Joseph Schumpeter's economic theories: An analysis
By Isaiah Varghese
web posted September 22, 2024
Joseph Alois Schumpeter was among the most influential economists of the 20th century. During his tenure as a professor, Schumpeter's published writings experienced varying degrees of success. The most noteworthy of these, Capitalism, Socialism, and Democracy, would later be considered one of the greatest economics texts of his time. In this book, Schumpeter faulted socialism and democracy for being quixotic and praised capitalism as a whole, but noted some of its inherent faults.
Schumpeter's controversial opinions were initially abandoned in favor of the more popular economic theories of the time. Keynenism, which ranked among these popular theories, was based on the influence of statistical aggregates and lauded static equilibrium for catalyzing growth. Schumpeter believed that Keynenesians ignored too many variables and therefore lost sight of accurate economic predictions. Furthermore, he claimed that individual actions could not be ignored among aggregates, and that static equilibrium dulled the economy's ability to grow its production possibilities frontier. Instead, he proposed continual innovation, which entails creative destruction. Creative destruction, a term coined by Schumpeter himself, describes how capitalism replaces withering businesses with modern and growing ones. Entrepreneurs, another term coined by Schumpeter, were at the forefront of innovation in capitalist economies; whenever an entrepreneur reduced the opportunity costs of producing a good, created a new good, or increased demand was deemed an innovator. Innovation, Schumpeter claimed, was the mechanism that drives the economy forward. This was the basis of his theory on business cycles– a circular flow which reaches a dead equilibrium until the entrepreneur innovates, which disturbs the equilibrium and stimulates the economy. Schumpeter's theory of economic growth was initially unpopular, but eventually became the centerpiece for modern economics as it aptly described the state of capitalist economies such as those in America and Australia.
After decades of economic study, Schumpeter published Capitalism, Socialism, and Democracy in 1942, which suggested capitalism as the ideal economic environment to promote growth, albeit with a caveat. Socialism, he believed, did not properly incentivize the economy to be productive nor laborers to gain human capital. On the contrary, he suggested that capitalism's abrupt and often uncomfortable market evolution facilitated economic growth. However, despite his ardent belief in capitalism, Schumpeter admitted almost cynically that he believed it was inherently destined to fail because of its own success; because of its success, capitalism would create a large intellectual class that survived by attacking the very freedom that sustained its existence. As a result, capitalistic societies would crumble and resort to socialism.
On the whole, I agree with Schumpeter; I agree that economists such as Keynes must take care not to overgeneralize the economy. In addition, I also believe that pure democracy is a poor solution because of the superficial nature of humankind and the general lack of legal knowledge. I also firmly believe that capitalism and continual innovation are the greatest and, surprisingly, the most stable way of expanding the production possibilities curve of a given economy. However, I disagree with Schumpeter's assumption that capitalism will eventually fall to socialism, because he failed to account for the role of the government. Capitalist economies will continue to find new ways to innovate, until innovation is no longer needed and production finds an equilibrium. Then, when innovation turns to the production of goods to solely satiate consumer desires, governments will step in to protect the freedom of individuals and corporations, because they do not wish to upset the production equilibrium. After this point, entrepreneurs will continue to innovate, providing for the wants of the people, until they must stop because of government regulations. At this point, production will hit its final equilibrium, and innovation will cease because there is nothing more to innovate; all factors of production have been found and are being utilized in a state of maximum productivity. In this final equilibrium, the individuals, corporations, and government have checks and balances which prevent the economy from becoming socialist. For example, if the government tried to seize control over the corporations, the masses would defy their government to protect their freedom, and the corporations themselves would protest by cutting production and crippling the economy and government in question.
Although Schumpeter's economic propositions were initially abandoned in favor of more popular economists at the time, such as John Maynard Keynes, his theories regarding capitalism, long-term economic growth, and entrepreneurship have become essential in explaining how modern capitalist economies evolve to satiate consumer demands more excellently than other forms of economic governance. 
(c) 2024 Isaiah Varghese. This is Isaiah Varghese's first contribution to Enter Stage Right.
