HIST363: Global Perspectives on Industrialization

Schumpeter's vast erudition is apparent in his posthumous History of Economic Analysis (1954), although some of his judgments seem quite idiosyncratic. For instance, Schumpeter thought that the greatest eighteenth century economist was Turgot, not Adam Smith, as many consider. These judgments are partly explained by his opinion that there is one general system of economic analysis, and Léon Walras was the one who found it.

In Schumpeter's treatise, other economists were rated by how much of Walras' theory could be read into them. Schumpeter criticized John Maynard Keynes and David Ricardo for the "Ricardian vice". According to Schumpeter, Ricardo and Keynes reasoned in terms of abstract models, where they would freeze all but a few variables. Then they could argue that one caused the other in a simple monotonic fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model.

Schumpeter was a supporter of free markets. However, while Adam Smith was concerned with the effects of supply and demand on product price, Schumpeter focused on innovation, rather than price, as the dominant force in the business cycle. In his early analysis, valuing the role of the entrepreneur as the agent of change, and later recognizing the need for large-scale development of new ideas, he predicted that a full-labor economy would tend to lead firms to invest in new technology rather than raise product prices.

He also argued that the family was the fundamental unit of the capitalist economy. Also, Schumpeter did unintentionally recognize the dangers of disassociating human morality from economics when he predicted that capitalism would fall due to the business and government bureaucracy and corruption that can occur in the free market.