HIST363: Global Perspectives on Industrialization

While John Maynard Keynes revolutionized economic thinking by answering the same questions economists before him (David Ricardo, John Stuart Mill, Alfred Marshall, even Karl Marx) had asked with different answers, Schumpeter asked different questions. While Keynes regarded the economy as a closed system, that, when healthy, was in static equilibrium, Schumpeter rejected equilibrium as healthy and regarded innovation as the basis of a healthy economy. For Schumpeter, dynamic disequilibrium is key and the economy is likened to a growing, living organism rather than a machine.

Schumpeter had openly derided the "stagnation thesis" introduced in Keynes's General Theory. This thesis holds that as a country grows richer, investment opportunities shrink but the propensity to save increases; therefore savings and investment balance only at high unemployment.

For Schumpeter, the entrepreneur who moves resources from old, obsolescent technology and the firm that invests in developing new ideas providing new employment, are essential to the health of the economy. But, for Schumpeter, innovation is also "creative destruction," as the new makes obsolete the old.

While Keynes concluded that a permanent equilibrium of full employment and prosperity could be achieved by government control - government spending, the volume of credit, or the money supply - Schumpeter saw government intervention as increasing inflation until capital would be consumed and both capitalism and democracy destroyed. Keynes was famous for his saying "in the long run we are all dead," but it was Schumpeter who saw that short-term measures have long-term impacts. Schumpeter warned that capitalism could destroy itself if those in power looked only to the short-term.