Prophet of Innovation: Joseph Schumpeter and Creative Destruction, by Thomas K. McCraw (Belknap Press, April 2007)

Forbes magazine once suggested that Schumpeter, rather than Keynes, is the seminal economist for our time. Schumpeter had a dynamic vision of capitalism, stressed entrepreneurship, and yet saw that a free society was vulnerable to the disloyalty of its intellectuals. Modern capitalist democracy, for Schumpeter, had vanquished the atavistic imperialism of times past, yet it was anything but stable.

Both Schumpeter’s appeal and his mystery stem from the difficulty of placing him in the standard boxes. Reading Schumpeter became a kind of Rorschach test. Was he a straightforward classical liberal, but one who liked playing around with controversial and possibly self-subverting ideas, in the mold of Robert Nozick or John Gray? Or was he a European pessimist first and a political thinker second? He even has been read as a defender of planning who thought that the time for capitalism—for better or worse—had passed.

Thomas K. McCraw, a business historian at Harvard and Pulitzer Prize winner, is the latest to offer a new interpretation. His magisterial Prophet of Innovation: Joseph Schumpeter and Creative Destruction is a well-written and entrancing look at one of the twentieth century’s most important economic and political thinkers. McCraw’s book may rightly take its place as one of the two or three best biographies of an economist ever written; perhaps only Robert Skidelsky’s set on Keynes or Sylvia Nasar’s book on John Nash reach higher peaks.

Prophet of Innovation is so splendid because it succeeds on so many different levels. If the book were simply an account of the Harvard economics department, it would stand as a lasting and significant contribution to the history of economic thought. Alternatively, it is one of the best treatments of what it was like for European intellectuals to migrate to the United States. Or are you interested in why Austria fell apart during the 1920s, and how someone with as little real world experience as Schumpeter became Minister of Finance? The book is also a love story, and an account of how a possibly dysfunctional man can nonetheless find romantic happiness after repeated failures and tragedies.

‘Creative destruction’ has become a mantra in managerial and economic discourse; even books from history and literature borrow the phrase for their titles.

Last but not least it is an intellectual history. McCraw reads Schumpeter very much as a prophet and defender of capitalism. He offers a startling reinterpretation of Capitalism, Socialism, and Democracy, based on the idea that Schumpeter’s supposed praise of central planning is in part ironic. In his view Schumpeter is convinced there is no desirable alternative but capitalism, no matter how hard it may be to maintain capitalistic institutions. After this discussion, no one will be able to read Schumpeter the same way, without either accepting McCraw’s view or rebutting it. McCraw reminds us Schumpeter insisted that capitalism had to be judged over the course of decades and centuries, not in the short run.

The treatment is occasionally odd. Schumpeter has a reputation for having been an arrogant snob and McCraw overreacts by going to great lengths to show Schumpeter’s benevolence. The reader is left a little confused. Furthermore nobody’s treatment of Schumpeter’s career-closing History of Economic Analysis is satisfactory, including McCraw’s, if only because no commentator knows the topic of the History as well as Schumpeter did. Arguably that quirky tome reestablishes Schumpeter’s credentials as intellectually conflicted, rather than a straightforward classical liberal.

I am personally most interested in Schumpeter as a turning point in European intellectual thought. “Creative destruction” returns over 700,000 hits on Google and it has become a mantra in managerial and economic discourse; even books from history and literature borrow the phrase for their titles. The idea suggests that the creativity of an economy—or a business—stems from allowing the shift of resources away from old patterns and toward more valuable ends. Surely it is better that the automobile has put so many horse and buggy makers out of work. Schumpeter coined the phrase in his Capitalism, Socialism, and Democracy (1942): “This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

The question is why creative destruction is so unpopular in Western Europe these days, among both policymakers and intellectuals. Job losses are considered anathema by politicians and voters, no matter what long-run opportunities are opened up. Denmark has labor markets about as flexible as the United States’s, but in part that is because the national government spends so much on retraining workers to keep down unemployment.

McCraw tries to explain why Schumpeter was so enamored of the idea of creative destruction. He suggests that Schumpeter was inspired by the entrepreneurial activities of his mother, who supported the family and engineered a series of moves from the small town of Triesch to Graz and then to Vienna. Once Schumpeter was in Vienna, he saw the city undergo rapid and sometimes disruptive progress. Nonetheless the city was arguably the intellectual capital of Europe at the time. Schumpeter’s own experience as a businessman involved some repeated failures, and only later significant wealth. He had a direct and personal understanding of the benefits of volatility.

Western Europe lost that love of change with the two World Wars, but according to McCraw, Schumpeter remained a partisan of creative destruction throughout his life. Why did he fail to make the intellectual shift with the bulk of his Continental homeland? Had his time at Harvard changed him so much, or was he intellectually schizophrenic in the first place?

McCraw doesn’t answer every question about Schumpeter but he comes closer than I would have thought possible. Every year there are three or four non-fiction books that have to be read, and this is one of them.

Tyler Cowen is Professor of Economics at George Mason University and Director of the Mercatus Center.