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Schumpeter's Business Cycles

Schumpeter's Business Cycles

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 Business History Review
80 (Summer 2006): 231–261. © 2006 by The Pres-ident and Fellows of Harvard College.
Thomas K. McCraw
Schumpeter’s
 Business Cycles
 as Business History 
 Business Cycles
was Joseph Schumpeter’s least successful book,measured by its professed aims and several other yardsticks. Yet the book has two vital aspects that have largely been over-looked. First, the prodigious research that went into its writ-ing caused a significant change in Schumpeter’s thinking aboutcapitalism. It moved him to a more historical and empiricalapproach that shaped nearly all his subsequent work. Andsecond, much of the book constitutes a preview of modern,rigorous business history. This article explores both of theseelements—not in the spirit of rescuing a neglected classic, because the book is not a classic. Instead,
 Business Cycles
is anoble failure that paid unexpected dividends both to the authorand to scholarship.
THOMAS K. MCCRAW is the Isidor Straus Professor of Business History at HarvardBusiness School.The author thanks Kevin Burke and Felice Whittum for research assistance; Rawi Ab-delal, Jim Baughman, Jack High, and four anonymous referees for helpful advice; and SusanMcCraw for dozens of suggestions about organization, content, and presentation.
1
The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Inter-est, and the Business Cycle
(1911; translation into English by Redvers Opie, Cambridge,Mass., 1934).
I
n 1939, Schumpeter published his two-volume, 1,095-page tome,
 Business Cycles
, after more than seven years of concentrated re-search. He was fifty-six years old at the time and had been a professorat Harvard since 1932. He was well known throughout the world, hav-ing published scores of articles, over seventy book reviews, and three books, including the brilliant
Theory of Economic Development 
(1911;English translation, 1934).
1
Schumpeter struggled mightily with the research and writing of 
 Busi-ness Cycles.
As he told his friend and fellow cycle theorist Wesley ClairMitchell in 1937, “In order to carry out so detailed an investigation as would be necessary I would have to have a whole research staff working
 
Thomas K. McCraw/232
for me.” To another friend, he wrote, “I am still a slave to my manu-script and for instance . . . worried last night till 2
 A 
.
M
., on such ques-tions as whether potatoes were important enough in Germany in 1790to count in the business cycle.”
2
Even as he wrote the book, he pursued many other activities. As theundisputed star of the Economics Department, he entertained a streamof visiting scholars, led several faculty discussion groups, spent prodi-gal amounts of time counseling graduates and undergraduates, andtaught a heavy load of courses. He also devoted considerable energy toa second big project—a book on money—but decided to defer (and ulti-mately to abandon) that effort. By the time he neared completion of 
 Business Cycles
, he was “in a state of perfect exhaustion,” as he wrote inJune 1937. Early in 1938, he reported to Harold Burbank, chairman of the Economics Department, “I am half dead and certainly entirely dazed
Schumpeter at work in his office at Harvard shortly after
 Business Cycles
was written.(Source: HUD 343.04, the 1943 Harvard [Class] Album, p. 43. Harvard University Archives.)
2
 Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist  Process
(New York, 1939). Schumpeter to Mitchell, 6 May 1937; Schumpeter to Oscar Lange,24 Feb. 1937, both in
 Joseph A. Schumpeter: Briefe
/
 Letters
, eds. Ulrich Hedtke and RichardSwedberg (Tübingen, 2000) (hereafter cited as
 Briefe
), 295, 301, 303.
 
 Schumpeter’s
Business Cycles
as Business History/233
from the long hours I must spend on rereading and touching up my manuscript.”
3
Today, research efforts comparable to what Schumpeter was trying todo often employ teams of half a dozen statisticians, economists, and othersocial scientists. But in the 1920s and 1930s, this model of academic re-search was just getting started, and Schumpeter worked almost entirely on his own. As his student James Tobin recalled, “He didn’t recruit stu-dents to help him; he didn’t suggest topics arising in his own research tostudents for papers or dissertations; he didn’t try out the ideas or findingsof his draft chapters in seminars. That so enormous an achievement wasthe product of lonely research tells what a great scholar Schumpeter was.”
4
The design of 
 Business Cycles
—a three-country study of the UnitedStates, Britain, and Germany, covering the whole capitalist epoch—wassimply too big for Schumpeter or any other scholar to handle alone. Buthis attempt to do it changed his thinking in a profound way. He adopteda much more empirical and historical approach to economics, which in-formed both
 Business Cycles
and his subsequent work. The change isquite clear in
Capitalism, Socialism and Democracy
(1942), one of theseminal nonfiction works of the twentieth century.
5
3
Committee on Research in the Social Sciences, Directors’ correspondence, letter, Schum-peter to Committee (16 June 1937), in box 4 (P–Z), UAV 737.18, Harvard University Archives.Department of Economics, correspondence and records, 1930–61, letter, Schumpeter toBurbank (17 Jan. 1938), in box Robertson-Schumpeter, UAV 349.11, Harvard University  Archives.
4
James Tobin, foreword to Eduard März,
 Schumpeter: Scholar, Teacher, Politician
(New Haven, 1991), ix. Most reviews of 
 Business Cycles
were favorable. See E. Rothbarth of Cam- bridge,
 Economic Journal 
52 (June–Sept. 1942): 223–29; J. Marschak of the New School,
 Journal of Political Economy
48 (Dec. 1940): 889–94; and Oscar Lange of the University of Chicago,
 Review of Economic Statistics
23 (Nov. 1941): 190–93. Hans Neisser of the Univer-sity of Pennsylvania noted several problems with Schumpeter’s argument, but conceded that“it will always be a marvel that such a book could be written by one man.” Hans Rosenberg of Brooklyn College wrote, “This work cannot be merely read; it must be studied.” Neisser,
 An-nals of the American Academy
208 (March 1940): 205–6; Rosenberg,
 American Historical  Review
46 (Oct. 1940): 96–99.Simon Kuznets, a business-cycle theorist, pioneering macroeconomist, and future No- bel Laureate then based at the Wharton School, wrote the longest and most important cri-tique. He praised Schumpeter for having written a “monumental treatise” that raised all theright questions, but he argued that cycles are quantitative phenomena, and instead of robustnumbers Schumpeter had presented “an intellectual diary.” He had told of his “journey through the realm of business cycles and capitalist evolution,” disclosing “his encountersthere with numerous hypotheses, diverse historical facts, and statistical experiments.” Theseefforts were praiseworthy, but they could not substitute for tight quantitative analysis. SeeKuznets,
 American Economic Review
30 (June 1940): 257, 266–71. A response came fromNicholas Mirkowich of the University of California, who pointed out that the book is not aboutcycles alone, but is a more general theory of economic development, extending the work Schum-peter had begun in his first two books; and contending that readers should not throw out the baby with the bathwater. See Mirkowich,
 American Economic Review
30 (Sept. 1940): 580.
5
Including
 Business Cycles
, Schumpeter’s published work for the remainder of his careertotals about two million words. Of this work, Nathan Rosenberg has argued, “The fact is thatmost of what Schumpeter wrote qualifies as history, both economic and intellectual. . . . More

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