The Good Fight

Portrait of an Economic Revolutionary

One of the founding fathers of the current entrepreneurial revolution may be Joseph A. Schumpeter, a former Austrian finance minister, Harvard professor, author of Capitalism, Socialism and Democracy and radical economist who died in 1950. Never heard of him? That's probably because Schumpeter's peer, John Maynard Keynes, was considered the real economic revolutionary of their time. But lately, the lesser known Schumpeter's theories have been getting a lot more play among futurists, economists, businesspeople, professors, even Alan Greenspan. The key difference? Schumpeter focused on entrepreneurs, innovation and change, while Keynes concentrated on government spending and stability.

"Keynes said the key players in the economy were government and big business; Schumpeter said they were the individual innovators," says futurist Paul Saffo. "Schumpeter believed 'stabilized capitalism' was a contradiction in terms. Whereas Keynes assumed capitalism left to its own devices would move to the middle, stable ground, Schumpeter said capitalism would move toward change. And that's exactly what has happened."

Schumpeter's trademark idea was that of "creative destruction," in which innovations introduced by entrepreneurs capsize a sense of stability in the market, thereby compelling existing businesses to either acclimate and compete, or go bust. Eventually, through this process of destruction and creation, the economy grows.

These theories, though underestimated during Schumpeter's lifetime, are now proving to be spookily accurate. But even his supporters admit he did miss the mark in some of his predictions. "He thought we would go through an entrepreneurial phase that eventually would mature, and we would end up with something like socialism with a humane face," says Saffo. "He thought this whole period would be transitional, to a new large company world order. Specifically, he thought the process of invention would become systemized, and that the lone inventor in the garage would be taken over and institutionalized and bureaucratized. And we know it's not quite that simple. Even he underestimated the revolution he identified."

As a credit to the power of entrepreneurs, not many economists are likely to make that mistake today. It's become fashionable for economy watchers to toss around the term "creative destruction," particularly in connection to the New Economy. Schumpeter even has his own association of devotees--the International Schumpeter Society spans 33 countries. "We're living in a Schumpeterian world," says Saffo. "There's no doubt about it."

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This article was originally published in the March 2002 print edition of Entrepreneur with the headline: The Good Fight.

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