic aids to economics may be closer to what is being called the "Austrian" point of view" (1985, p. 5, n.6).

(And in that book, Pete and I have maintained, Lavoie himself was still too much influenced by neoclassicism. Back in that day, for example, Lavoie told us that he thought much of neoclassical micro theory was correct. This was back in 1985, and Pete and I challenged him on that. He would soon become critical of the entire enterprise.)

Anyway, while yes, entrepreneurs innovate, it is the way that he modeled it that we have the most trouble with.

Pete (I know you've been out of town) and Steve, do you agree with me here? I'm surprised that I seem so far to be the lone wolf on this side of the debate!

[Roger Koppl]

Baumol's "Entrepreneurship: Productive, Unproductive, and Destructive," (JPE, 1990, 98: 893-921) addresses the issue of institutional incentives and entrepreneurship. His abstract:

The basic hypothesis is that, while the total supply of entrepreneurs varies among societies, the productive contribution of the society's entrepreneurial activities varies much more because of their allocation between productive activities such as innovation and largely unproductive activities such as rent seeking or organized crime. This allocation is heavily influenced by the relative payoffs society offers to such activities. This implies that policy can influence the allocation of entrepreneurship more effectively than it can influence its supply. Historical evidence from ancient Rome, early China, and the Middle Ages and Renaissance in Europe is used to investigate the hypotheses.

But Gilad and Harper use the idea of "locus of control," which shows how the institutional structure can influence the overall amount of entrepreneurship. The cites:

Gilad, B. (1982). On encouraging entrepreneurship: an interdisciplinary approach. Journal of Behavioral Economics, 11(1), 132–163.

Harper, D. (1996). Enterpreneurship and the market process: an inquiry into the growth of knowledge. London: Routledge.

Harper, D. (1998). Institutional conditions for entrepreneurship. Advances in Austrian Economics, 5, 241– 275.

IMHO, there is also a complexity and computability dimension to the issue. A lot of what we mean by "creativity" is unpredictability, which you get in complex systems. Adam Smith says somewhere that creativity is the bringing together of distant and dissimilar elements into a coherent whole, or something like that. (Anyone got that quote?) So it's clear that a complex adaptive system is going to be "creative" in precisely Smith's sense. New combinations continue to surprise us because of the computability issue: we cannot compute the outcomes of a complex system in advance and must therefore wait for such outcomes to unfold.

I think policy can influence the amount of creativity (as it were) by ensuring things such as transparency that enable increased complexity and foster internal locus of control. Policy can influence the direction of creativity for the sort of reasons Baumol explained.

[Current]

I think this is all too much 20:20 hindsight.

Austrian economists didn't really understand how different their ideas were until after Schumpeter was dead. Mises and Hayek got it during the 40s though.

If Schumpeter isn't an Austrian school economist what about Bohm Bawerk?

[Dave Prychitko]

Even better, what about Wieser's Austrianism?

I'll let others discuss all of that!

[liberty]

Current, indeed, well said. I meant to touch on that when I mentioned the political/economic funding-- as Roger expanded on.

[Dave Prychitko]

"I think this is all too much 20:20 hindsight."

But I offered quotes from Mises and Hayek writing during the time of Schumpeter's work. They themselves had 20:20 vision at that time!

[Dave Prychitko]

Folks, outside of Ivan's wonderful quote from Schumpeter himself, which I truly appreciate (and tried to carefully respond to), nobody else has offered citations of Schumpeter to back up their own case. I don't want to keep continuing this way.

[Current]

"But I offered quotes from Mises and Hayek writing during the time of Schumpeter's work. They themselves had 20:20 vision at that time!"

But is Schump not an Austrian economist because he didn't subscribe to their view? At the same time though he did subscribe to many other views that were distinctive of the Austrian school of that time.

Look at it this way. Suppose the analytical tool Foo from ~50 years ago gains a strong hold in economics. You decide to use that tool in your work. Some other Austrians don't. For years the exact problems and nature of Foo are disputed. Then Austrians, starting with a few and then all abandon Foo. Does this then mean that in 50 years from now you should not be considered an Austrian economist?

We should make allowances for the fact that the Austrian school was different then. What is obvious to us now was not obvious then.

