Schumpeter on Keynesians

by Don Boudreaux on June 11, 2011

in Innovation, Scientism, State of Macro

While searching through Thomas McCraw’s superb 2007 biography of Joseph Schumpeter (Prophet of Innovation) for a passage I recall in which McCraw mentions that Schumpeter’s teaching load at Harvard included Saturday classes (!) – a passage that I’ve yet to find – I reread McCraw’s treatment of Schumpeter’s reaction to Keynes’s General Theory.

Schumpeter disliked Keynes’s book.  McCraw unconvincingly attributes much of Schumpeter’s negative reaction to The General Theory to the alleged fact that Schumpeter envied Keynes (an envy that intensified, we are told, with the relative failure of Schumpeter’s own 1939 book Business Cycles).

I suspect that Schumpeter reacted negatively to The General Theory because it’s a book that deserved a negative reaction, especially from an economist as insightful as Schumpeter – an economist who, quite the opposite from Keynes, understood that the capitalist economies were not in the 1930s (and would not be in the future) exhausted of opportunities for innovation and investment.

Quoting from Schumpeter’s 1948 presidential address to the American Economic Association, McCraw writes on page 481 of his biography of Schumpeter:

But their [the young economists of the late 1930s and 1940s] focus on the techniques of Keynesian macroeconomics – which are amenable to mathematical modeling and very useful in the new methods of national income accounting – had diverted attention from the vision that underlay the whole apparatus.  Even though the Keynesian creed of stagnationism “has petered out with the situation that had made it convincing” – the Great Depression having given way to unprecedented prosperity – most economists had remained so enthralled with Keynesian technique that they seemed “bound to drift into one of those positions of which it is hard to say whether they involve renunciation, reinterpretation, or misunderstanding of the original message.”  And in taking this tack, as Schumpeter had said many times before, most economists had lost sight of the heart of the capitalist process, which in its endless dynamism was the opposite of Keynesian stagnationism.

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{ 25 comments }

David Pinto June 11, 2011 at 5:53 pm

Harvard used to hold all classes on a three day schedule, M-W-F and T-T-S, all classes one hour long. At some point, the Tuesday schedule became Tuesday/Thursday, with classes on those days 1 1/2 hours.

Greg Ransom June 11, 2011 at 6:07 pm

This is almost a paraphrase of what Hayek said about Keynea in 1941 — and repeated many times.

MIchael E. Marotta June 11, 2011 at 6:34 pm

That supply and demand can be in equilibrium at a point seems so pretty that is hard to doubt. Moreover, if they can be so, and if disequilibrium, under-utilization, and over-production sound so bad, then, why not, like good engineers, just tighten a belt, apply some lubricant, balance the dynamic load, and align inputs with outputs? Then, supply and demand can be forever in equilibrium – unlike anything else in the universe.

Daniel Kuehn June 11, 2011 at 7:02 pm

re: “the Keynesian creed of stagnationism”

If you guys are going to make off-the-wall criticisms and turn economics into a grade school lunchroom with cliques, rather than a progressive science, can you at least get straight what names you call us? One day we’re utopians and the next day we’re dystopians. One day we’re too formal and over-technicalize everything, the next day we’re pedestrian and oversimplified. If you’re not going to make a substantive critique, that’s fine. But if you zero in on name calling as your strategy of choice at least keep it consistent. I need to know what stereotype I’m expected to fulfill so I can plan my responses accordingly.

This must be a stressful way to do economics – always a food fight between Team Keynes and Team Hayek. I’m glad I’m able to appreciate the contributions of both and don’t feel the need to bend over backwards to constantly pit them against each other. Team Edward/Team Jacob is somewhat endearing from teenage girls (and a brilliant marketing strategy if nothing else). Team Keynes/Team Hayek is a little sad.

Don Boudreaux June 11, 2011 at 7:04 pm

Um, Danny: you’re quoting Thomas McCraw (although I agree with and endorse his interpretation). Keynes clearly was a stagnationist. If you dispute this fact, then you should re-read The General Theory.

The utopian part of your creed is that you believe that the problems caused by capitalist stagnation can be mitigated well by enlightened government policies – a piece of utopian nonsense if ever such existed.

Justin P June 11, 2011 at 7:58 pm

*Like

Methinks1776 June 11, 2011 at 9:49 pm

Ditto!!!!

ArgosyJones June 12, 2011 at 1:16 am

So, then Don, are you saying that “the problems caused by capitalist stagnation” can not be mitigated by government policy at all, or only by the unenlightened policies which you presumably recommend?

indianajim June 11, 2011 at 7:40 pm

“I’m glad I’m able to appreciate the contributions of both and don’t feel the need to bend over backwards to constantly pit them against each other.”

From what I know about Keynes and Hayek, I’d need to bend over backwards NOT to regularly pit their ideas against one another on major themes (e.g., the socialization of investment versus The Fatal Conceit; paradox of thrift vs. “saving up for stuff” (as Roger Garrison puts it); aggregates vs. the particular circumstances of time and place; …).

Methinks1776 June 12, 2011 at 1:22 pm

Well, Jim, Danny does appreciate both. Hayek makes him appreciate markets (that is, he can’t deny that markets are more efficient than central planning) and Keynes allows him imagine himself as one of the elites at or near the steering wheel. As an admitted fan of social engineering, Danny prefers markets where they achieve his ends. Where they don’t, he’s happy to destroy them in favour of attempting to achieve his preferred ends.

The attempts never work. But, don’t think for one second that the failures reflect negatively on the elite attempting them or of the theories themselves. No, sir. The failures (like Soviet failures) are either claimed as successes (LOL) or, if that doesn’t work, then they are a result of undermining by an opposing party (the Republicans, capitalists – depends on the regime).

