Joseph A. Schumpeter: The Economics and Sociology of Capitalism

Introduction

The Man and His Work

JOSEPH A. SCHUMPETER: A BIOGRAPHICAL PROFILE

The first thing you notice when you enter the conference room of the economics department at Harvard are the rows of photographs of previous members of the department. Your eyes wander from one stern-looking gentleman to the next, recognizing a few and trying to determine the identity of the others. You suddenly realize that one photograph is in some way different from the others—that of Schumpeter. After looking at it for a while, you figure out the reason: While all the other photographs are in black and white, that of Schumpeter is in color.

It is clear that Schumpeter’s personality as well as his work are considerably more colorful than those of most economists. Joseph Alois Schumpeter was born on February 8, 1883, in Triesch (Třešť) in the Austro-Hungarian Empire, which is in present-day Czechoslovakia.¹ His mother, Johanna Schumpeter (born Grüner), was the daughter of a physician. His father, Joseph Schumpeter, Sr., was a cloth manufacturer who also owned a factory in Triesch. The paternal grandfather, Alois Schumpeter, had founded the factory, and his son expanded and mechanized it, replacing horse power with mechanical power. By the time Joseph was born in the early 1880s, the Schumpeters were a well-established and respected family in the small town of Triesch.

The Schumpeter family was Catholic and belonged to the German minority in a town of about five thousand people, the majority of whom were Czech. It seems that the family came to the region after the Reformation. There has been speculation that Schumpeter is a German version of the Italian Giampietro, and that the origin of the family is Italian. There exists no proof for this—or for the colorful legend which circulated in the Schumpeter family, that an early member of the family was a robber knight who was beheaded and demoted from the nobility at Nuremburg in the 1200s. According to the same legend, the Schumpeters thereafter made their living as glassblowers and weavers. The family then became prosperous; individual members were several times offered positions within the nobility by the Austrian emperor, but never accepted.²

Schumpeter—affectionately called Jozsi (pronounced Yoshi) by family members and friends—was the only child of Joseph, Sr. and Johanna. On January 14, 1887, when Schumpeter was four years old, his father died of unknown causes. The widow and her little boy continued to live in Triesch, but then moved to Graz. They probably moved so that Johanna could be near the person who was to become her second husband, the recently retired field marshal—lieutenant Sigismund von Kéler. Joseph, Jr. therefore entered primary school (Volksschule) in Graz, in 1888. In 1893, when he had completed the first stage of his education, his mother and von Kéler, who was thirty-three years older than she, were married and the whole family moved to Vienna. Schumpeter’s stepfather had earlier been stationed in Vienna where, by virtue of his position and family name, he had good contacts. Von Kéler used these to get the young boy into the famous school Theresianum, where the aristocracy of the Austro-Hungarian Empire traditionally sent their children. The education Schumpeter attained here was roughly the equivalent of American high school and two years of college.³

Little is known about Schumpeter’s stay in Theresianum, which began in 1893. However, there exists a photo of him from 1898 (which incidentally is the earliest photo of him), and it depicts a shy and unsure boy.⁴ In all other photos of Schumpeter, he virtually radiates self-confidence and determination, so one might assume that he felt somewhat out of place in this prep school for the aristocracy. He was also a day student, which put him in a special category. One of the goals of Theresianum was to teach the students to look at the world from different perspectives and not to adhere to any one view; this was intended to be good training for the day when the students would be taking over the administration of the Empire with all its nationalities and ethnic groups. According to Schumpeter’s lifelong friend, Felix Somary, this attitude at Theresianum was to have a profound impact on Schumpeter’s character:

Schumpeter . . . never seemed to take anything in life seriously. He had been educated in Theresianum, where the pupils were taught to stick to the issue and not let personal feelings interfere. One should know the rules of all parties and ideologies, but not belong to any party or believe in any one opinion. And Schumpeter knew how to play all political games superbly, from the extreme left to the extreme right.⁵

According to the pupils, the unofficial motto of Theresianum was, To be a bit stupid means that you come from a good family (A bisserl blöd is vornehm). On this account too, Schumpeter must pretty quickly have shown that he came from the wrong circles in society. He excelled in Greek and Latin as well as in French, English, and Italian. He was also very interested in sociology and philosophy.⁶ And his grades were excellent when he graduated from Theresianum in 1901.

Later in 1901, Schumpeter enrolled at the University of Vienna and began to study economics. He first focused on social history and the history of law, but this was soon followed by a sharp turn toward economic theory.⁷ In 1906 he received his Ph.D., and at this point he was pretty well set on his course in life: He wanted to be an economist.

But before we say anything more about Schumpeter’s career as an economist, we need to pause for a moment. A person’s character is to a large extent shaped by what happens in childhood; and since Schumpeter was a very complex person, it is necessary to look more carefully at his first years. When we do this, however, we are struck by how little knowledge there is. All that is known covers little more than a page, and most of it has been presented here. What is especially lacking is some insight into Schumpeter’s character. How did he react to the death of his father? What was his relationship to his mother? And what did he think of his stepfather?

Insofar as Schumpeter’s relationship to his father is concerned, there exists no information whatsoever. We know a little bit more about what he thought of his stepfather. According to a friend, Schumpeter did not look upon von Kéler as a father, but he did regard him with a certain admiration.⁸ Later in life he would hint that von Kéler was the supreme commander of all troops in Vienna—rather than just a retired officer with a generous pension. Our knowledge of Schumpeter’s mother—and this is probably the greatest lacunae of them all—is also very sketchy. Schumpeter supposedly idolized his mother, and he described her as handsome, talented, and ambitious for her son.⁹ Schumpeter, we are told by the same source, was extremely attached to his mother: His devotion to her continued without diminution or disillusion not only to the end of her life but to the end of his. After having left Austria in 1925, Schumpeter returned only once in his life to his native country, and that was for his mother’s funeral.

Given what we know about Schumpeter being admitted to Theresianum through von Kéler’s connections, the description of Schumpeter’s mother as ambitious for her son makes sense. There also exist many stories which confirm that Schumpeter desperately wanted to be successful; unfortunately, it appears that his hopes were consistently dashed. He never could live up to his mother’s expectations.

