MANAGERIAL AND DECISION ECONOMICS

Manage. Decis. Econ. 29: 675–677 (2008)

Published online in Wiley InterScience

(www.interscience.wiley.com) DOI: 10.1002/mde.1430

BOOK REVIEW

PROPHET OF INNOVATION: JOSEPH SCHUMPETER

AND CREATIVE DESTRUCTION, by McCraw, T. K.,

Belknap Press of Harvard University Press: Cambridge and

London, 2007, xiþ 719pp., USD 35.00 (cloth).

Many readers, as I did, will close Prophet of Innovation with a

feeling of dissatisfaction. On the plus side, McCraw’s life of

Joseph Alois Schumpeter is not as dauntingly long as it seems:

Nearly 30% of the volume is devoted to notes and other end

matter, and so the text runs to a more digestible 506 pages.

Generous line spacing and a respectable number of archival

photographs speed the pace of reading.

On the minus side, Prophet of Innovation pales in comparison

with the recent and far more penetrating biographies of John D.

Rockefeller, Sr. by Ron Chernow, of J. P. Morgan by Jean

Strouse, and of Andrew Mellon by David Cannadine. In the

end, one doesn’t know Joseph Schumpeter quite as fully as one

now knows those titans of industry. And we certainly don’t

know him as well as we know Robert Skidelsky’s John

Maynard Keynes, who was born the same year (1863).

Something is missing from Prophet of Innovation, perhaps

because McCraw chose not to be ‘concerned with Schumpeter’s

economic thinking, narrowly construed’ (p. xi). That choice, in

my judgment, fatally compromises any attempt to tell the story

of a man who lived and breathed economics over a

distinguished, remarkably productive academic career that

spanned four decades, taking him from the classrooms of the

University of Vienna, where he (and Ludwig von Mises) studied

under Eugen von Bohm-Bawerk, to Harvard Square.

What we are left with is a workmanlike recounting of the

facts of Schumpeter’s life, emphasizing the strong influences on

him of three women: His mother Johanna, who, following the

death of Schumpeter’s father calculatingly married Sigmund

von Keler, a retired general 33 years her senior, in order to

provide financial security for herself and entree to good schools

for young Joszi; his second wife, Annie Reisinger, who died in

childbirth before the first anniversary of their marriage; and his

third, Elizabeth Boody, a scholar in her own right, who

specialized in the Japanese economy and though stricken by

breast cancer in 1948, undertook the monumental task of

organizing, editing and securing a publisher for her husband’s

History of Economic Analysis, which did not appear in print

until both had passed away, he in 1950, she in 1953. These

personal details, especially the psychological impact of the

nearly coincidental deaths of his mother, Annie and their

stillborn son in 1926, blows from which Schumpeter never

completely recovered and escape from which he sought in work,

overshadow all that follows.

McCraw traces the winding path Schumpeter took through

academia, interrupted early on by a stint at Austria’s Finance

Ministry, which he subsequently leveraged into the chairman-

ship and presidency of the Biedermann Bank, a position that

ultimately plunged him deeply into debt when the owner of a

glass-making factory failed to repay a loan Schumpeter had

personally guaranteed. He supplies thumbnail sketches of the

major historical events of the period (two world wars and the

Great Depression) and summarizes many of Schumpeter’s

popular and scholarly writings, with special attention to The

Theory of Economic Development (1911, but not translated and

published in English until 1934), Business Cycles (1939),

Capitalism, Socialism and Democracy (1942), which went

through three editions in his lifetime, the last in 1950, and

History of Economic Analysis (1954).

Prophet of Innovation’s other protagonist is capitalism (p. ix).

McCraw is a business historian, perhaps most well known for

Prophets of Regulation (1984), which contains essays on Charles

Francis Adams, Louis Brandeis, James Landis and Alfred

Kahn, and a little less so for an edited volume titled Creating

Modern Capitalism (1994). McCraw consequently is at his best

when discussing the development of large-scale business

enterprises in Britain, Germany, and the United States during

the late nineteenth and early twentieth centuries that provided

empirical context for Schumpeter’s famous description of the

competitive market process as one of creative destruction, an

insight that led him to place entrepreneurship and innovation at

the heart of economic progress. But McCraw is too enamored

of ‘stable mixed economies[,] one of the few aspects of modern

capitalism that Schumpeter did not foresee’ (p. 149; emphasis in

original), to appreciate the policy implications of Schumpeter-

ian reasoning. Despite Schumpeter’s observations that

‘innovation often benefitted from the rise of big business,

because giant firms could afford to gamble on new techniques’

(p. 164), that ‘‘trustified’ capitalism neither stifled innovation

nor prevented the ongoing creation of new startups’ (p. 165),

and that ‘the typical economic theorist or government

commission’, blinded by static equilibrium models, did not see

the behavior of firms ‘as an attempt . . . to deal with a situation

that is sure to change presently}as an attempt . . . to keep on

their feet, on ground that is slipping away from under them’ (p.

