Prophet of Innovation: Joseph Schumpeter and Creative Destruction by Thomas K. McCraw records the life of one of the 20th century’s most original and insightful scholars, Joseph Schumpeter. This biography is the clearest and most comprehensive guide to Schumpeter’s life and work and the turbulence of his time which has, like the classic business cycle, come round again. As a part of my regular academic activities under, I was assigned by Professor Dr. Rasheduzzaman, my honourable course teacher , to review the book “Prophet of Innovation: Joseph Schumpeter and Creative Destruction by Thomas K. McCraw” . Hope, this review with will give a compact and clear notion about the the book.

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PROPHET OF INNOVATION:JOSEPHSCHUMPETER
AND CREATIVE DESTRUCTION
BY THOMAS K. MCCRAW
CAMBRIDGE,MASS.: HARVARD UNIVERSITY PRESS,2007
719 PAGES
Prophet of Innovation: Joseph Schumpeter and Creative Destruction by Thomas K.
McCraw chronicles the life of one of the 20th century’s most original and insightful
scholars, Joseph Schumpeter. It’s the lively and penetrating prose of the book itself that
make its appearance in paperback a cause for rejoicing. McCraw’s book on
Schumpeter is an absorbing read, with short chapters, lots of personal detail and
historical scene setting, and an important anti-Galbraithian economic theme. This
biography is the clearest and most comprehensive guide to Schumpeter’s life and work
and the turbulence of his time which has, like the classic business cycle, come round
again. It is testimony to the growing prominence of Schumpeter that he should attract
as a biographer someone who is a distinguished business historian, an emeritus
professor at Harvard Business School, and a winner of the Pulitzer Prize (for Prophets
of Regulation (1984)). Like Schumpeter himself, McCraw sees Keynes as the relevant
benchmark. Both Schumpeter and Keynes were born in 1883, and their careers
comprehended more-or-less exactly the first half of the twentieth century.
As a part of my regular academic activities under the course PA-522, I was assigned by
Professor Dr. Rasheduzzaman, my honourable course teacher , to review the book
“Prophet of Innovation: Joseph Schumpeter and Creative Destruction by Thomas K.
McCraw” . Hope, this review with will give a compact and clear notion about the the
book.
At the beginning of his biography of Professor Joseph Alois Schumpeter, Thomas
McCraw describes the Vienna of Schumpeter’s birth as a “techno-romantic”
civilization. It is a characterization, he says, that “applies as aptly to the man as to the
country.” In Thomas K. McCraw's brilliant biography of Joseph Schumpeter (1883-
1950), I was intrigued by the evolution of his career after he earned a Ph.D. at the
University of Vienna (1906). His mother "married up" to give him access to a better
education (and higher social status) in Vienna, and the boy genius made his mark there
-- before failing as finance minister in the post WWI chaos. At age 24, he served as a
secretary of state for finance in the new Austrian republic (1919-1920), and later
became chairman and president of a Vienna-based Biederman Bank (1920-1924) that
collapsed. As a result of that and several substantial investments in companies which
also failed, Schumpeter suffered major financial setbacks (both professional and
personal) but eventually repaid his debts, then taught at the University of Bonn (1925-
1932) before accepting an offer to join the Harvard faculty as a professor of economics
where he continued to teach until his death in 1950. McCraw also examines
Schumpeter's personal life that, understandably, reflected the successes and failures in

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his career. For example, Schumpeter fell deeply in love with Anna Josifina Reisinger
and married her in 1925. The next year, his beloved mother died and within a month,
his wife died in childbirth, as did their son. McCraw suggests that Schumpeter never
fully recovered from these personal losses.
Joseph Schumpeter was brilliant, magnetic, cultured, urbane, witty and engaging. All
of his life Schumpeter championed capitalism yet was an expert on Marx, Marxist
economics, and the entire socialist literature. He was a political conservative and
antisocialist who notwithstanding served as Finance Minister for a socialist
government in post-World War I Austria. He lauded capitalism’s superior performance
while predicting the system’s death from too much success. He was superbly educated
and he taught at the best universities. He was an accomplished scholar and prolific
writer, a snappy dresser and bon vivant, elegant, charismatic and handsome.
Colleagues revered him, students loved him and women adored him. His ambition: to
become the best economist, horseman and lover in the world. Schumpeter was one of
the world's leading economists while he lived, and has become an iconic figure since
his death. John Maynard Keynes is widely considered the doyen of economists.
However, Schumpeter's ideas have more impact in our postmillennial era, which some
economists have termed the "century of Schumpeter."
The contrast between Schumpeter and Keynes appears most clearly on the level of
vision, a term Schumpeter popularized in his History of Economic Analysis. Keynes
was fundamentally an economic pessimist in the manner of the nineteenth-century
classical economists. His vision of the long run was that the marginal return to capital
was in secular decline as capitalism used up all its investment opportunities; but his
famous understanding of the short run was that clever intervention guided by smart
people could keep the system afloat. Schumpeter’s vision was precisely the reverse.
Schumpeter believed that capitalism’s potential was unbounded: an unending dynamic
process of change For him, the best course was always to maintain good
entrepreneurial policies and institutions and to sit tight through the destruction phases
of creative destruction despite the inevitable political temptations to tinkering. At all
levels, Schumpeter’s litmus test is whether the players are pursuing innovation and
bringing about creative destruction.
In the years after 1914, and especially during the Great Depression, Keynes’s vision
captured the temper of the times, whereas Schumpeter’s optimism seemed quaint and
irrelevant. After World War II, however, and perhaps especially after 1989, it was
Schumpeter who began to seem right on target. Capitalism was discovering investment
opportunities literally unimaginable in 1940; liberalism, globalization, and freer trade
were back; and economic historians were coming around to the view that, far from
being a massive meltdown of capitalism, the Great Depression was more like a
colossal failure of the mechanisms of short-run tinkering with the monetary and
banking systems.