Still, we need to know much more about Schumpeter as a child and as a youngster to understand his personality when he was ready to enter adulthood as a student in Vienna. There exists no autobiographical fragment on this point; Schumpeter did not like to write about his past, nor did he preserve material about himself.¹⁰ There are not even any anecdotes about his early life; the anecdotes that Schumpeter liked to tell about himself are all about his life as an adult. There is, however, one document, which, in the eyes of one of Schumpeter’s closest friends, gives some clues to his psychology. It is the outline to a novel entitled Ships in the Fog. Schumpeter probably wrote the outline in the early 1930s, and it was found among his papers after his death. The novel itself was never written.¹¹

It is often the case that people who write fiction for the first time produce thinly veiled autobiographical stories. This seems to have been true of Schumpeter and his projected novel. The hero in Ships in the Fog—Henry—is an only child. When he is four years old, his father has an accident and is killed. The widowed mother does not have much money, but she does her best to see to it that her son gets a good start in life: She had connections which she resolutely exploited for her darling. And how did Henry see his mother? According to the outline, she was an excellent woman, strong and kind. After the death of her husband, she became the one great human factor in Henry’s life. Her ancestry was British and was rather plain compared to that of Henry’s father, which racially was a mixture defying analysis. The father’s family came from Trieste in the Austro-Hungarian Empire and had Greek, German, Serb, and Italian elements.

And how was Henry himself—the central figure—portrayed by Schumpeter? First of all, Henry had a pervasive feeling of homelessness. Even though he loved his mother, he could not really identify with her, and he did not feel English at all: Where was he at home? Not really in England! Often he had thought so but ancestral past had asserted itself each time. But neither did he feel at home in his father’s home country: Certainly not . . . in what had been the Austro-Hungarian Empire. Henry was also confused about which social group to identify with: More important than country means class—but he did not with subconscious allegiance belong either to society or the business class or the professions or the trade union world, all of which provided such comfortable homes for everyone he knew. The only stable point in Henry’s life was work. He had no family, no real friends, and no woman. Work was all that is left.

There are indeed several sides to Schumpeter’s personality that cannot be found in his portrait of Henry. Schumpeter, for example, was a bit of a snob and a showman—not to mention that he also was a brilliant scientist. Still, there are striking parallels between the character Henry and Schumpeter. Both were fatherless early in life and had strong mothers; and both often felt lost and unhappy.

In 1901, the eighteen-year-old Schumpeter registered as a student at the Faculty of Law at the University of Vienna. While there, he specialized in the study of economics. He had several famous teachers, in particular Eugen von Böhm-Bawerk and Friedrich von Wieser. After six years of studies, Schumpeter received his doctorate of law (Doctor utriusque juris; literally, doctor of each of the two laws—Roman law and canon law). When his university education was completed, Schumpeter applied for his Habilitation or permission to lecture in three areas: economics, statistics, and sociology.¹² This was granted on suggestion by the two referees, Böhm-Bawerk and von Wieser. Schumpeter also could have taught law and political science. In addition, he had acquired some knowledge of mathematics, even if he never was to become particularly skillful in this area. Mathematics, incidentally, was frowned upon by the Austrian economists—especially by von Wieser—and Schumpeter had to attend lectures in mathematics on his own. While he was a student in Vienna, he became exposed to Marxist ideas, but little is known about Schumpeter’s early reaction to Marxism. We do know that in 1905–1906, Schumpeter participated in a very lively seminar together with the two famous Marxists Otto Bauer and Rudolf Hilferding. Böhm-Bawerk had published a harsh critique of Marxism a few years earlier, which had created quite a stir in Marxist circles. In the heated debates between Böhm-Bawerk and the Marxists, according to one of the participants in the seminar, Schumpeter attracted general attention through his cool, scientific detachment. The seemingly playful manner in which he took part in the discussion . . . was evidently mistaken by many for a lack of seriousness or an artificial mannerism.¹³

The University of Vienna was an extremely interesting place to be at the turn of the century for someone like Schumpeter. Carl Menger had just stopped teaching when Schumpeter arrived in 1901, but his spirit was very much alive in the teachings of his two foremost disciples, Eugen von Böhm-Bawerk and Friedrich von Wieser. Schumpeter took courses from both, as well as from Eugen von Philippovich and Karl Theodor von Inama-Sternegg. The latter was a famous statistician and economic historian, for whom Schumpeter wrote a series of brilliant statistical papers. It is generally considered that it was von Wieser and Böhm-Bawerk who had the greatest influence on Schumpeter in Vienna. In his first book, Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (The Nature and Essence of Theoretical Economics, 1908), Schumpeter says that von Wieser and Walras are the two economists to whom he owes the most.¹⁴ And in his next work, Theorie der wirtschaftlichen Entwicklung (The Theory of Economic Development, 1911), it is Böhm-Bawerk whom Schumpeter explicitly mentions.¹⁵ However, there seems to have been a third professor in Vienna to whom Schumpeter also felt indebted. When Schumpeter applied for his Habilitation in 1909, he did not single out von Wieser or Böhm-Bawerk. Instead he wrote: My studies have . . . first of all been influenced by the Counciller von Philippovich.¹⁶

After he received his doctorate in law on February 16, 1906, Schumpeter seems to have been unsure about what to do next. Since he had no private fortune, he needed a profession. There were a few alternatives open to him. First, he could become an academic and teach. To do this, however, he first needed his Habilitation (that is, a second doctorate to qualify for academic teaching posts), and that would take several years of further study. In addition, Schumpeter had already developed a taste for the good life and no doubt had dreams of a lifestyle better than that of a professor. His second alternative was to become a lawyer. This was certainly more lucrative than being a professor, but he would first have to work for years as a law clerk and then pass a bar examination. Schumpeter was very young when he got his doctorate—he was only twenty-three years old—and after a summer term at the University of Berlin (where he studied economics), he decided to go abroad. In an autobiographical letter, written many years later, Schumpeter says that after having taken his degree in Vienna and following up on an impulse which early asserted itself, I then travelled about for a few years studying economics from various standpoints.¹⁷