352), but rather indulged a distaste for big business in

‘indiscriminate ‘trust busting’’ (p. 481; emphasis in original),

McCraw nevertheless extolls the virtues of government inter-

vention to control the abuses of unfettered capitalism.

McCraw reserves his highest praise for the New Deal, to

which Schumpeter was implacably opposed, especially so it’s

‘vital measures’, such as the Social Security Act, the National

Labor Relations Act, the Securities Act and the Securities

Exchange Act, which supposedly ‘made American capitalism a

good deal more humane’ (p. 425). He also applauds the

economic management of the War Production Board, the Office

Copyright # 2008 John Wiley & Sons, Ltd.

of Price Administration, and mistakenly credits the massive

increase in military spending during the Second World War

with bringing America’s Great Depression to an end (Higgs,

1997). Schumpeter’s warning that a transformation already

underway from ‘regulated, or fettered, capitalism’ into ‘a guided

capitalism that might, with almost equal justice, be called

socialism’ (p. 426; emphasis in original) goes unheeded. Like

Britain of the inter-war period and even more so in that nation’s

rush to vote Winston Churchill out of office shortly after the

Third Reich had collapsed, McCraw seems to have become

‘‘state-broken’}that is, accustomed to a strong government

hand’ (p. 365).

At the time he was writing The Theory of Economic

Development, Schumpeter was well aware that threats to the

status quo produced by new products, new production

processes, and new types of business organization would

encounter stiff opposition (p. 72). He also recognized that

entrenched interests would attempt to enlist government in the

battle ‘to preserve their culture and status’, as they for example

did in successfully petitioning for the Weaver’s Act of 1555,

which outlawed factories and the use of particular mechanical

devices (p. 257). McCraw does not acknowledge the lessons of

public choice that, far from protecting the interests of

consumers, making capitalism more humane, and unleashing

the forces of innovation and entrepreneurship, the regulatory

apparatus of the mixed economy for the most part is responsive

to the self-serving demands of established firms for protection

from the Schumpeterian gale of creative destruction.

Academic politics supplies some comic relief from the heavy

load of classroom teaching, one-on-one tutoring of under-

graduates, lectures, travel, and writing that absorbed much of

Schumpeter’s time. He did not suffer fools gladly and, in fact,

playing on the German pronunciation of ‘full’ that is how he

often referred to his full-professor colleagues; assistant and

associate professors were ‘asses’ (p. 225). Harvard, whose

faculty Schumpeter joined in 1932, and where he remained until

the end after turning down an attractive offer from Yale that

would have freed more time for research, was ‘a despicable

playground of despicable little tyrants’}‘a stifling atmosphere

. . . more like a brewery’, a ‘professorial monkey cage’ rife with

‘cunning antics’ by which he was not amused (p. 399).

Schumpeter was particularly affronted ‘when, in early 1940,

the [economics] department’s old guard refused to offer Paul

Samuelson an assistant professorship’ (p. 307).

Samuelson, like many of Schumpeter’s colleagues and

students, including Irving Fisher and Ragnar Frisch, who

collaborated with him in founding the Econometric Society,

Gustav and Wolfgang Stolper, Frank Taussig, Talcott Parsons,

Edward Mason, Seymour Harris, Wassily Leontieff, Paul

Sweezy, Alvin Hansen, Arthur Smithies, James Tobin, and

John Kenneth Galbraith, make occasional and usually brief

appearances in Prophet of Innovation. So, too, does John

Maynard Keynes, whose General Theory of Employment,

Interest and Money completely upstaged Business Cycles, and

from which Schumpeter privately accused Keynes of appro-

priating his ideas without attribution (p. 155). McCraw devotes

much more space to Schumpeter’s on-and-off, decade-long

affair with Mia Stockel, committing nearly an entire chapter to

previously untranslated and unpublished letters she wrote to

him from Europe during the 1930s. Mia finally married after

despairing of becoming Schumpeter’s wife; apparently because

they were members of a local English Club, she and her

husband were shot dead on the orders of Hungary’s Nazi

government during a purge of intellectuals, business people,

and landowners in late January 1942 (p. 300).

