Joseph Schumpeter

Austrian-raised/trained historian, economist, author, and finance minister of German-Austria

Matthew Retzloff

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Matthew Retzloff

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September 15, 2022

Joseph Schumpeter (1883-1950) was an Austrian-raised/trained historian, economist, author, and finance minister of German-Austria. He was one of the most accomplished economists of the 20th century. 

Schumpeter popularized "creative destruction" to describe the entrepreneurial process. He was also known for his theories on economic development and capitalist economies. 

Joseph Schumpeter

He was born in a small town called Triesch, the Czech Republic, and his family was a long-established German Catholic family. Schumpeter was the only son of his father, who died in early 1887. 

After the sad loss of his father, Schumpeter's mother moved to Graz, where he received his first elementary education. 

In 1893, his mother married a man named Sigismund von Kleber, and shortly after, the family moved to Vienna. His stepfather, a military officer, secured Schumpeter's place in a prestigious Theresianum school. 

In 1901, Schumpeter enrolled at the University of Vienna, where he graduated with a doctorate in Civil and Roman Law. He later embarked on his journey working at a law firm in Cairo, Egypt, and published "The Nature and Content of Theoretical Economics" in 1908.

Schumpeter decided to further his studies in Economics and later returned to Vienna to obtain a Ph.D. Upon his completion, he started working as a professor of economics at the University of Graz in 1911. 

Some of his most outstanding achievements :

  • Published "The Theory of Economic Development" in 1911.
  • Member of the Socialization Commission of Germany in 1918.
  • Served as the German- Austria Minister of Finance in 1919.
  • Became the President of Biedermann Bank in 1921
  • He obtained his U.S citizenship in 1939

Accomplishments and Theories 

Schumpeter's many contributions to economics and political theories remain recognizable in the modern world. He is known for his 1942 book Capitalism, Socialism, and Democracy. This book indicates the idea of creative destruction

Creative Destruction 

According to Schumpeter, creative destruction refers to competitive business innovations to generate economic profits for winners and improve living standards for people but destroy less desirable products and production methods. 

Joseph Schumpeter recognized that competition drives the ever-changing and ever-more-productive market economy. He considered creative destruction an 'essential fact about capitalism' because it was seen as a driving force of Capitalism. 

Creative destruction assumes that long-standing systems must be eliminated to free up resources and energy to utilize innovation. 

Schumpeter believed that opportunities for profit-seeking can lead to economic progress, essentially a natural outcome of forces inside the market. 

He also thought creative destruction was necessary to create new markets and growth. 

Examples of creative destruction 

Companies must adjust to innovations in technologies to keep their business afloat. 

  • Digital downloads and mobile music players such as Apple Music and Spotify destroyed CDs.
  • LED lights are slowly replacing incandescent bulbs 
  • Video streaming services eliminated the use of DVDs. 
  • Tablets and kindles are replacing printed hard copy books.
  • Smartwatches (Apple watches) are replacing traditional looks.

The competitive pursuit of monopoly profits led to introducing these inventions, ultimately improving living standards while destroying the less profitable industries and services.


Joseph Schumpeter saw the entrepreneur as more than just a business owner. Instead, entrepreneurs are the people who experiment with what he calls "new combinations" of resources. With these resources, entrepreneurs create new products and services. 

They also discover new markets and find new efficient ways to coordinate businesses.

Schumpeter believed that innovation was the key factor in any entrepreneur's field of specialization. He argued that encouraging technological progress and innovation is the job of "entrepreneurs." 

He also said markets do not naturally tend toward equilibrium unless profit margins are eliminated. 

Old products and industries become less popular as technologies evolve. The foundation of any economic system's future is innovation and invention.

Business cycles 

A business cycle is a cycle of fluctuations in the Real Gross Domestic Product (GDP) around its long-term natural growth rate. It further explains the expansion and contraction of economic activity. Schumpeter believed in the presence of business cycles. 

His two theories, creative destruction, and entrepreneurship, link to the concept of business cycles. 

