Business Cycles: A Theoretical, Historical, and Statistic Analysis of the Capitalist Process (Abridged)

384 Pages·2003·1.5 MB·English

by  Joseph A. Schumpeter (Author)

Joseph Schumpeter, Business Cycles. (1939) 3

Joseph A. Schumpeter [1883-1950]

BUSINESS CYCLES.
A Theoretical, Historical and Statistical Analysis
of the Capitalist Process.

New York Toronto London : McGraw-Hill Book Company, 1939, 461 pp.
Abridged, with an introduction, by Rendigs Fels
Joseph Schumpeter, Business Cycles. (1939) 4

Table of Contents

I. EDITOR'S INTRODUCTION

II. Chapter I. INTRODUCTORY

III. Chapter II. EQUILIBRIUM AND THE THEORETICAL NORM OF
ECONOMIC QUANTITIES

A. The Meaning of a Model
B. The Fundamental Question
C. The Stationary Flow
D. Equilibrium and the Theoretical Norm
E. Complications and Clarifications
F. Imperfect Competition
G. Equilibrium Economics and the Study of Business Fluctuations

IV. Chapter III. HOW THE ECONOMIC SYSTEM GENERATES EVOLU-
TION

A. Internal Factors of Change
B. The Theory of Innovation
C. The Entrepreneur and His Profit
D. The Role of Money and Banking in the Process of Evolution
E. Interest (Money Market; Capital)

V. Chapter IV. THE CONTOURS OF ECONOMIC EVOLUTION

A. The Working of the Model; First Approximation
B. Looking at the Skeleton
C. The Secondary Wave; Second Approximation
D. Many Simultaneous Cycles; Third Approximation

VI. Chapter V. TIME SERIES AND THEIR NORMAL

A. Introduction
B. Trend
C. A Single Cyclical Movement
D. Many Simultaneous Waves
Joseph Schumpeter, Business Cycles. (1939) 5

VII. Chapter VI. HISTORICAL OUTLINES. I. INTRODUCTION; 1786-1842

A. The Fundamental Importance of the Historical Approach to the Prob-
lems of the Cyclical Process of Evolution.
B. Questions of Principle. —A few questions of principle must be dis-
posed of first
C. The Long Wave from 1787 to 1842

VIII. Chapter VII. HISTORICAL OUTLINES. II. 1843-1913

A. The Period 1843-1897.
B. The Agricultural Situations of the Period
C. Railroadization
D. Some Features of the Development of Manufactures
E. The First Sixteen Years of the Third Kondratieff (1893-1913)

IX. Chapter VIII. 1919-1929

A. Postwar Events and Postwar Problems
B. Comments on Postwar Patterns
C. Further Comments on Postwar Conditions
D. Outlines of Economic History from 1919 to 1929
E. The "Industrial Revolution" of the Twenties
Joseph Schumpeter, Business Cycles. (1939) 6

Joseph Schumpeter,
BUSINESS CYCLES (1939)
I.
EDITOR’S INTRODUCTION

RENDIGS Fels -
Vanderbilt University

Table of Contents

"The younger generation of economists should look upon this book
merely as something to shoot at and start from—as a motivated pro-
gram for further research."'—Joseph A. Schumpeter, Preface to Busi-
ness Cycles, 1939 edition, p. v.

Schumpeter had bad luck with Business Cycles. 1 The most ambi-
tious work of the trilogy setting forth "the Schumpeterian system," it
has attracted less attention than his Theory of Economic Develop-
ment 2 or his Capitalism, Socialism, and Democracy. 3 It is true that a
reference to Business Cycles can occasionally be found in a footnote,
but the text to which the footnote is appended rarely contains a dis-

1 The full citation is Joseph A. Schumpeter, Business Cycles : A Theoretical,
Historical, and Statistical Analysis of the Capitalist Process, 1st edition (New
York and London : McGraw-Hill Book Company, Inc., 1939}. Schumpeter,
an Austrian economist who spent the last eighteen years of his life at Har-
vard, was born in 1883 and died in 1950. For an account of his life see the
"Memorial" by Arthur Smithies in the American Economic Review, Sep-
tember 1950, pp. 628-45.
2 The Theory of Economic Development ; an Inquiry into Profits, Capital,
Credit, Interst, and the Business Cycle, translated from the German by Red-
vers Opie (Cambridge, Mass. : Harvard University Press, 1934).
3 3d edition (New York : Harper & Brothers Publishers, 1950).
Joseph Schumpeter, Business Cycles. (1939) 7

criminating discussion of its ideas. Clemence and Doody accorded it
its proper place in The Schumpeterian System, but they preferred de-
fending their former teacher against criticism to paying him the higher
compliment of building on his work. 4