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Of course, Schumpeter was far from the only economist who was eclipsed by Keynes.
But, in terms of pure economic theory, Schumpeter was far less the anti-Keynes; in
particular, Schumpeter’s monetary theory was far more Keynesian than it was
monetarist. Though he disagreed fundamentally with stagnationism, Schumpeter
believed that the process of growth could never be made stable through monetary
policy of any sort, since, in his view, the money supply was the endogenous product of
the entrepreneurial process.
In his two-volume Business Cycles of 1939, Schumpeter wanted to place the
entrepreneurial innovation process at the heart not only of episodic growth but also of
the repetitive "business cycle". Without the lure of those monopoly profits, there would
be no incentive for anyone to bear the risks of entrepreneurship. Schumpeter believed
that large firms were both the source and the result of successful innovation; and so
tampering with them would be dangerous. But the issue is more subtle than that. The
English economist John Hicks once remarked that "the best of all monopoly profits is a
quiet life," meaning that a seller with monopoly power might settle for less than the
largest possible profit in order to avoid attracting rivals who would have to be beaten
off amid turmoil and uncertainty. There is much evidence that having to compete with
best practice is itself an important spur both to innovation and to other aspects of
industrial performance. Maybe there is an optimal intensity of competition. The
important players in this process are entrepreneurs and investment bankers, who
generate “new purchasing power out of nothing”. The investment banker is not just the
middleman standing between savers and users of capital; he is instead “a producer” of
money and credit, “the capitalist par excellence”. Schumpeter hammered the function
of banks in creating money. As described vy Schumpeter, there are 5 types of
innovation [page 73]:
 The introduction of a new good – or a new quality of a good.
 The introduction of a new method of production.
 The opening of a new market.
 The conquest of a new source of supply of raw-materials or half-manufactured
goods.
 The carrying out of a new organization.
Innovation is not the same thing as invention. Anyone can invent a new product or a
new technique of production. The entrepreneur is the one who first sees its economic
viability, bucks the odds, fights or worms his way into the market, and eventually wins
or loses. Each win means profit for the entrepreneur and his backers, and it also means
a jog upward for the whole economy. In the course of this process, which cannot
possibly run smoothly, many businesses, individuals, and institutions, themselves
founded on earlier successful innovations, will be undermined and swept away.
Schumpeter called this birth-and-death process "creative destruction," and realized
before anyone else that it was the main source of economic growth. There is no
feasible alternative for capitalism; this is capitalism. Here is a characteristically strong
statement: "Without innovations, no entrepreneurs; without entrepreneurial

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achievement, no capitalist returns and no capitalist propulsion. The atmosphere of
industrial revolutions -- of 'progress' -- is the only one in which capitalism can
survive."
The picture generated by classical and neoclassical economics had none of this
dynamism, turbulence, and intrinsic uncertainty. (Malthus was perhaps a partial
exception.) Smooth trends and stationary states, equilibria of one kind or another,
predominated. There is a sense in which Schumpeter could claim to have been the
progenitor of a torrent of modern research that analyzes the dynamics of profit-driven
innovation and innovation-driven economic growth. Even creative destruction has been
translated into equations.
Of greatest interest to me is the context or frame-of-reference the biographical material
provides for one of Schumpeter's most influential business concepts, "creative
destruction," which he introduced in his most popular book, Capitalism, Socialism, and
Democracy," first published in 1942. This process of Creative Destruction is the
essential fact about capitalism. It is what capitalism consists in and what every
capitalist concern has got to live in. He goes on to explain, "The first thing to go is the
traditional conception of the modus operandi of competition. Economists are at long
last emerging from the stage in which price competition was all they saw. As soon as
quality competition and sales effort are admitted into the sacred precincts of theory, the
price variable is ousted from its dominant position. However, it is still competition
within a rigid pattern of invariant conditions, methods of production and forms of
industrial organization in particular, that practically monopolizes attention. But in
capitalist reality as distinguished from its textbook picture, it is not that kind of
competition which counts but the competition from the new commodity, the new
technology, the new source of supply, the new type of organization (the largest-scale
unit of control for instance) - competition which commands a decisive cost or quality
advantage and which strikes not at the margins of the profits and the outputs of the
existing firms but at their foundations and their very lives."
In my view -- and that of most contemporary economists, I believe -- Schumpeter's
most original and most lastingly significant book was Theory of Economic
Development, which appeared in 1911. It was at the University of Czernowitz, not far
from the beginning of his career as an economist, that he worked out his conception of
the entrepreneur, the maker of "new combinations," as the driving force and
characteristic figure of the fits-and-starts evolution of the capitalist economy. He was
explicit that, while technological innovation was in the long run the most important
function of the entrepreneur, organizational innovation in governance, finance, and
management was comparable in significance.

