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Review of Prophet of Innovation
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BOOK REVIEW
Thomas K. McCraw (2007). Prophet of Innovation: Joseph Schumpeter and Creative
Destruction (The Belknap Press of Harvard University Press).
INTRODUCTION
Joseph Schumpeter, or ‘Schumpy,’ as he was affectionately known, was not only the
leading Harvard expert on the economics of entrepreneurship during and even after
his lifetime, but was also extremely knowledgeable of entrepreneurial psychology.
This intellectual biography by Thomas McCraw will be of interest to not only
business academics, but also to those who are actually involved in studying the
vicissitudes of the entrepreneurial process on a daily basis. Schumpeter’s theories of
entrepreneurship are influential not only in departments of business and economics;
they have also paved the way for one of the most important ideas in contemporary
strategy – ‘creative destruction.’ The term ‘creative destruction’ is of great
consequence in the history of strategy. Schumpeter had the habit of generating not
only new technical terms like ‘creative destruction,’ but also new sub-disciplines like
‘business history,’ or the ‘history of entrepreneurship,’ when he went about
routinely doing economics as he understood it.1 There are three parts to this
voluminous book. A great deal of the length is related to the meticulous notes and
bibliographic references that McCraw has included for his readers. This section will
be particularly useful for professional readers in the areas of business and economic
history. It will also be of interest to researchers who want to delve deeper into these
areas.
PIONEERING BUSINESS HISTORY
The first part of the book deals with Schumpeter’s birth, childhood, and education in
economics. The second part is about his approach to economics. The third part is
about his attempts to incorporate business and economic history into mainstream
economic theory. McCraw’s main intent in writing this biography is to explain
1 See, for instance, Richard Foster and Sarah Kaplan (2001). Creative Destruction: From Built to Last to
Built to Perform (London: FT Prentice Hall).
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where Schumpeter is coming from; how he educated himself in a number of areas in
addition to economics; and how his multi-disciplinary learning culminated in his
insight studies of business cycles, entrepreneurship, the comparative analysis of
economic systems, and the history of economic analysis. It is interesting that
McCraw, a leading business historian at the Harvard Business School, should focus
on a fellow academic rather than attempt yet another empirical business history
here. That should explain – to the uninitiated – the importance that he accords to the
life, thought, and theories of Joseph Schumpeter. Business history, or the history of
entrepreneurship, as we now know it, would not exist but for the pioneering work of
Joseph Schumpeter; the fact that Schumpeter did not consciously intend to invent
business history is beside the point. What matters is that in his attempt to
understand the theoretical difference between inventions and innovations, he
wound up theorizing the important role that entrepreneurs play in a capitalist
economy and the creative destruction that ensues in the economy as a consequence
of their relentless efforts.
ENTREPRENEURS & THE OPEN SOCIETY
This notion of creative destruction seems like an oxymoron at first glance – i.e. a
simple contradiction in terms; but what it actually represents is the idea that
innovations bring new things into the economy in place of whatever has become
obsolete. This process of replacing the old with the new is ongoing; it never comes to
an end; hence, the idea of creative destruction. The destruction is not an end in itself,
but a consequence of emerging innovations, processes, and technologies. Societies
that encourage entrepreneurs and the entrepreneurial process will put up with more
change and creative destruction compared to those that don’t. For Schumpeter, the
most important aspect of capitalism and the capitalist way of life was creative
destruction. Schumpeter’s critique of Marxism is related to the idea that Marx was
obsessed with capitalists rather than with entrepreneurs. While Schumpeter was
‘eclectic’ in this theoretical work and did not reject Marxism in its entirety, the fact
that Marx did not understand the role played by entrepreneurs and creative
destruction in the process of wealth creation was the main argument that he held out
against him. The exclusion of entrepreneurs from society leads to the mistaken
notion that the wealth of a society is fixed once and for all in history or increases too
slowly to be factored into economic analysis. The emphasis on the relentless class
struggle for instance in Marxism would not have been necessary if the positive role
played by entrepreneurs had been recognized much earlier in political economy. For
Schumpeter, it is entrepreneurs who keep society ‘open.’ When societies become
inhospitable to entrepreneurs, they become closed societies obsessed with their own
past rather than being positively oriented towards a better socio-economic future for
everybody. What Schumpeter’s career amounts to then is making an effective case
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for entrepreneurs. The urgency with which Schumpeter furthers his case relates to
the fact that during the two world wars, what was really at stake was the ideological
conflict between capitalism, fascism, and communism. That is why Schumpeter, who
began as an expert on business cycles, moved to the study of comparative economic
systems, and wanted to bring out the limitations in the socialist way of life.