Schumpeter first visited England. He stayed there for about a year, and according to a friend, it was the happiest year of his life.¹⁸ Schumpeter liked England immensely, especially its aristocratic side. The British political system—tory democracy—was from this point on his political ideal. The young Schumpeter seems to have enjoyed English social life as well: He attended balls, he socialized in the best circles, and he practiced his favorite sport, riding. In a passage which breathes joyous recollection, Schumpeter was many years later to write that I . . . lived in England as a young man and a great snob.¹⁹ But his stay was not only hedonistic; Schumpeter also worked hard. He spent long days in the British Museum, where he added to his already profound knowledge of economic literature. For a while he was affiliated with the London School of Economics as a research student. And he made a tour of Oxford and Cambridge, visiting Edgeworth and Marshall. It is clear that Schumpeter was very eager to visit the great minds in economics, whose works he had studied. Sometimes, however, these meetings did not turn out as he had expected. He was, for example, advised by Marshall to give up the hope of ever becoming a good economic theorist!

Schumpeter started to dabble in the study of British common law while in England. But this led nowhere because, to cite Schumpeter himself, he couldn’t stand eating the requisite meals in the Temple.²⁰ It is likely that what sparked Schumpeter’s interest in law at this point was that he had fallen in love. The target of his affections was Gladys Ricarde Seaver, the daughter of a high dignitary of the Church of England. The two were married in 1907. Very little is known about Schumpeter’s first wife except that she was stunning.²¹ In the few references I remember Schumpeter making to this marriage, a friend has recalled, he said that whatever good manners he had, he owed to his first wife.

It is in any case clear that once Schumpeter was married, he needed a well-paying job. He eventually found one as a lawyer in Egypt, where no previous experience was needed to practice law at the so-called International Mixed Court. It seems that Schumpeter became associated with an Italian law firm in Cairo as the junior partner. Various colorful anecdotes exist from these years about how Schumpeter administered the fortune of an Egyptian princess; how an Arab sheik threatened to whip him for making a Moslem accept interest; and the like. In any case, Schumpeter seems to have done very well financially as a lawyer, and he lived in high style, with a race horse to his name. His work was also progressing well, and it was in Cairo that he signed the preface to his first great book, The Nature and Essence of Theoretical Economics (1908). This work was the result of many years of study and hard work in his spare time as a lawyer. The book was dedicated to Schumpeter’s mother and not to his wife. Exactly what his relationship to his wife was like and how long they actually lived together is unclear. Schumpeter hinted to one of his friends that the relationship only lasted a few months.²² According to other sources, however, the two lived together from the marriage in 1907 until at least 1914, when Gladys used the outbreak of World War I as an excuse not to return to Austria from England. In any case, it is generally agreed that it was an ill-conceived marriage. The divorce could not be finalized until 1920, probably for formal reasons.

After two years in Cairo, Schumpeter contracted Malta fever, a painful infectious disease, and decided to return to Vienna. He applied for the right to lecture in economics and related topics and was granted his Habilitation at the University of Vienna on January 25, 1909. He delivered his Habilitation lecture, The Verification of Abstract Theorems by Statistics, on February 15, and he became Privatdozent with effect of March 16. The reason Schumpeter decided to leave his career as a lawyer is not known—probably he had wanted to be an economist since his days as a student, and the positive reception of his 1908 book no doubt was encouraging. Schumpeter’s first academic appointment was as associate professor (ausserordentlicher Professor) at the University of Czernowitz. In those days Czernowitz was situated in the easternmost part of the Austro-Hungarian Empire (today, it is called Chervotsy and is part of the Ukrainian Soviet Socialist Republic). It seems that Schumpeter liked the city of Czernowitz, and later in the United States he would entertain his colleagues with stories from these days that might well have come out of the Arabian Nights.²³ One of these anecdotes was about how Schumpeter challenged the local librarian to a duel over the right of his students to use the books more freely. Schumpeter won, after having scratched his opponent. Schumpeter apparently also clashed with his university colleagues, whom he found dull and provincial. Their small-town manners annoyed Schumpeter: He liked to shock them by appearing at faculty meetings in riding boots and aroused unfavorable comment by dressing for dinner when he and his wife were dining alone.²⁴

Schumpeter taught courses in economics and general social science at the University of Czernowitz. His scientific creativity flourished, and it was in Czernowitz that Schumpeter completed what was to be his most famous work in economics: The Theory of Economic Development. The book was finished and published in 1911 (not in 1912, as it says on the cover).²⁵ At the time Schumpeter was only twenty-eight years old, and the publication of this book no doubt confirmed his theory that the third decade in a scientist’s life is a decade of sacred fertility.²⁶

Schumpeter’s own creativity, however, continued unabated even after his thirtieth birthday. This is clear from his publication record at the University of Graz, where he moved as full professor (ordentlicher Professor) in 1911. The Graz faculty was dominated by historical economics, and Schumpeter’s type of theoretical economics was not appreciated. When Schumpeter applied for the position, he was initially placed well below several other candidates. His book from 1908 on economic theory was criticized for being filled with empty generalizations, trivialities, and so on.²⁷ The decision by the Graz faculty to appoint someone other than Schumpeter was, however, overruled by an imperial decision—possibly because of the intervention of Böhm-Bawerk.²⁸ Hence, Schumpeter became the youngest full professor at the University of Graz.