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In 1942, Schumpeter published Capitalism, Socialism, and Democracy, which was
reprinted and translated many times. It was his most successful book by a wide margin,
and it is certainly a big canvas. McCraw thinks of it as a landmark of twentieth-century
social science, and gives it many pages of description and discussion. The book
reiterates the standard Schumpeterian vision of capitalist turmoil and transformation,
with the entrepreneurs as the indispensable heroes. This time he suggests a mechanism
within capitalist society that (inevitably?) causes it to undermine itself. He also makes
the rather paradoxical argument that, with long habit, even the process of innovation
itself becomes routinized and depersonalized, and therefore weakened.
His political analysis of capitalism, socialism and democracy may look dated even if it
has interesting points. But I see bias as we all have when we talk about convictions or
faith… [indeed see below!] Still, let me go on quoting. “Capitalism has developed the
seeds of its own destruction. Persons of supernormal ability and ambition can reach a
much higher standard of living, provided they would pursue business careers.
Capitalism substituted impersonal efficiency to the feudal features. So that people have
“the individualistic rope” to hang themselves. The bourgeoisie is politically helpless
and unable not only to lead its nation, but even to take care of its particular class
interest. Furthermore capitalism and in particular big business undercut not only the
aristocracy, but also many small producers and merchants. A share of stock for
tangible assets takes the life out of the property. And if this trend goes on long enough,
there will be nobody left to defend the bourgeois values” [Page 357].
Large businesses do not command the same degree of loyalty from their workers.
Employees take economic progress for granted but they have little emotional
attachment to the success of their companies. (And because of the uncertainty), they
feel personally insecure. Because people have come to expect a continuous flow of
new products and methods, innovation itself is being reduced to routine, progress is
depersonalized and automatized. Individual entrepreneurship becomes less salient. By
reducing everything to a calculus of costs and benefits, it rationalizes. Economic
efficiency is only one of the many human goals and not necessarily the most important
to every individual so that the future of capitalism cannot be assured on the basis of is
superior economic performance. (And do not forget, there are always cycles and
crises…) [Page 358]
His criticism of socialism is also dated, but here it is: a socialist system must replace an
economy based on mature big-business capitalism, through routine governmental
action and will take 50 to 100 years to complete. The noneconomic attributes need to
be primary motives but worth the price of reduced economic efficiency. Can
innovation impulses be released as in capitalism this way? Furthermore, it has to be

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assumed that uncertainties or imperfect information are not an issue, that
improvements can be disseminated by a central authority, that business cycles are
eliminated, that unemployment does not exist, that the disappearance of the private
sphere eliminates friction and antagonism. One way is to nationalize big business while
neglecting small producers with a way to motivate managers. (Comment: Schumpeter
analyzed Germany, the UK and the USA; not France, which in a way has some
attributes of his description). [Page 360]
Then he switches to the analysis of democracy. Schumpeter is not sure of what
common good is as it may mean different things for individuals. And it is not the same
thing as the choice of the majority. He compares voters and voting to customers and
buying, with advertising/marketing as similar. McCraw adds “it is as if he were
discussing capitalism in America and democracy in Europe.” “He wrote on democracy
as simply a mechanism, while ignoring its powerful ethical dimension.” [Pages 369-
71]
This book is a comprehensive account of Joseph Schumpeter's life and will enable the
reader to understand where the Schumpeterian notion of "creative destruction" came
from. To understand ideas or a system of ideas one usually needs to understand the
context from which they came and this is certainly the case with Schumpeter's view of
economics. Twentieth century economic thinking was dominated by the Anglo-Saxons,
most notably of course Maynard Keynes. Schumpeter was Austrian and much
influenced by the historical approach to economics that was commonplace in central
Europe in the early 20th century. Keynes' and his followers' thinking was inevitably
heavily influenced by the immediacy of the problems of the 1930s whereas
Schumpeters' was based upon an extraordinary understanding of the history of
economics and many other disciplines. The sheer breadth of Schumpeter's historical
knowledge and understanding was amazing and sprang from prodigious hard work and
sheer perseverence.
A well written book which is a very good to read. The reader will learn much about
Schumpeter's view of the world, his theories and the background to them and, equally
interesting is the detailed portrait of this strange man who was undoubtedly a historian
and a great economic thinker.