Molon Lobe June 13, 2011 at 12:38 am

Economics is a “progressive science?” You either don’t understand what science means or you are still listening to economics as explained by a five year old.

SaulOhio June 11, 2011 at 7:46 pm

“Schumpeter disliked Keynes’s book. McCraw unconvincingly attributes much of Schumpeter’s negative reaction to The General Theory to the alleged fact that Schumpeter envied Keynes (an envy that intensified, we are told, with the relative failure of Schumpeter’s own 1939 book Business Cycles).”

When has it become acceptable to attack someone’s character instead of debating the issues? This might be acceptable in bar rooms and internet chat rooms, but how has it become a legitimate rhetorical method in academia?

Don Boudreaux June 11, 2011 at 8:21 pm

Fair point. But although McCraw is hardly an ideological firebrand – indeed, I suspect (although I don’t know for sure, for that’s how closely he has kept his own politics close to his vest) that McCraw is likely left-of-center of the median economist – my best guess is that McCraw was struggling to render the pronouncements of a scholar who he obviously came to admire (Schumpeter) with the popular image of a writer (Keynes) whose main contribution McCraw simply assumes to be as profound as mainstream economics and pop ideology today simply, if foolishly, accept it as being.

Curt Doolittle June 11, 2011 at 8:49 pm

Daniel K.

“One day we’re utopians and the next day we’re dystopians. One day we’re too formal and over-technicalize everything, the next day we’re pedestrian and oversimplified.”

I cautiously suggest that it is entirely possible to be all of those things at once. One can cause a dystopia by pursuing a utopian fantasy using technical error that oversimplifies everything.

Which is precisely the criticism. :)

:)

Don Boudreaux June 11, 2011 at 9:00 pm

Yep. Well-said.

indianajim June 11, 2011 at 9:57 pm

ditto

DG Lesvic June 12, 2011 at 1:31 am

Saul asked

“When has it become acceptable to attack someone’s character instead of debating the issues?”

At least since the displacement of economics by Public Choice.

That’s not to say that there isn’t a place for Public Choice, just not at the expense of economics. And, if a Public Choice Theory, why not a Scientific Choice Theory as well, directed at scientists as well as public officials?

And, by the way, let’s not get too sentimental over Schumpeter.

He was no bargain.either.

DG Lesvic June 12, 2011 at 1:50 am

The adulation of Keynes is just another triumph of style over substance.

In The Man Who Predicted the Depression, Wall Street Journal, Nov 7,8. 2009, Mark Spitznagel explains the ascendancy of the man who didn’t, Keynes, over the man who did, Mises.

“So what if Keynes had lost his shirt in the stock-market crash. His book was peppered with fancy math (even Greek letters) and that meant rigor, modernity.”

Modernity in economics is like modernity in music and art, the elevation of nothingness, of non-art, non and anti-music, of Schoenbergs over Rachmaninoffs, artifice over genius, the revenge of mediocrity, defeat of humanity, and end of another golden age.

Daniel Kuehn June 12, 2011 at 8:05 am

This guy seems pretty uninformed, and you should be a more critical reader.

For one thing, Keynes’s book is notable in that it was not peppered with math (and actually the math it does include isn’t in “greek letters”). Dierdre McCloskey pointed this stylistic choice out in the same article that she called Keynes a “sensationally good economist”.

He also not only predicted the depression, but the dips along the way. Mises – if you count a casual conversation that was never published and could not be verified – predicted the depression too. But you have to remember that the depression Mises predicted and the depression Keynes predicted were different. It struck Britain much earlier in the 20s than it did the rest of the world – long before the Kreditanstalt problems.

DG Lesvic June 12, 2011 at 12:17 pm

Daniel,

Being a glutton for punishment, and actually have read Keynes, you have the advantage over me.

So I’ll just have to take your and Dreadly’s word that Keynes was a sensationally good economist.

Pray telll me though precisely what was his best and most original contribution. Now don’t think too hard. It ought to pop right up.

Congratulations. You finally win one.

Mises June 14, 2011 at 9:42 pm

The ordinary supply curve, p = (Zr + Ur(Nr))/Or = (φr(Nr) + Ur(Nr)) /ψr(Nr)

Where,

φr(Nr) = the expected proceeds (net of user cost), depending on some employment level, Nr

Ur(Nr) = the expected user cost, depending on some level of employment, Nr

ψr(Nr) = the level of output, depending on some level of employment, Nr

Keynes entire reasoning for this complex and confusing equation is so that, “we can aggregate the Nr’s in a way in which we cannot aggregate the Or’s, since ∑Or is not numerical quantity.” Essentially, Keynes used Section II to refute the argument that net output can be used in economic analysis, but then claims here that if you use a mathematical formula dependent on employment that represents net output, everything is fine. This is unfortunate because not only are the Greek symbols and equations confusing, they focus on the aggregate when all economic action is taken by individuals.

John Ray June 12, 2011 at 8:03 am

Don,

A reference to Saturday classes is on page 634. I’m able to find this, in spite of not having the book in my hands, thanks to Google Books, an service we enjoy thanks to the entrepreneurial-powered innovation which Schumpeter celebrated.

Keep up the good work.

Don Boudreaux June 12, 2011 at 10:57 am

Thanks much!

Philip George June 12, 2011 at 11:24 pm

Incidentally, Joseph Schumpeter is the only economist I know who treated the idea of money as cash balances with the contempt it deserves. The idea is accepted without question by Keynesians, Austrians and monetarists.

http://www.philipji.com/item/2011-04-20/joseph-schumpeter-on-money

Ryan Vann June 14, 2011 at 2:04 pm

I beleive you are being overly pedantic here. I was mostly taught in the New Keynesian and Neo-Classical schools, but I always understood money demand to be a function of other tangible desires.

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