He was also the only professor of economics in Graz, and as such he had a heavy teaching load. He had to lecture on all aspects of economics as well as in social science. This must have been very tiring, especially since he also chose to be a lecturer at the Graz University of Technology, but it does not seem to have slowed Schumpeter down. His third major work in economics was published during this period, Epochen der Dogmen- und Methodengeschichte (Economic Doctrine and Method, 1914).²⁹ He also wrote a small book on the history of the social sciences as well as a number of important articles. According to a letter to a publisher from these years, Schumpeter was also working on several other projects, including a book on public finance, one regarding political sociology, and one on feminism.³⁰

According to what Schumpeter later told his friends, he was not very happy in Graz. The town apparently lacked the redeeming features of Czernowitz, and during most of his stay in Graz, he was alone. The local faculty also seems to have been uncommonly dull. In 1913, however, he found a way to escape: He became a visiting professor at Columbia University. His year in the United States was very successful and he left Columbia with an honorary degree (Litt.D., 1914). It appears that Schumpeter enjoyed himself thoroughly during his stay in the United States, and in a farewell letter to an American colleague, written on the day of his departure for Europe, he wrote:

I have seen, and given addresses at, seventeen American universities and am taking with me the pleasantest impressions of men and institutions. Truly this is a great country and I am awfully sorry to have to leave it. I always felt that in the inspiring company of American colleagues I could turn out much better things than I shall be able to over there.³¹

Once back in the unstimulating environment of Graz, Schumpeter tried to escape as often as possible. Vienna was just a three-hour train ride away, and he preferred to be there. From 1918 onward he was offered—and accepted—various full-time commissions, mainly of a political nature, which took him away from Graz. In 1920 he returned and taught for a while. In 1921, however, he handed in his resignation. A life different from that of the scholar was tempting him.

Schumpeter used to entertain his American students with the following anecdote. As a young man, Schumpeter said, I had three ambitions in life: to become the world’s greatest economist, the world’s greatest lover, and the world’s greatest horseman. Silence. I never became the world’s greatest horseman. But this popular anecdote fails to tell the whole story of the young Schumpeter and his ambitions. Schumpeter admitted as much at a lunch, held in his honor at the University of Wisconsin in 1943. On this occasion he was asked point blank if the famous story about his three ambitions was true. Well, Schumpeter said, he had actually had two more ambitions as a young man: He had also wanted to become a successful politician and an accomplished connoisseur of art.³²

Schumpeter’s interest in art persisted throughout his life and seems to have given him much pleasure. He was especially interested in cathedrals and often took the opportunity, while touring the Mediterranean countries for vacation or business, to study the local churches. His diaries are filled with postcards of favorite Gothic cathedrals and drawings he liked to make of particular details. Schumpeter was also fond of the classics, and read them in their original form. After his death in 1950, Homer’s Odysseus—in Greek—was found on his desk, with favorite passages underlined.

Schumpeter’s interest in art, however, does not qualify as a burning ambition; and it never interfered very much with the rest of his life. His interest in politics, on the other hand, did exactly that. Indeed, it not only interfered with his life, it also created havoc in it. As a result, Schumpeter was always reluctant to discuss the various political episodes of his life, and it is only during the last few years—more precisely since the mid-1970s—that we have come to know more about Schumpeter’s political activities.³³

Schumpeter’s first involvement with politics probably occurred during World War I. Schumpeter viewed the war as a bloody madness which was devastating Europe. His attitude has been described as pro-Western—especially pro-British—anti-German, and pacifist.³⁴ What seems to have galvanized Schumpeter into action, however, was his Austrian patriotism and the rumor during the war that secret negotiations had been initiated between Austria and Germany about a customs union. The general context was the following. During the war the notion of a German-led Middle Europe had become popular in Germany. By uniting all German-speaking parts of Europe, it was hoped that Germany would finally have the strength to stand up to both the West and the East. When Schumpeter heard the rumor of an impending customs union between Austria and Germany, he became very worried and contacted one of his former professors at the University of Vienna, Heinrich Lammach. Schumpeter had studied law and foreign policy under Lammach, who was a well-known political figure in Vienna with strong ties to the emperor. Lammach encouraged Schumpeter to put down his ideas in a memorandum, which he promised to try to show to the emperor, Franz Joseph I. Whether the emperor actually read Schumpeter’s memorandum is not clear. But we do know that in 1916–1917, Schumpeter wrote several political memoranda, which were circulated in great secrecy in the highest Catholic, conservative circles in Vienna. Schumpeter would later hint at meetings he had had with the emperor during the war, yet little is known about the actual impact of Schumpeter’s writings.

The memoranda and the correspondence with Lammach give us a picture of Schumpeter’s political ideas when he was in his early thirties. Two beliefs stand out most vividly. The first is Schumpeter’s strong concern for Austria’s independence and his suspicion of German foreign policy vis-à-vis Austria. He did not want Austria to be chained to Prussia in a customs union; Austria’s industry and financial system were so underdeveloped that the Austro-Hungarian Empire would soon be dominated by Germany. A German Mitteleuropa would be a disaster: Then the Austria we know and love would not exist any longer.³⁵

The second element that stands out in Schumpeter’s political writings from these years is his political recipe for how the Austro-Hungarian Empire should be ruled. What Schumpeter essentially wanted was a form of tory democracy or a mixture of aristocratic elitism and bourgeois democracy. The monarchy should remain and a government be formed of the historical families of the Empire, that is, of members from the highest aristocratic circles. The parliament should be loyal to the monarch, and the liberty of the press minimal. Schumpeter rounded off his vision of a conservative democracy with a few welfare measures, such as compensation to victims of the war, and the like.

World War I spelled the end of a world—the world that Schumpeter had both grown up in and in which he felt most at home. A new Europe and a new Austria now emerged, where different men with different ideas held power. As a sign that the world had indeed changed, Schumpeter received an offer in late 1918 to enter the political world—not from Heinrich Lammach and the aristocratic circles he had been courting during the war, but from two of his Marxist fellow students at the University of Vienna, Rudolf Hilferding and Emil Lederer. They wanted to know if he would be interested in serving on the Socialization Commission which had just been formed in Germany. Schumpeter, who believed in the sanctity of private property and that socialization basically was theft, accepted the offer. Later he was to quip that the reason he had been asked was that if somebody wants to commit suicide, it is a good thing if a doctor is present.³⁶

As part of the German Socialization Commission, Schumpeter spent a couple of months in Berlin in late 1918 and early 1919.³⁷ The commission consisted of a mixture of Marxists and liberals. About half of the members were economists and the other half trade unionists; Karl Kautsky was the chairman and Eduard Heimann the secretary. Formally, the commission was connected to the German government, but it soon demanded—and was granted—status as an independent research group. The main question that the commission discussed was socialization. What type of socialization was needed? What role should the state play in socialized enterprises? And how could one get former leaders of private enterprises to work in socialized enterprises?