The publication date of Business Cycles proved singularly unfor-
tunate. Had it appeared three years before Keynes's General Theory
sent economists scurrying off in other directions instead of three years'
afterwards, it would have gained from the enormous interest everyone
had in business cycles in 1933 and might have been accorded a recep-
tion second only to that later received by the General Theory itself. 5
Instead, it appeared just as the outbreak of World War II raised eco-
nomic problems to which Keynes's tools, but not Schumpeter's, could
be readily adapted. But Business Cycles lost almost as much from ap-
pearing six years too soon as from appearing six years too late. Given
a different title, it might in 1945 have profited from the growing inter-
est in economic development, for its theme is as much how the pre-
sent industrial nations developed as the themes indicated by its title
and subtitle. Modern scholars can hardly be blamed if they turn for
Schumpeter's ideas on the subject that currently fascinates them to a
book called The Theory of Economic Development rather than to a
book called Business Cycles.

They might have done so even if the titles had been reversed ; they
might well prefer the shorter, more finished account to the longer, less
polished one. The kind of fault that contributed to the success of
Keynes's General Theory added to the neglect of Schumpeter's Busi-
ness Cycles. Both would have been better books had their authors
spent another year improving them. Whereas the shortcomings of the
General Theory stimulated other economists to lay bare and refine and

4 Richard V. Clemence and Francis S. Doody, The Schumpeterian System
(Cambridge, Mass. : Addison-Wesley Press, 1950).
5 John M. Keynes, The General Theory of Employment, Interest, and Money
(New York : Harcourt, Brace and Company, 1936).
Joseph Schumpeter, Business Cycles. (1939) 8

apply the model half-concealed in it, incidentally making Keynesians
of them, the similar need to clarify and improve and use the Schum-
peterian model repelled them. There are no Schumpeterians. One need
not take issue with Schumpeter's criticism of Marshall for lavishing
too much time on the eight editions of the Principles to hold that he
himself made the opposite error. 6

Though a quarter of a century has elapsed since the first edition of
Business Cycles, the opportunities it opened up for further research
remain largely unexploited. The chief exception is Schumpeter's own
Capitalism, Socialism, and Democracy. Much has been published on
innovation and entrepreneurship, usually with a nod in Schumpeter's
direction but no more. Even a work like Yusif A. Sayigh's Entrepre-
neurs of Lebanon, which ostensibly takes Schumpeter's concepts as its
starting point, actually deals with entrepreneurs as people—their edu-
cation, religion, opinions, even the number of their children—to the
neglect of what was central to Schumpeter's analysis, innovating ac-
tivity and its impact. 7

At the time Business Cycles was written, work on Kuznets cy-
cles—the long swings of fifteen to twenty years—was still at an early
stage. Since then a large amount of statistical and a small amount of
analytical work has gone forward. Those who have made the principal
efforts to explain Kuznets cycles, Matthews and Abramovitz, have not
seen fit to draw on Schumpeter's work but have resorted to an incom-
plete and essentially aggregative tool, the capital-stock adjustment
principle. 8 (It is ironic that a generation of economists that tegards

6 «Alfred Marshall, Principles of Economics, 8th edition (London : Macmil-
lan and Co., limited, 1922).
7 Entrepreneurs of Lebanon ; The Role of the Burine» Leader in a Developing
Economy (Cambridge, Mass. : Harvard University Press, 1962).
8 R.C.O. Matthews, The Business Cycle (Chicago : University of Chicago
Press, 1959), Ch. 12 ; Moses Abramovitz, "The Nature and Significance of
Kuznets Cycles," Economic Development and Cultural Change, April 1961,
pp. 225-48.
Joseph Schumpeter, Business Cycles. (1939) 9

