Horror Quote from Joseph Schumpeter

Joseph A. Schumpeter was one of Eugen von Böhm-Bawerk’s star pupils; another one was Ludwig von Mises. A couple of years ago I wrote a piece called Stray Observations on Joseph A. Schumpeter, where I tried to sort the wheat from the chaff in his book Capitalism, Socialism and Democracy. I also read his The Great Economists (in a Swedish translation), a series of monographs on some economists, from Marx to Keynes. One thing that struck me was that he lavishes as much praise on Marx and Keynes as he does on Menger and Böhm-Bawerk. This should be enough to establish that I regard Schumpeter as a “mixed bag”.

But there is some real poison in the mixture. From a Mises.org article by Gary North[1]:

Felix Somary records in his autobiography a discussion he had with the economist Joseph Schumpeter and the sociologist Max Weber in 1918. Schumpeter was an Austrian economist who was not an Austrian School economist. He later wrote the most influential monograph on the history of economic thought. Weber was the most prestigious academic social scientist in the world until he died in 1920.

Schumpeter expressed happiness regarding the Russian Revolution. The USSR would be a test case for socialism. Weber warned that this would cause untold misery. Schumpeter replied, “That may well be, but it would be a good laboratory.” Weber responded, “A laboratory heaped with human corpses!” Schumpeter retorted, “Every anatomy classroom is the same thing.” [Felix Somary, The Raven of Zurich (New York: St. Martin’s, 1986), p. 121.]

Schumpeter was a moral monster. Let us not mince words. He was a highly sophisticated man, but he was at bottom a moral monster. Anyone who could dismiss the deaths of millions like this is a moral monster. Weber stormed out of the room. I don’t blame him.

I don’t blame him either.

[1]) Gary North is a new acquaintance to me, but Wikipedia informs that he tries to combine “Austrian” economics with Christian beliefs.

Creative Destruction?

A while ago I wrote a piece called Stray Observations of Joseph A. Schumpeter. Now I want to make another stray observation.

I am currently reading Jörg Guido Hülsmann’s Mises: The Last Knight of Liberalism [or the first of their return]. Hülsmann devotes a section in the beginning of the book to presenting Schumpeter’s views. (It follows after presentations of Menger, Böhm-Bawerk and Wieser, and the point is to show where Mises stands in relation to his predecessors and contemporaries.) I quote:

First, Schumpeter argued that economic development was exclusively the result of pioneering “entrepreneurs” – a special breed as different from the rest of mankind as greyhounds are from poodles. Innovative entrepreneurs are the true driving force of social evolution. They impose unheard-of products and methods of production on a reluctant society of mere adjusters. (P. 172.)

So far, so good. One cannot contest that great innovators drive society forward. Think Edison. Think Steve Jobs. Or, for that matter, think Hank Rearden. Or go pre-historical and think Prometheus. Those innovators are the Atlases that carry the world on their shoulders. Objectivists have to agree with Schumpeter here. (I find it slightly exaggerated to call them the exclusive driving forces, but this is a nit-picking criticism.) Hülsmann continues:

It was this thesis in particular that roused the admiration of Schumpeter’s friends and colleagues. Twenty years later, Mises listed the book [Theory of Economic Development] as one of the top four German-language contributions to economics. It has continued to fascinate some of the best Austrian economists to the present day. (Ibid.)

But there is a second thesis, so I continue the quote:

Second, Schumpeter portrayed entrepreneurs as essentially resourceless market participants. They needed new fiduciary bank credit (“credit out of thin air”) to finance their projects because all other investment capital was already tied up in other projects. For Schumpeter, capital was essentially “purchasing power” rather than a quantity of real goods that could sustain workers in the production process. Bankers could therefore create “capital” out of nothing by simply printing additional banknotes. (P. 173; italics mine.)

What this means, to put it bluntly (and how else should I put it?), is that those innovative entrepreneurs, those Atlases that carry the world on their shoulders, are dependent on counterfeit money! Or, to put it in other words, they are dependent on inflation. If it weren’t for the creation of credit out of thin air and its inevitable consequences – higher prices, not to speak about business cycles – we would not be able to enjoy such things as the electric light, automobiles, radio and TV, computers, mobile phones, etc., etc. Those inventions would have stayed in the heads of the innovators, and they would never have materialized because of lack of funds. Sounds weird, doesn’t it?

Now I ask myself – a wee bit sarcastically – if this is the basis of Schumpeter’s famous phrase “creative destruction”. Is inflation and business cycles the price we have to pay for progress? Is monetary destruction the price we have to pay for enjoying the innovations of the creative geniuses?

Well, I guess your guess is as good as mine.