The answer to these and similar questions can be found in the various reports that were issued by the commission. Schumpeter signed the general report, like all the other members. He also signed the majority report together with the Marxists, in which it was argued that socialization was necessary to increase the efficiency of the economy. By socialization, it should be noted, the committee neither meant that the state should be running the economy nor that the workers should. What was needed was some kind of intermediary socialist agency. A former member, himself a liberal and signer of the minority report, has this to say about Schumpeter’s role in the commission:

Certainly Schumpeter’s presence added much brilliance and interest to our internal discussions and our very informal conversations outside the Committee Room. In fact Schumpeter sided mostly with the more extreme propagators of immediate and integral socialization, i.e., more with Lederer who, at that time, was rather radical and doctrinaire in his intention to bring forth Socialism in our time, as against Hilferding who—as always in practical matters—was more compromising and willing to yield to the arguments of his opponents. In a private conversation with Schumpeter and some other members, after the official close of a session, I expressed a certain surprise about his position, whereupon he answered, I don’t know whether or not Socialism is a practical possibility, but I am convinced that it is impossible if not applied integrally. At any rate, it will be an interesting experiment to try it out.³⁸

In the early spring of 1919, Schumpeter was asked to become finance minister in the new Austrian government. He immediately accepted, and thus begins one of the most spectacular chapters in Schumpeter’s life. On March 15, 1919, he moved into his new office in one of Vienna’s most magnificent baroque palaces. But this would end in a nightmare for Schumpeter, and after a few months he was forced to resign. Popular rage at the impossible financial situation in the country was turned against Schumpeter personally, and he became overnight one of the more disliked persons in the new Austria.³⁹

The government that Schumpeter entered in the spring of 1919 was a coalition government made up of the Social Democrats and members of the Christian Social Party, a Catholic conservative party. The head of the government was Karl Renner, a Marxist of the reformist type. Schumpeter did not formally belong to any party and was therefore brought in as a technical minister. It has been suggested that Schumpeter was asked to become finance minister because neither party wanted to assume responsibility for the financial situation in Austria. Whether this is true is unclear. It was in any case on the suggestion of the Marxists—more precisely Rudolf Hilferding and Otto Bauer—that Schumpeter was brought into the government. They knew him fairly well from the days at the University of Vienna and in the Socialization Commission in Berlin. In addition, Schumpeter had publicly advocated a financial policy during the last years of the war that was broadly similar to that of the Social Democrats. But he was not a socialist; beginning in his youth, Schumpeter was a confirmed conservative.

Austria’s finances were in terrible shape in 1919. The income of the state, which mainly came from taxation, was simply not enough to cover the expenses. Money had to be found for the war debt, for the unemployed, for food subsidies, and for the enormous bureaucracy that the small republic had inherited from the Austro-Hungarian Empire. There was very little food in the country and many people lived at a starvation level, especially in the capital. One study has determined that the calorie intake of individuals in Vienna averaged 1,270 in 1919, as opposed to the recommended 2,300. Unemployment was skyrocketing and more than trebled during December 1918—May 1919. In brief, the economic situation was close to hopeless.⁴⁰

When he entered the government, Schumpeter had very clear ideas about how to attack Austria’s financial problems. There were three major points on his program: to impose a capital levy; to stabilize the currency; and to import capital from abroad. The Social Democrats were also advocating a capital levy, and this may be one reason why Schumpeter was offered the position as finance minister in the first place. Schumpeter, however, wanted the capital levy primarily for purposes of currency reform, while Otto Bauer and the Marxists saw it more as a tool for the socialization of the economy. In terms of stabilizing the currency, Schumpeter first of all wanted to acknowledge the existing devaluation of the Austrian crown. And to get the economy going, Schumpeter felt that capital should be imported from abroad.

It is generally agreed that Schumpeter was a failure as a finance minister. Some argue that no one could have succeeded—that Schumpeter’s financial plan was brilliant, but that the situation was just hopeless.⁴¹ Whether the situation was indeed hopeless is hard to judge. But it is clear that Schumpeter was not a skillful politician and that his personality was not an asset for a public figure. The Austrian press from 1919 contains many sarcastic comments about Schumpeter’s chameleonic personality. Just a few days after he took office, he was greeted by a satiric verse in Der Morgen to the effect that he was a person with three souls—one conservative, one liberal, and one left wing.⁴² And a few days before he was dismissed in October 1919, the Arbeiter-Zeitung said that he always adjusted his speeches according to whom he spoke; when he spoke to the workers, he sounded like a Social Democrat, and so on. To Karl Kraus, the great Austrian satirist, Schumpeter had more different views than were necessary for his advancement.⁴³

What especially turned Schumpeter’s Marxist colleagues in the government against him was his opposition to their plan for Austria’s Anschluss to Germany. The plan for a German Mitteleuropa, which Schumpeter had already fought against during World War I, was adopted after the war by some of the Austro-Marxists. What they had in mind was not so much a strong German state as a Social Democratic Middle Europe, which could hold its own against the capitalist West as well as the Soviet Union. Schumpeter, however, would have none of this and began to criticize the government’s policy, both publicly—in speeches and interviews—and in private, at the British and French missions in Vienna. This infuriated Renner and Bauer, and Schumpeter was several times severely rebuked. On October 17, 1919, he was fired.