In assessing Schumpeter’s legacy, McCraw resists saying that

‘we are all Schumpeterians now’. One testament to Schumpe-

ter’s influence he does put forward, however, is that, ‘by the

twenty-first century, every reputable business school offered

numerous courses devoted to entrepreneurship, innovation, and

business strategy, and many housed full-blown departments

devoted to these subjects’ (p. 497). One imagines Schumpeter

turning over in his grave at the very idea that entrepreneurship

and innovation are things that can be taught by business school

professors or learned by business school students. I am

reminded of two stories. One is about Harlan Ellision, the

science fiction writer, who once began a convention talk by

asking how many members of the audience were hopeful of

becoming published authors of sci-fi. When lots of hands flew

up, Ellison reportedly said, ‘What are you doing here, then?

You should be at home writing!’ The other is about Larry

Ellison, the CEO of Oracle and to my knowledge not related to

Harlan, who, during his commencement address at Yale, a few

years ago called the graduating class a bunch of losers.

Warming to his theme, Ellison accused the graduates of wasting

their time and thereby condemning themselves to earning six-

figure salaries working for others, rather than making fortunes

by emulating successful entrepreneurs like himself and fellow

college dropout Bill Gates. (Yale’s president did not give Mr.

Ellison an opportunity to finish his address.)

One very good recommendation McCraw makes in Prophet

of Innovation is for a ruthless editor to reorganize and reissue

Schumpeter’s two-volume Business Cycles as three separate

books (pp. 277–278). One of these would contain Schumpeter’s

detailed and no longer important attempt to force messy

macroeconomic data into stylized Kondratieff (50–60 year),

Juglar (8–10 year), and Kitchin (40-month) cyclical patterns.

The two other, far more valuable books would be devoted to

Schumpeter’s summary of the events of the 1920s and 1930s,

and to his masterful description of the long-term evolution of

business in Britain, Germany, and the United States. Any

takers?

Economists have not ferreted out the sources of innovation,

nor have they identified the characteristics that distinguish the

entrepreneur from the pedestrian businessman or– woman (but

see Mokyr, 2002 for an insightful start). Innovation and

entrepreneurship are idiosyncratic, epiphenomenal and there-

fore not reducible to formula. Schumpeter called this the

‘principle of indeterminateness’, recognition of which late in life

caused him to abandon his quest for an ‘exact economics’.

What we do know, however, is that entrepreneurship and

innovation can flourish only in societies that respect property

rights and that allow individuals the right to capture the profits

of success (and to bear the costs of failure). To McCraw, the

ubiquity of the ‘mixed economy’ that lies somewhere between

the poles of unfettered capitalism and socialism, the either-or

extremes between which Schumpeter thought all countries were

destined to choose, is, combined with the collapse of centrally

planned economies, evidence of the robustness of the entrepre-

neurial spirit and the intellectual victory of Schumpeterian

ideas. Maybe so. But 60 years is hardly long enough to justify

concluding that ‘mixed economies seem as durable as any

capitalist arrangements have ever been or are likely to be’ (p.

441). With local, state and federal tax rates averaging 50%, with

BOOK REVIEW676

Copyright # 2008 John Wiley & Sons, Ltd. Manage. Decis. Econ. 29: 675–677 (2008)DOI: 10.1002/mde

Reaganism and Thatcherism having been tossed into the

dustbin of history, and with the inexorable growth of big

government under an ostensibly conservative Republican

administration, it’s too soon to tell.

REFERENCES

Higgs R. 1997. Regime uncertainty: why the greatdepression lasted so long and why prosperity resumedafter the war. Independent Review 1:561–590.

Mokyr J. 2002. The Gifts of Athena: Historical Origins ofthe Knowledge Economy. Princeton University Press:Princeton and Oxford.

William F. Shughart IIDepartment of Economics University of MississippiP. O. Box 1848 University, MS 38677-1848 USA

BOOK REVIEW 677

Copyright # 2008 John Wiley & Sons, Ltd. Manage. Decis. Econ. 29: 675–677 (2008)DOI: 10.1002/mde