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Innovations propagate business cycles that trend to higher
equilibria.Reviewed by Thomas J. Hickey, 2005-12-04
Schumpeter published his own theory of business cycles three years
after Keynes' General Theory (1936). In his review of Keynes' book
in Journal of the American Statistical Association (1936)
Schumpeter described Keynes' "Propensity to Consume" as nothing but
a deus ex machina that is valueless if we do not understand the
"mechanism" of changing situations in which consumers' expenditures
fluctuate. And he adds that Keynes' "Inducement to Invest", his
"Multiplier", and his "Liquidity Preference", are all an Olympus of
such hypotheses, which should be replaced by concepts drawn from
the economic processes that lie behind the surface phenomena.
Schumpeter had his own business cycle theory describing the cycle
as an interaction between the stable Walrasian system and
revolutionary innovations.
In the opening chapter of his Theory of Economic Development (1934)
Schumpeter says that any satisfactory explanation of economic
factors must ultimately be in terms of noneconomic factors. In his
book, Three Views on Method in Economics (1960), Henry W. Briefs
reported a 1954 conversation with Jacob Marshak, econometrician and
former Research Director for the Cowles Commission, about
Schumpeter's book, Business Cycles (1939). In his review of
Schumpeter's book in Journal of Political Economy (1940) Marshak
criticized that he could not translate Schumpeter's business cycle
theory into a complete system of equations, because he needed an
equation for innovation. In subsequent personal correspondence
Marshal asked Schumpeter what drives innovation, and in reply
Schumpeter referred Marshak to Henri Bergson's elan vital. This is
certainly a noneconomic factor!
However in his Business Cycles book, Schumpeter states that
innovation is internal to the economy. It is not external like an
earthquake, nor is it the same as invention. He maintains that
innovations are made by the actions of entrepreneurs, who produce
discontinuous structural changes in the production function, by
making new combinations of input factors that increase marginal
productivity. Each such change in turn propagates a damped cyclical
oscillation in the levels of economic output, which trends to a
stable equilibrium at a higher level. But Walrasian equilibrium is
never actually achieved, because the cyclical phases of increased
activity occasion further innovations, so innovations and business
cycles are both endogenous.
Schumpeter's theory is closer to economic history than Keynes'
theory, particularly the pre-Depression period of industrialization
from which he drew his perspective. He has more to tell us about
economic development than about business cycles, and his book
Business Cycles is actually an extension of his earlier book,
Theory of Economic Development. See my other reviews and my web
site philsci.
Don't forbide this bookReviewed by Marc Magrans De Abril, 2005-05-10
If you don't want to be swallowed with the Mathematics of the
General Equilibrium Theory of Walras (and then Arrow and Debreu)
read from chapter one to three of Schumpeter's Business
Cycles.
I don't recommend the other chapters to reach a better
comprehension of Schumpeter... I think it's too much out of context
history. Very dificult to understand for engineers, economists and
non historian people. Perhaps a best option is the reading of "The
Human Web: A Bird's-Eye View of World History" by McNeill. This
book has a mountains of unexpected links with Shumpeter's...but, of
course, I know It wasn't Schumpeter's Aim to describe economy in a
Human History Perspective.
GreatReviewed by Naval, 2001-03-18
One of the best books ve read in a long time....i read it because of Mr.Greenspan....wanted to learn about how the "MAN" thinks and am glad that i read it...a must for people really interested in economics......
Comprehensive theoretical frameworkReviewed by Anonymous, 2000-01-23
A thorough description of Schumpeter's ideas and theories with practical applications. His 'creative destruction' theory is well documented and explained. A wonderful read in an argument against government intervention in industry.