Schumpeter also angered his Marxist colleagues in the government by his attitude toward their socialization program. In Berlin, Schumpeter had signed the majority report and many people had the impression that he was a proponent of radical socialization. And during the first few months as finance minister, Schumpeter indeed seemed to advocate socialization. On March 20, 1919, for example, he said in a public speech that We shall have to intervene on a massive scale in the private economy. Socialization is the decisive issue of our time.⁴⁴ A few weeks later, however, Schumpeter was talking about limited socialization measures. Schumpeter also infuriated his Marxist colleagues by letting foreign interests buy up Austria’s largest steel and iron producer, the famous Alpine Montan Corporation. That the owner was a foreigner made it impossible for the government to nationalize the corporation. Schumpeter was accused of having done nothing to stop the transaction in order to undercut the government’s socialist plans. Schumpeter himself, however, saw the whole affair in a different light. As far as he was concerned, there was no reason for him to stop the affair with the Alpine Montan Corporation; he saw no reason to do so and, even if he had wanted to do it, he said that he had no legal right to do so.⁴⁵

By mid-October 1919, the Social Democrats had had enough of Schumpeter’s intrigues. And Schumpeter had no support from any other group to fall back on. The government members from the Christian Social Party did not defend him since he was too closely identified with the Marxists, He was also known as a Jewfriend.⁴⁶ And the officials at the Treasury had from the beginning distrusted the brilliant young finance minister. The propertied classes, finally, were angered by Schumpeter’s socialist policies, such as his advocacy of a capital levy and socialization. Schumpeter also offended many people simply by his flashy lifestyle and snobbish mannerisms. A respected newspaper editor, Gustav Stolper, later wrote that Schumpeter’s lifestyle was regarded as totally un-Austrian. Stolper was convinced that the elegant Schumpeter with his silk shirts, silk handkerchiefs, and . . . race horse made many people worried. Where did he get all the money for this?⁴⁷ When Schumpeter was forced to resign on October 17, quite a few people apparently drew a sigh of relief.

Why did Schumpeter fail as a finance minister? As already mentioned, there are those who feel that Schumpeter had no talents for politics, and others who claim that the situation was hopeless. My own feeling is that Schumpeter gave many people—including his Marxist colleagues in the government—the impression that he was considerably less conservative than he actually was. And this easily led to situations where Schumpeter’s actions surprised and dismayed those around him: They felt he was unreliable and dishonest.

In any event, after his dismissal from the government Schumpeter returned briefly to the University of Graz. However, teaching at a minor university was not what he wanted at this stage of his life. In 1921 he became president of a small and highly respected Viennese banking house, the Biedermann Bank. Schumpeter was not involved in the daily affairs of the bank; being the president was apparently more of a ceremonial task.⁴⁸ In any case, Schumpeter’s venture into banking ended badly. In 1924 the bank became insolvent, due to a combination of bad times and dishonest dealings of some of Schumpeter’s associates. Schumpeter had to resign, and the bank was liquidated in 1926. In retrospect, it is clear that Schumpeter had gone into banking at exactly the wrong moment; the Biedermann Bank was just the first in a long series of banks in Austria and Germany that collapsed in the 1920s and 1930s. In the end, Schumpeter had to assume responsibility for 120,000 Austrian schillings (roughly the equivalent of $250,000 today), and this meant that he had to borrow a considerable amount of money. After his debacle as a banker, Schumpeter’s popularity in his country reached a new low. In the Austria of 1925, a contemporary observer notes, Schumpeter was a ‘nonentity.’ ⁴⁹

In 1924, Schumpeter was forty-one years old, and he must have been very disappointed. He had left academia and entered politics and business, only to fail miserably. He had also accumulated a mountain of debts—for unpaid taxes, for living expenses in Vienna, and for the trouble at the Biedermann Bank. The great hopes that his mother had had for him were crushed by these events. She was still a very important factor in his life, especially after the failure of his first marriage. Schumpeter later wrote, Disappointment was in store for her. Disappointment all the more bitter because realization was so near; all the more bitter, in a sense, because precisely in every other respect he gave her satisfaction and always not only felt but also manifested in every word and act his unconditioned attachment to her. . . .⁵⁰

Schumpeter’s precarious situation in the early 1920s made him reevaluate his plans for the future. It seems that he finally decided to leave politics and business permanently and continue his pursuit of academia. His students from the late 1920s remember him often discussing the pros and cons of life as a businessman and a politician, on the one hand, and life as an academic, on the other. But it was not without a struggle that Schumpeter came to his decision to become an academic again. He later wrote to a friend, who had just received a university appointment, I welcome you back to academic activities which as in the fifth century in Rome are perhaps the least distasteful ones to indulge in, in the world as it is.⁵¹ For the rest of his life Schumpeter would always feel drawn to the world of politics. His American students remember that he would often begin his digressions on politics with the words, If I were among the living, I should [do this and that]. . . .⁵² Schumpeter was undoubtedly a political animal at heart. But he never gave in to his impulse to reenter politics; he had made his decision to stay out of politics and he stuck to it.⁵³

The first offer that Schumpeter received to return to academia came from Japan, where he was invited as a guest professor. Schumpeter accepted this offer, but a short time later, in 1925, he was offered a chair in public finance at the University of Bonn, and he decided to take this offer instead. The person who had pushed for his appointment—against a certain resistance in Berlin—was Arthur Spiethoff, a fellow economist and friend of Schumpeter’s. Schumpeter’s social and financial situation quickly improved, even though he had to work painfully hard for many years to pay off his debts. Schumpeter seems to have enjoyed teaching at Bonn, which was clearly a better university than Graz and Czernowitz. His lectures were truly innovative, as Schumpeter introduced his students to a host of new economic theories which the historically minded economists had succeeded in keeping out of the German universities. According to Schumpeter’s students, his lectures were always very well delivered. Schumpeter spoke freely, and he used only a few small notes on which a couple of lines had been jotted down.⁵⁴ Schumpeter lavished attention on his students, and he was very much liked in return. He would give an inordinate amount of time to every student who wanted his help. When the student was also the son of a good friend, he would of course get special treatment, as the following charming account by Wolfgang Stolper makes clear:

I had the good fortune of being probably Schumpeter’s only tutee [in Bonn]. This procedure too, he deliberately introduced from England. Every Monday evening I appeared to read and discuss a paper he had assigned to me the week before. But that was really only a small part of my education. Every Monday noon I had to appear to order dinner and select a wine, for this too was part of the education of a gentleman. In the evening Schumpeter would approve my choice (since his wine cellar was excellent that was not really too difficult) and we would discuss anything that came to his mind: Goethe’s poems or his letters to Frau von Stein, Gothic cathedrals about which he knew an enormous amount, Picasso and Braque. I do not remember ever discussing music, however, which was my special love. At about ten o’clock we would retire to the glassed-in veranda with a magnificent view of the Rhine and the Seven Mountains (Schumpeter had rented the house used by the emperor as a student) and until one in the morning we would discuss economics. . . .⁵⁵

