The Worldly Philosophers

Joseph Schumpeter was born in Austria in 1883, the same year as Keynes. They shared an admiration for capitalism and high-class bourgeois values but had very different views about the future of capitalism. Although Keynes believed that there was always a short-term threat of stagnation, which might require government intervention, capitalism would always lead to long-term growth, ending the problem of scarcity, as Keynes predicted, by 2030. Schumpeter saw capitalism as inherently dynamic; it did not require permanent government support, although government spending could ease social distress in times of depression. He believed that capitalism would produce growth in the short term, but it would not survive in the long term.

Schumpeter attended a school for sons of the aristocracy, where he imitated the tastes and customs of his wealthier schoolmates. A brilliant student, he became an advisor to an Egyptian princess and published his first book on economics, The Theory of Economic Development, in 1912. He argued that the capitalist economy was successful when it was at a steady state, where growth was absent and profit nonexistent: “Profits appeared in a static economy when the circular flow failed to follow its routinized course” (295).

Schumpeter believed profits came not from the exploitation of labor or the growth of capital, but from the introduction of new technological or organizational inventions into this static system. Profits were generated when an innovative capitalist produced the same goods as others, but at a cheaper cost. The person who introduced these innovations was not a normal businessman who follows the given routines, but an entrepreneur, who could come from any social class. The entrepreneur engaged in “creative destruction,” the process by which innovation replaces old technology with new, fundamentally altering society in the process. The profits generated by innovation, however, went not to the entrepreneur but to the capitalist. Eventually, others copied these innovations, eliminating profit and returning the economy to its steady state.

The Theory of Economic Development launched Schumpeter’s professional career. He spent brief periods with the German government, with an Austrian bank, and as an economics professor at Harvard. The Great Depression tested his assumptions: If capitalism derived its energy from the innovations of entrepreneurs, why had this energy stopped? He gave an answer in Business Cycles, published in 1939, arguing that three different business cycles operated in the short, medium, and long terms. In the genesis of the Great Depression, all three cycles hit their lowest point at the same time. At the same time capitalism, which was fueled by faith in the values and virtues of the market system, had lost its mobilizing force.

Schumpeter’s most important work, expanding on his previous insights, was Capitalism, Socialism, and Democracy, published in 1942. He wrote in part to critique Keynesianism, but his true intellectual foe was Marx. Marx saw the constant struggle between the working class and the bourgeoisie as the impetus for capitalist dynamism, but Schumpeter thought dynamism came not from the capitalist but from the upstart entrepreneur.

Schumpeter and Marx were not always at odds. Like Marx, Schumpeter believed that capitalism could not survive: “Capitalism may be an economic success, but it is not a sociological success” (302). He argued that capitalism bred a rational, critical ideology that brought down precapitalist institutions like the monarchy; the same ideology would eventually turn on itself to bring down bourgeois values. Capitalism would end not because of a working class uprising or a series of worsening crises, but because when the ideological atmosphere changed, the bourgeois class would lose faith in itself, and capitalism would morph into socialism. 

Since society evolved from tradition and command systems toward free market capitalism, three changes have occurred: a dependency on the accumulation drive as the primary means for organizing society; the creation of a market that determines production of goods and the distribution of wealth; and capitalist societies guided by two authorities, one public and one private, with clearly delineated spheres of activity. Together, these changes formed the market system and accompanying social constructs that the worldly philosophers sought to understand.

Heilbroner notes three reasons why modern economists are driven to see economics as a science. First, those who study the economy want to find regularities they can codify into mathematical laws, like the laws observed in the natural world. Second, they believe economic behavior is easier to predict than other aspects of social decision-making, such as politics. If economics became a true science, economists could both predict and change the course of human events.

Economics, however, cannot be solely envisioned as a science for two reasons. First, human behavior cannot be understood without taking into account volition and free will, which are inherently unpredictable: “If economics were in fact a science, we humans would be mere robots, no more capable of choosing what was to be our response to a price rise than is a particle of iron to presence of a magnet” (318). Second, social life is always inherently political. People occupy categories of privilege, and capitalist societies are no exception. Economics can never claim be fully objective and scientific because the market system is produced by society, not processes outside of human control, like evolution or physics, and policy recommendations can never be neutral.

Economics cannot, and should not, be seen as a science. Its ultimate usefulness lies in understanding capitalism, which will shape human collective destiny for the foreseeable future. Despite basic similarities, capitalisms take on different forms; with regard to these different social aspects, worldly philosophy plays a most important role. This future will bring many strains and stresses: climate change, nuclear weaponry, ethnic hatred, and the growth of a truly supranational globalized economy, which arose within nation-state capitalism but has since escaped its control. The purpose of economics should be “to develop a new awareness of the need for, and the possibilities of, socially as well as economically successful capitalisms” (321). A worldly economic philosophy, Heilbroner believes, can guide nation-state market systems through this challenging future.