Dividends from Schumpeter’s Noble Failure

Before influential Harvard economist Joseph Schumpeter wrote the seminal Capitalism, Socialism and Democracy, there came the difficult-to-digest Business Cycles. Although the book was a failure, professor Thomas K. McCraw, who has written a forthcoming Schumpeter biography, believes Business Cycles developed Schumpeter's thinking on capitalism and ultimately changed the practice of business history. Excerpted from Business History Review.
by Thomas K. McCraw
Business Cycles was Joseph Schumpeter's least successful book when measured by its professed aims and several other yardsticks. Yet the book contains two vital aspects that have largely been overlooked. First, the prodigious research that went into its writing caused a significant change in Schumpeter's thinking about capitalism. It moved him to a more historical and empirical approach that shaped nearly all his subsequent work. And second, much of the book constitutes a preview of modern, rigorous business history. This article explores both of these elements—not in the spirit of rescuing a neglected classic, because the book is not a classic. Instead, Business Cycles is a noble failure that paid unexpected dividends both to the author and to scholarship. A link to the full version of this article from Business History Review is available at the end of this excerpt.

In 1939, Schumpeter published his two-volume, 1,095-page tome, Business Cycles, after more than seven years of concentrated research. He was fifty-six years old at the time and had been a professor at Harvard since 1932. He was well known throughout the world, having published scores of articles, over seventy book reviews, and three books, including the brilliant Theory of Economic Development (1911; English translation, 1934).1

Schumpeter struggled mightily with the research and writing of Business Cycles. As he told his friend and fellow cycle theorist Wesley Clair Mitchell in 1937, "In order to carry out so detailed an investigation as would be necessary I would have to have a whole research staff working for me." To another friend, he wrote, "I am still a slave to my manuscript and for instance … worried last night till 2 a.m.., on such questions as whether potatoes were important enough in Germany in 1790 to count in the business cycle."2

Even as he wrote the book, he pursued many other activities. As the undisputed star of the Economics Department, he entertained a stream of visiting scholars, led several faculty discussion groups, spent prodigal amounts of time counseling graduates and undergraduates, and taught a heavy load of courses. He also devoted considerable energy to a second big project—a book on money—but decided to defer (and ultimately to abandon) that effort. By the time he neared completion of Business Cycles, he was "in a state of perfect exhaustion," as he wrote in June 1937. Early in 1938, he reported to Harold Burbank, chairman of the Economics Department, "I am half dead and certainly entirely dazed from the long hours I must spend on rereading and touching up my manuscript."3

With his typical intellectual curiosity, Schumpeter strays in Business Cycles onto whatever tangents interest him.

Today, research efforts comparable to what Schumpeter was trying to do often employ teams of half a dozen statisticians, economists, and other social scientists. But in the 1920s and 1930s, this model of academic research was just getting started, and Schumpeter worked almost entirely on his own. As his student James Tobin recalled, "He didn't recruit students to help him; he didn't suggest topics arising in his own research to students for papers or dissertations; he didn't try out the ideas or findings of his draft chapters in seminars. That so enormous an achievement was the product of lonely research tells what a great scholar Schumpeter was."4

The design of Business Cycles—a three-country study of the United States, Britain, and Germany, covering the whole capitalist epoch—was simply too big for Schumpeter or any other scholar to handle alone. But his attempt to do it changed his thinking in a profound way. He adopted a much more empirical and historical approach to economics, which informed both Business Cycles and his subsequent work. The change is quite clear in Capitalism, Socialism and Democracy (1942), one of the seminal nonfiction works of the twentieth century.5

The Main Goal Of The 1939 Book

Schumpeter chose the title Business Cycles not only because the topic was then fashionable (it was the central economic puzzle of the time, and had been even before the Great Depression), but also because he wanted to emphasize the economic ebb and flow that defines capitalism. "Cycles," he writes in his preface, "are not, like tonsils, separable things that might be treated by themselves, but are, like the beat of the heart, of the essence of the organism that displays them."6

This may be true enough, but here Schumpeter extends the theme of cycles into something like a determinate paradigm. He attempts the hopeless task of fitting historical patterns of business booms and busts into predictable wave periods of standard lengths. "Barring very few cases in which difficulties arise," he writes, "it is possible to count off, historically as well as statistically, six Juglars [eight- to ten-year cycles] to a Kondratieff [fifty to sixty years] and three Kitchins [forty months] to a Juglar—not as an average but in every individual case."7

That so enormous an achievement was the product of lonely research tells what a great scholar Schumpeter was. —James Tobin

Clement Juglar, Joseph Kitchin, and Nikolai Kondratieff were prominent business-cycle theorists. References to their work appear hundreds of times in the text of Schumpeter's book, and make it extremely difficult to read…. Schumpeter's student Paul Samuelson later commented that the book's arguments "began to smack of Pythagorean moonshine."8

Schumpeter himself had ambivalent feelings about his framework. As he told Wesley Clair Mitchell, "I must repeat again, lest misunderstanding arise, that I file no theoretical claims for the three-cycle scheme. It is primarily a descriptive device which I have found useful." In the text of Business Cycles, he admits that it "is indeed difficult to see" why boom-and-bust patterns might occur at such determinate intervals. Indeed it is, and Schumpeter's own stance is guarded and empirically informed. As he said to Mitchell, "Any such diagnosis stands and falls with the historical evidence on which it rests." Theory is indispensable to understanding business cycles and capitalism itself. But detailed historical analysis is no less so.9