Soon after his appointment at the University of Bonn, Schumpeter remarried. His new bride, Annie Reisinger, was about twenty years younger than Schumpeter, and very little is known about her except that she was uncommonly graceful and beautiful. Annie was the daughter of the caretaker in the apartment house in Vienna where Schumpeter’s mother (by now divorced from von Kéler) was living. Apparently Schumpeter had taken a strong liking to Annie when she was very young—twelve years in one account, a few years older in another—and decided to marry her when she came of age.⁵⁶ Together with his mother, Schumpeter decided on a suitable education for Annie in Paris and Switzerland, for which he also paid. Exactly how old Annie was when she and Schumpeter married is not clear. A good guess is that she was twenty-two years old and that the marriage took place in 1925. One thing, however, is beyond doubt: Schumpeter was extremely happy with Annie. She was his great love in life—the great wonder of my life (das grosse Wunder meines Lebens), as he would later describe her in a letter.⁵⁷ The newly married couple had a very active social life. Years later, we are told, stories continued to circulate in Bonn of the gay and lavish parties the Schumpeters gave, how they were the most desirable couple on any hostess’s list.⁵⁸

Schumpeter’s happiness with Annie was to be very brief. On August 3, 1926, she died in childbirth. The child, a little boy, also died. According to the death certificate, Joseph Schumpeter only became three and three-quarters hours old.⁵⁹ Adding to Schumpeter’s sorrow was his mother’s sudden death a little more than a month before, on June 22. It is clear that this was a turning point for Schumpeter. One of his closest friends says that after that time a streak of resignation and pessimism was unmistakable in his character.⁶⁰ Other friends noticed the change as well; and from then on it seems that Schumpeter was basically a very unhappy person.

This unhappiness was expressed in many ways. Schumpeter became very restless and eagerly seized every opportunity to leave Bonn. During the academic year of 1927–1928 he was at Harvard. A large part of 1930 was spent in the United States as well, teaching at Harvard again. On the way back from the United States, Schumpeter spent some time in Japan, where he gave a number of greatly appreciated lectures.

In Germany, Schumpeter also traveled and gave lectures. Unlike his trips abroad, however, these were motivated largely by his desperate efforts to pay off his debts. His private correspondence from these years contains many despairing comments about the prostitution he had to endure. He more or less lectured for anyone who offered a good honorarium, and he wrote a huge number of articles in various economic magazines. This wore him down and it also made him depressed. This slave chain has no end, he wrote to a friend in 1928, this forced labor can last for twenty years.⁶¹

The period in Bonn (1925–1932) is usually considered very productive in terms of scholarship for Schumpeter. And it is true that he buried himself in work after Annie’s death. During the years spent in Bonn, he published a long stream of articles as well as a second and thoroughly revised edition of The Theory of Economic Development (1926). In 1930 Schumpeter also helped to found the Econometric Society in the United States. But despite these accomplishments, all was not well with the intellectual Schumpeter. He had difficulty concentrating, and he was unable to produce a major work in economics, as he had in previous decades. In a letter to a friend, written while in Singapore in 1931, Schumpeter wrote that the sense of decay, physical and mental . . . always accompanies me.⁶² We know that Schumpeter’s main intellectual project during the years in Bonn was a treatise on money. He had very high hopes for this work, entitled Geld und Währung (Money and Currency). During 1930 in particular, he worked furiously to finish the manuscript, but failed. That same year Keynes also published his Treatise on Money, and when Schumpeter read it, he found to his dismay that most of what he had written Keynes had already anticipated. According to one account, Schumpeter tore up his manuscript and started a new one. According to another version, Schumpeter began to rewrite his manuscript. Ultimately, however, Schumpeter worked on his treatise on money until his death. He sometimes announced its impending publication, but he could never bring himself to finish the manuscript.⁶³ In brief, things were not coming as easily to Schumpeter as when he was a young man.

In the 1930s, however, Schumpeter’s academic star was still shining brightly, and he received several job offers—including one from Japan and another from Harvard. Apparently he was not particularly interested in either. What he really wanted was the chair in economic theory at the University of Berlin, and when this position became available, Schumpeter immediately made it known that he was interested. But he did not get it. Instead it went to Emil Lederer, a German economist and one-time collaborator with Schumpeter in the German Socialization Commission. Exactly why Schumpeter did not get the chair in Berlin is not clear. It is rumored that he had enemies at the Prussian Ministry of Education, who had already tried to block his appointment at the University of Bonn. There was also resistance at the University of Berlin itself, where it was feared that Schumpeter’s debts would interfere with his scientific activities.⁶⁴ In any case, Schumpeter was bitterly disappointed when he did not get the chair in Berlin in 1931. In addition to this setback, he was faced with several other irritations in his life as well: His new relationship with Mia Stockel, his secretary, was not going anywhere, and he was disgusted with the political situation in the Weimar Republic, especially with the role of labor.⁶⁵ Disappointed and without much enthusiasm, Schumpeter decided to accept the offer from Harvard in 1932.

On June 20, 1932, Schumpeter gave a farewell speech to his students in Bonn. The theme he had chosen was Where is economics going? and Schumpeter particularly emphasized that economics was an objective science, where each new piece of knowledge has to prove its true value:

Unlike in business and politics, what matters in science is not momentary success. All we can say is that if in science something wins through, it will have proved its right to exist; and if the thing is not worth anything, it will surely wither. For my part, I am willing to accept the judgment of future generations.⁶⁶

Schumpeter also said that if the National Socialists came to power, young economists should take the chance to influence them: What giant subjective possibilities this constitutes for a young man!⁶⁷

Schumpeter was to live in the United States from 1932 until his death in 1950. He would never visit his native Austria again, and the last time he saw Europe was in 1935. In February 1933 he had already written to the U.S. immigration authorities and announced his intention to become a citizen. When he left Germany in 1932 he left behind a sizable number of books, letters, and manuscripts, which he never sent for. Schumpeter seemed to prefer leaving his old life behind completely.