In light of his views on entrepreneurship, Schumpeter stated that entrepreneurs upset equilibriums and are the main force behind economic growth, which occurs cyclically over several time scales.

According to Schumpeter, Capitalism's history has been characterized by long and short waves. First, a new set of technology and industries emerged, which caused a long wave.


Joseph Schumpeter's 5 Types of Innovation

According to Schumpeter, innovation is any policy an entrepreneur takes to reduce the cost of production and increase demand for their goods and services. He believed that all organizations must innovate to sustain a growth market position. That is, innovation is a way of bringing economic growth.

The five types of innovation are : 

1. Product 

The introduction of a new quality product that consumers are not familiar with.

2. Process 

The introduction of new production methods and processes. These new techniques are usually the ones that have not been tested in relevant manufacturing branches. 

3. Business model 

The introduction of a new market that a country's manufacturing branch has never ventured into, regardless of whether the market always existed. 

4. Source of supply 

A new approach for sourcing and supplying raw materials or semi-manufactured goods.

5. Mergers & investments 

They are creating new industries and approaches, such as the creation of a monopoly. Monopoly refers to an industry with a single seller in the market. When a company can distinguish its product from others, it can generate profit. 

Two categories of innovation 

  • The first category comprises all actions that lower the overall cost of production, such as the adoption of new production techniques, the introduction of new equipment, creative ways to structure the market, etc.
  • The second category includes the introduction of a new commodity or high-quality goods, the emergence or opening of a new market, the discovery of new sources of raw materials, the development of a new variation or a new product design, etc. are all considered to fall under the second category of innovation. 

Joseph Schumpeter's Innovation Theory of Profit

Innovation Theory of Profit proposes that an entrepreneur's primary responsibility is to create innovations and that he receives compensation for his efforts in the form of profit. 

Profits are generated for a shorter period since the competitors copy the innovation, making it no longer unique or innovative.

If the law permits entrepreneurs to patent their inventions, entrepreneurs can make greater earnings for a more extended period. For example, a product's design may be protected by a patent to prevent copying. 

The manufacturing cost tends to rise due to increasing factor prices over time, even though the supply of those factors remains constant. On the other hand, when businesses implement innovations, the availability of good products and services grows, and their costs decline.

As a result, while the output per unit cost rises, the production per unit income declines.

History of Economic Analysis 

In the book "History of Economic Analysis," Schumpeter gave a thorough overview of the history of economic theory from Ancient Greece to the end of World War II. 

He addressed topics such as the techniques of economic analysis, contemporary developments in other sciences, and the sociology of economics. 

The History of Economic Analysis is among the best conceptual histories of any social science ever written. 

Despite never being finished, it has been regarded as a modern classic because of its extensive subject matter and distinctive analysis of critical historical events. 

The History of Economic Analysis continues to reflect Schumpeter's many interests in the humanities, including history, philosophy, sociology, and psychology.

The book covers a wide range of economic topics, including continental European economists, the works of Plato and Aristotle, and medieval Scholastics. In addition, it covers the great British economists, from Adam Smith to Maynard Keynes.

What would destroy Capitalism, according to Schumpeter? 

Joseph Schumpeter believed in the concept of Capitalism. However, he predicted that Capitalism would ultimately be destroyed.

According to Schumpeter, Capitalism's successes would ultimately lead to its downfall because they would give rise to a sizable intellectual class whose livelihood depended on undermining the bourgeois system of private property and freedom, which was essential to the educated class' survival. 

Key Takeaways

  • Joseph Schumpeter is an Austrian most accomplished economist in history. 
  • The most notable contributions of Joseph A. Schumpeter included his 1942 book Capitalism, Socialism, and Democracy, which introduced the concept of creative destruction.
  • Schumpeter coined the term creative destruction, which refers to the constant product and process innovation mechanism by which new production units replace obsolete ones. 
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Researched and authored by Natalie Ramaabya | LinkedIn

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