[Roger Koppl]

Folks,

I'm growing a bit confused about this discussion. You could say Schumpeter is "Austrian" or "not Austrian" depending on your definition of "Austrian." He was Bohm-Bawerk's star pupil and thus has a clear claim to be called "Austrian." OTOH, he is somehow not exactly embraced by the "modern Austrian school" associated with this blog. Apparently, there is some sort of reason to cast him out from our Austrian paradise. Don't we need clear criteria for "Austrian" to make such a judgment? Since there is more than one plausible criterion, we should not be surprised if Schumpeter *is* Austrian is this sense, but *not* Austrian in that sense. Isn't that kind of a straightforward remark? I've put out a criterion "Austrian-ness" that I think is reasonable and defensible, though not uniquely "correct." By that criterion dear old J. A. is "out" notwithstanding the benefits we can all gain by taking his work seriously. If you want to disagree and count him "in," are you not under an obligation to state a criterion of "Austrian-ness" that puts him in? We could squabble over which demarcation criterion is best, but it seems unlikely that one and only one such criterion could be "correct." N'est pas?

[Roger Koppl]

Our discussion on this thread inspired me to make a post at Thinkmarkets on modeling creativity.

http://thinkmarkets.wordpress.com/2009/04/01/can-we-model-creativity/#comments

Our blogosphere friend Bogdan Enache has already added a nice comment.

[Dave Prychitko]

Current, I think I agree with what you are saying in your last post. But this is not a general issue here. It is a specific one: Schumpeter himself. I discussed his work from the 30s and 40s, and it is now 70 years later.

Whom, among the main Austrians that were contemporaries of Schumpeter, and whom today, among the main Austrians, offer an argument that Schump was working in the Austrian tradition (such as market processes, the role of non-equilibrium prices in conveying knowledge, the Austrian theory of the business cycle, and so on)?

Did Mises, Hayek, Rothbard, Kirzner, Salerno, Rizzo, O'Driscoll, White, Selgin, Vaughn, Shenoy, Boudreaux, Boettke, Horwitz, for example, argue that Schumpeter was/is an Austrian economist?

Where in the literature do you find evidence to back your case? That's all what I'm asking at this point. Where is it in the literature?

Now, if someone wants to consider Schump an Austrian, fine. We have our interpretations, and I'm not on a mission. I was instead trying to back up my argument in the face of criticism. That's all.

One of the drawbacks of a blog is that an issue like this can rarely be sustained as a scholarly debate -- citations, quotes, etc from every side. I'm looking at it from the perspective of both an Austrian and historian of thought, and I'm forgetting what the point of The Austrian Economists blog is really all about. I forgot what Pete said: blogs are like discussions at scholarly conferences that take place in the lobby. (I'd add: But with no drinks!) I seem to be behaving like that nerd who pulls out papers and books on the spot and read them aloud, trying to debate that way with others on the couch across from me.

Anyway, it takes time not only to type up one's thoughts in this venue, but also to track down books, read passages, and then type up the quotes. I understand the costs -- I've been incurring them myself. The costs of all the above comments of mine are now sunk. And I now stand at a new margin. For me it has become too costly to continue on this way.

I hope you and the others continue. I'd like to read more of the exchanges -- as a consumption good. More like the guy listening in on the conversation and quietly enjoying its volleys.

[Current]

As far as I can see Schumpeter held the following views. In "For" I see:
* He was a marginalist.
* Thought of capital as inhomogenous.
* Thought competition between suppliers of identical commodities to be unrealistic and not a very important aspect of competition.
* Thought entrepreneurship very important and incorporated it in his general economic theorising. He thought about entrepreneurship broadly.

In "Against" I see:
* Agreed with much Walrasian economics.
* Agreed that socialism is possible, thereby not recognizing the points of Mises and Hayek.
* Had a different business cycle theory to ABCT.

In my view the point for outweigh the points against. I think though that it's such a matter of perspective that it's not really possible to agree on it. And perhaps in this case agreeing or disagreeing doesn't mean that much anyway.

That said I'm not an economist. And as Dave Prychitko points out I haven't got quotes to back up my case. I appreciate others doing the work to bring some quotes to back up their point. I'm afraid I haven't the time right now, for which I apologise.

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