Schumpeter arrived in the United States on September 25, 1932, and proceeded immediately to Cambridge. For the next few years he would stay with F. W. Taussig, who lived in a pleasant house at 2 Scott Street near the Harvard campus. Taussig took a fatherly interest in Schumpeter, who responded by trying to behave like a good son. The first letters that Schumpeter wrote from his new country breathed optimism and contentment. I feel quite happy at Harvard which in fact is an old love of mine, he wrote to Adolph Lowe a few weeks after his arrival.⁶⁸ And at Christmas 1932 he summed up his first impressions to another friend with the following words: Academic life goes its pleasant course as usual at Harvard. I like the place immensely.⁶⁹

Schumpeter must have received a warm welcome from his new colleagues in the economics department when he arrived at Harvard. In 1927 the department had decided that they needed an outstanding man, and that Schumpeter was it. A vote had been taken, which Schumpeter easily won (followed by Gustav Cassel and Edwin Cannan). The choice of Schumpeter was articulated to the dean by Allyn Young in the following words:

Schumpeter, beyond doubt, is the most distinguished of the younger generation of economists on the continent of Europe. . . . He is, I imagine, about forty-five years old. His English is good, and his special interests are such that he could handle precisely the graduate courses which I have been giving. He is well known in America, and his coming to this country would create a great deal of interest among American economists, and would be very distinctly a feather in our cap.⁷⁰

When Schumpeter arrived at Harvard, the economics department was in a period of transition. Historical economics had traditionally dominated the department. Interestingly, Harvard’s economics department also taught the sociology courses, since there was no separate sociology department. But this was increasingly considered outmoded, and historical economics as well as sociology were in the process of being phased out. The department was looking for something more in tune with the times. Schumpeter, who all his life had been a fervent advocate of the introduction of mathematics into economics, fit perfectly into the new type of department that was now taking shape. He quickly succeeded in assembling a Committee on Instruction in Mathematical Economics, and in the fall of 1933 he taught the first course in mathematical economics at Harvard.

The department was also going through a generational change in the early 1930s. Taussig was getting old, and it was Schumpeter who first took over his famous graduate course in economic theory, Ec-11. The Harvard department attracted several other excellent economists in addition to Schumpeter in the 1930s, such as Wassily Leontief, Gottfried Haberler, and Alvin Hansen. The result was an intellectually stimulating and exciting milieu for Schumpeter. In the 1930s, Harvard’s economics department became one of the best in the United States. The two theories that were to attract the most attention there were Chamberlin’s theory of monopolistic competition and Leontief’s input-output analysis. Still, to quote a standard article on the history of the Harvard department, Joseph Alois Schumpeter . . . was, without doubt, the outstanding member of the department in the 1930s and 1940s.⁷¹

The economics students at Harvard were also particularly brilliant during these years. They included Paul Samuelson, Richard Goodwin, James Tobin, Abram Bergson, Wolfgang Stolper, and many more. The junior faculty included such people as Paul Sweezy—a particular favorite of Schumpeter—and John Kenneth Galbraith. Schumpeter got along very well with the students and, as always, he gave generously of his time. In addition to office hours, every week he circulated a sheet among his graduate students, urging them to sign up for a half hour of discussion. Schumpeter used to amuse his students with a string of anecdotes from old-time Europe, and he consistently gave them inflated grades.⁷² With his various European mannerisms, Schumpeter must have been as exotic to his American students as a cowboy would have been to the students in Heidelberg. Paul Samuelson has given the following picture of his teacher in 1935 in the famous Ec-11:

After, and not before, the students had assembled for the class hour, in would walk Schumpeter, remove hat, gloves, and topcoat with sweeping gestures, and begin the day’s business. Clothes were important to him: he wore a variety of well-tailored tweeds with carefully matched shirt, tie, hose, and handkerchief. My wife used to keep track in that period of the cyclic reappearance of the seemingly infinite number of combinations in his wardrobe: the cycle was not simple and it was far from random.⁷³

Another picture of Schumpeter from these early days at Harvard, which also hints at the pleasure Schumpeter seems to have taken in his role as a Harvard professor, can be found in John Kenneth Galbraith’s memoirs. Galbraith describes his older colleague in the following manner:

Schumpeter was a slightly swarthy man of solid frame and a little less than average height. He had an amused and expressive face and an unremitting love for company and conversation. That Cambridge lacked the style of Franz Josef’s Vienna he never doubted, but he was determined to compensate as best he could. He held court each afternoon in a small coffee shop across Massachusetts Avenue from Widener Library. . . .⁷⁴

Schumpeter also appeared to have been satisfied with the way his work was going during these first years in the United States. This was clearly very important to him since work had become his main existential reason for living after Annie’s death. My work is my only interest in life, he wrote in a letter to Irving Fisher in the mid-1930s.⁷⁵ Schumpeter produced a steady stream of articles at Harvard, all in brilliant English prose, which earned him many admirers. An English translation of The Theory of Economic Development appeared in 1934 and got excellent reviews in the mainstream economic journals. Schumpeter was also very active in the 1930s in the Econometric Society. But most important, Schumpeter had high hopes for his two major intellectual projects during these years: a massive work on business cycles, and a more tentative, theoretical work entitled The Theoretical Apparatus of Economics.

Adding to Schumpeter’s well-being during these first years at Harvard was the fact that by 1935 he had paid off all his debts. Schumpeter also remarried in 1937, and so left Taussig’s house and moved into a home of his own, first at 15 Ash Street and then from June 1938 on at 7 Acacia Street in Cambridge. Schumpeter’s new wife also had a beautiful, large house in Connecticut--Windy Hill in Taconic—to which Schumpeter was immediately attracted.

Schumpeter’s third wife was Elizabeth Boody, and she came from a well-to-do New England family. She had been married before—to a book dealer named Maurice Firuski—but was divorced since 1933. As a student Elizabeth attended Radcliffe and earned a Ph.D. in 1934 in economics with economic history as her specialty. Thereafter she supported herself as a researcher at Harvard and Radcliffe, specializing in the economy of Japan, in which she succeeded in publishing