disaggregation as a shining virtue has underestimated the theory of
such a staunch opponent of aggregation as Schumpeter. In our heart of
hearts, we prefer the aggregates of Keynes, Harrod, Domar, etc. ; de-
spite Walras's earlier and better claim to a general theory, we permit-
ted Keynes to take over the term, Schumpeter's objections notwith-
standing. Our cant about disaggregation means only that we have
guilty consciences.) Yet Schumpeter's concept of recesssion could be
exceedingly helpful in interpreting the 1870s, a period which raises a
problem ignored by Matthews and Abramovitz in the works cited in
the footnote above. Their most telling evidence for the existence of
Kuznets cycles consists of two circumstances, swings in the rate of
growth of real GNP that average fifteen to twenty years, and the re-
currence of deep depressions at similar intervals—there was one in the
1870s, one in the 1890s, there would (or might) have been one in the
1910s but for World War I, and there was one in the 1930s. Including
1873-78 in the category of deep depressions at first sight seems rea-
sonable enough, since it is generally considered not only the longest
but also one of the worst business contractions on record. But
Abramovitz shows a "tentative" peak in the rate of growth of real
GNP, after eliminating the effects of business cycles, which he dates
1874.25.9 This means that the average annual rate of growth between
the complete business cycle with peaks in 1869 and 1873 and the
complete business cycle with peaks in 1873 and 1882 was higher than
for neighboring pairs of cycles—in fact it was the highest on record
for any successive pairs of cycles, in spite of the fact that the contrac-
tion included in the 1873-82 period is rated a deep depression,
whereas the contraction phase of the preceding cycle was very mild.
Thus the statistical finding about the rate of growth of real GNP col-
lides with the judgment that 1873-78 was a deep depression ; further-
more, it plays hob with Abramovitz's analysis of the way Kuznets cy-
cles unfold, in which deep depressions and troughs in growth rates go
together. How can the paradox of a rapid rate of growth in a period
encompassing deep depression be resolved ? Schumpeter's concept of
recession could illuminate it : previous innovation must have made
possible a great increase in output that imposed hardship—symptoms
Joseph Schumpeter, Business Cycles. (1939) 10

of depression—on all parts of the economy unable to adapt to the new
conditions. Not that one can turn to Schumpeter's own account of the
1870s for a ready-made explanation of the facts Matthews and
Abramovitz have wrestled with ; it is rather that today's economists
are missing an opportunity to build on Schumpeter's work.

The importance of a book is judged by what it leads to. By this
test, it is doubtful if Schumpeter's Business Cycles would merit rescue
from the limbo of "out of print." The first reason for the present edi-
tion lies in the conviction that it can yet stimulate significant research.
Why an abridged edition ? Ordinarily, I deplore abridgements, but in
the present case there is every reason to believe that a shorter version
will prove more useful, especially since the longer one will always be
available in libraries. Eliminating digressions and the less valuable
parts of the original two volumes, which ran to more than a thousand
pages, will enable the reader, I hope, to spend his time more profita-
bly. Having myself spent a great deal of labor trying to master the
original edition, I have nothing but sympathy for economists who felt
that it was not worth the effort

In the work of abridgement, my first concern has been to preserve
a complete statement of the theory, since less thorough accounts are
readily available elsewhere. This has meant retaining most of Chap-
ters II, HI, and IV and parts of Chapters I and V. Even in Chapters II-
IV, however, I have not hesitated to cut footnotes, paragraphs, and
whole pages where the discussion seemed to go pretty far afield, as
well as deleting superfluous sentences and phrases. Although I hope
that what remains is somewhat more readable than the original, it is
still hard going, and I would have liked to add as an appendix a sum-
mary of Schumpeter's theory that I prepared for my own use many
years ago. But it seemed better to save the space for Schumpeter's
own words. Besides, an excellent summary of Schumpeter's theory is
Joseph Schumpeter, Business Cycles. (1939) 11

already available in Clemence and Doody's The Schumpeterian Sys-
tem. 9

My second concern was to retain a full account of the interpreta-
tion of the cyclical history of one country, in preference to partial ac-
counts of the three countries that Schumpeter discussed at length. The
nature of the theory, which includes a Kondratieff cycle sixty years in
duration, calls for a long sweep of history. That the country chosen
should be the United States rather than England or Germany reflects
more than the national origins of editor and publisher. The United
States was the country Schumpeter devoted most attention to and, par-
ticularly in the discussion of the 1930s, is the one that best illustrates
the working of his model.

The decisions to keep fairly complete accounts of the theory and of
its application to one country dictated omitting virtually all the statis-
tical analysis (Chapters VII-XIII and a long section of Chapter XIV of
the original edition). One of the reviews that appeared not long after
the 1939 edition was published criticized it for not having a service-
able statistical technique. The criticism was just, and omitting the sta-
tistical chapters may be deemed no great loss. Perhaps it would have
been desirable to have cut them heavily, retaining the parts most use-
ful for throwing light on the implications of the theory, but the
abridged edition is quite long enough as it is.

I have regularly deleted references to sources of information. Since
Schumpeter's sources ace now obsolescent, if not obsolete, very few
readers would be interested in them.

9 Moses Abramovitz, Statement in United States Congress, Joint Economic
Committee, Employment, Growth, and Price Levels, Hearings (86th Con-
gress, 1st Session), Part II (Washington : Government Printing Office,
1959), p. 434.