Schumpeter's Rhetoric—and Keynes's

Schumpeter could be a very persuasive writer, but in Business Cycles he appears at his stylistic worst. Read cover to cover (a chore I do not recommend), the book conveys the impression of an author trying to squeeze a profusion of diverse topics into a single work, all in service to an untenable thesis. Schumpeter had grown up reading ponderous German treatises containing sentences hundreds of words long, and his verbosity in Business Cycles contrasts with the tight prose that marks the work of his fellow economist John Maynard Keynes. The book that made Keynes famous, The Economic Consequences of the Peace (1920), is an easy read, a model of concision and argument. Keynes's General Theory of Employment, Interest, and Money (1936) is much more technical and difficult, but no less a rhetorical tour de force.

In neither book does Keynes stray from his main subject. He writes with total self-assurance. He concedes nothing to the opposition. With consummate skill, he sweeps readers along to the conclusions he wants them to reach, even though his evidence is sometimes weak.10

Schumpeter's own refusal to prescribe remedies vastly reduced the appeal of Business Cycles.

None of this was accidental. During the years when Keynes was writing The General Theory, he tried out his ideas again and again within his elite circle of young economists at Cambridge University. He incorporated their many insights, particularly those of Richard Kahn, whose multiplier effect became crucial to Keynes's thesis. Meanwhile, Keynes discarded some of his own wrong-headed arguments and excess verbiage.11

Schumpeter, working almost alone, seldom exposed his work-in-progress to anyone. He badly needed what Keynes had—a peer group that would tell him, "No, this won't quite do." But he did nothing to assemble such a group. Any number of his colleagues and students—Wassily Leontief, Paul Samuelson, James Tobin (each a future Nobel Prize-winner), Gottfried Haberler, Paul Sweezy, Elizabeth Boody—could have helped. But Schumpeter never asked them. Instead, he plunged ahead, putting far too many words on paper and publishing reams of untested ideas and unedited copy.12

In his review of Keynes's General Theory, Schumpeter reproaches the author for calling his theory "general" when it actually applies to a special situation. Worse, under the guise of a "purely theoretical discussion," Keynes's logic moves from the policy he favors to a theory that will support it, a sequence abhorrent to Schumpeter. Throughout The General Theory, Keynes "pleads for a definite policy, and on every page the ghost of that policy looks over the shoulder of the analyst, frames his assumptions, guides his pen." Overall, says Schumpeter, "the capitalist process is essentially a process of change of the type which is being assumed away in this book." In Keynesian and other macroeconomic models, individual entrepreneurs, companies, and industries vanish from the scene. In complete contrast to Schumpeter's approach in Business Cycles, no mention of a single business firm occurs over the 403-page length of The General Theory.13

Yet what appealed to readers of The General Theory was the very aspect that offended Schumpeter: a plausible diagnosis of the Great Depression, and a prescription for its cure. However legitimate Schumpeter's protests may have been—and a flood of scholarship over the next four decades washed away substantial parts of Keynes's argument—most people at the time cared far more about finding a way out of the depression. Keynes provided a good road map, and that was a contribution of incalculable value. Conversely, Schumpeter's own refusal to prescribe remedies vastly reduced the appeal of Business Cycles. "I recommend no policy and propose no plan," he writes. Instead, his book can "be used to derive practical conclusions of the most conservative as well as the most radical complexion."14

With his typical intellectual curiosity, Schumpeter strays in Business Cycles onto whatever tangents interest him. And, in line with his frequent tributes to "science," he gives ample space to dissenting opinions. If this made his book more difficult and less persuasive, then so be it. Striking an almost defiant tone, Schumpeter says in his preface, "The reader will find the structure of the argument complex. To his justifiable groan I have nothing to oppose but the question whether he expected to find it easy." But however much an author's reach should exceed his grasp, it is not by this much.15

His method of writing resembles that of the American novelist Thomas Wolfe, another untamed genius who was turning out mammoth manuscripts at about the same time. Wolfe's fertile brain, like Schumpeter's, teemed with stream-of-consciousness associations that he scribbled down in the heat of composition. But unlike Schumpeter, Wolfe had a marvelous editor—Maxwell Perkins of Scribner's, who reorganized Wolfe's great novel Look Homeward, Angel and cut its length by almost one-third. Had an editor of Perkins's talents applied his skills to Business Cycles, the book might well have fulfilled—and exceeded—Schumpeter's ambitions.16

The reorganized work would likely have appeared not as one book but as three. The first editorial step would have been to strip the three-cycle scheme from the text and publish it separately as provocative hypotheses about business booms and busts. A second book would have drawn off about 250 of the 309 pages in Business Cycles devoted to the 1920s and 1930s and presented that material as an account of recent economic trends.17

The third book would have consolidated and elaborated the splendid passages on the long-term evolution of business.… In that form, the book would have been a successful marriage of history and theory, and potentially a masterpiece. Among other contributions, it would have signaled the birth of truly rigorous business history. Schumpeter had a very strong attraction to history, and after writing Business Cycles, he urged again and again that economists pay more attention to it.18

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