Schumpeter not only anticipated but also worried a great deal about the advent of
the Cold War; he knew the difference between a form of capitalism that could make
an effective case for entrepreneurs and a form of crony capitalism that couldn’t.
Genuine capitalism leads to an open society; crony capitalism leads to a closed
society. The practical consequence of Schumpeter’s forays in economic theory was to
make the world safe for the entrepreneurial form of capitalism.
STUDY OF ECONOMIC ANALYSIS
Schumpeter’s career as a theorist is also important for another reason; his
monumental study of the history of economic analysis. The fact that Schumpeter
could even attempt such a book says a lot about the years of research and study that
went into his formation as an economist. McCraw differentiates between doing
economics and studying the history of economic analysis – i.e. the methods
appropriate to the study of economics. Schumpeter’s eclecticism is related to the fact
that in addition to the studies that he came up with in the areas of economics that he
found relevant, his commitment to the history of economic thought was as high as
the history of the economy itself. This is a rare methodological combination in
economic theorists. Economists usually choose between committing to the study of
empirical history or the history of economic thought. Schumpeter was a bit of an
exception to this rule because he was equally good at both. Schumpeter’s work on
business cycles was an instance of his mastery of economic history while his history
of economic analysis was an instance of his in-depth command on questions of
theory, method, and the need for institutionalizing multi-disciplinary approaches to the
study of economics. Just as it was important for a capitalist society to remain open to
the advances of entrepreneurs; so, likewise, Schumpeter believed that it was
important for economic theory to stay open.
HISTORY OF ECONOMIC THEORY
What does it mean for a theory to stay open? It basically means that progress in
economic methods is not as linear as we would like it to be. The growth of economic
theory happens in fits and starts; that is why it is important for an economist to
remain open in his approaches to methods and disciplines whose insights would be
relevant going forward. That is why Schumpeter spent the best years of his academic
career in a painstaking rendition of the history of economic analysis. It was also his
way of thanking his precursors by taking them as seriously as it was possible for him
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to do so. Among the areas that Schumpeter found most useful were history and
sociology; what he wanted above all was to create an ‘economic sociology’ or the
sociology of economics that would blend insights from both economic history and
historical sociology. Even while Schumpeter was doing this, he was the first to make
a case for the inclusion of calculus and forms of higher mathematics to the arsenal of
tools that would be necessary to make a formal science of economics. Schumpeter
was working simultaneously on both the mathematical and discursive dimensions of
economic theory; this is all the more commendable given that his abilities in
mathematics were not comparable to his knowledge of the social sciences.
CONCLUSION
What the history of economic thought teaches us then is that advances in economic
analysis depend on being able to re-activate insights that were forgotten in the
history of economics, but which can make themselves relevant when the context of
revival bears significant resemblance to the context of invention.
This then is an indispensable biography about the patron saint of entrepreneurs; its
interest is not specific to or reducible to the Harvard community; it will be of interest
anywhere that entrepreneurs are held in high regard. Thomas McCraw, needless to
say, brings the kind of intellectual credibility and dignity to this biography that will
go a long way in making business history an important component of the MBA
curriculum in business schools in the years to come.
SHIVA KUMAR SRINIVASAN