His Secret Life

My serious studies in economics did not begin until the fall of 1939, my last year at Harvard, when I took a course with Alvin Hansen in which we wrestled with the problem of understanding the incomprehensible Depression that had been devastating the economy for almost a decade. From time to time various professors came to our class and told us why the Depression would go away as soon as one or another problem was removed, usually irresponsible trade union or government policy. From Hansen himself we learned of another view of the Depression, put forward only three years earlier by John Maynard Keynes—a view that envisioned the Depression as an instance of “unemployment equilibrium,” from which there was no rescue except the deliberate use of government spending to supplement the expenditure of the private sector.

Once, as I remember, we were exposed to an even more heretical idea, propounded by a short, dark, dramatic looking man, who, after removing his long cloak with a flourish, told us in heavily accented English: “Chentlemen, a depression iss for capitalism like a good cold douche”—a statement whose shock value lay not only in the unthinkable sentiment that the Depression had its uses, but in the fact that very few of us knew that a douche was the Europeans’ term for a shower.

This was Joseph Alois Schumpeter, already one of the most celebrated, and certainly the most enigmatic, of Harvard’s economists. Nearly all of us became instant Keynesians, but none of us became an instant Schumpeterian. The Theory of Economic Development, Schumpeter’s then best known book, described capitalism in a most peculiar way. It was depicted as being essentially a system where production and distribution followed changeless routines. This static society, entrapped in a “circular flow” (to use Schumpeter’s term), was only brought to life by the activities of entrepreneurs who imparted to it the characteristic dynamism we associate with the capitalist system. I shall discuss later the rationale for such a strange way of depicting capitalism, but it is not difficult to understand that in the climate of the 1930s a view of heroic entrepreneurship did not win converts.

It was not, in fact, until 1942, when Capitalism, Socialism, and Democracy appeared, that many of us took notice. This was a nuanced and complex book, in which entrepreneurs appeared in a tragic as well as heroic light, and in which capitalism, for all its dynamism, was portrayed as a system that would in the end succumb to degeneration and decay. “Can capitalism survive?” Schumpeter asked on page 61: “No. I do not think it can.” A hundred-odd pages later this was followed with: “Can socialism work? Of course it can.”

The shock of these questions and answers was all the greater in that Schumpeter had by then emerged as perhaps the second most important economist of the times—Keynes being incontestably the most famous and influential. After the Theory of Economic Development came a huge, tedious volume on Business Cycles, which did not win the acclaim Schumpeter had hoped for it, but which was nonetheless widely discussed. An unceasing flow of articles and reviews, plus no small amount of cultivation of his colleagues at meetings of the American Economic Association and elsewhere, also boosted his reputation among economists. Thus, although Schumpeter never enjoyed Keynes’s notoriety (which he pretended that he did not mind), he was widely regarded within the profession as a remarkable and original mind. Moreover, his conservative point of view and generally optimistic outlook with respect to capitalism’s future recommended him to those who did not welcome Keynes’s guarded pessimism. For myself, therefore, the dramatic message of Capitalism, Socialism, and Democracy had a special significance. I was then casting around for someone to follow Keynes in the final pages of a book on the history of economic thought. Schumpeter was obviously my man.

There was, however, a difficulty. Apart from a few celebratory essays written after he died, there was little information available about him. Schumpeter therefore came on stage only for a few moments in the first edition of The Worldly Philosophers, to deliver his startling lines. Even in the book’s most recent edition in 1986, by which time Schumpeter had an entire chapter devoted to himself, there was too little known about his life to permit more than a brief sketch. Some of the information, I now know, was not only inadequate, but inaccurate, and the inaccuracy was based on false information that came from Schumpeter himself.

That we now know much more is largely thanks to Professor Robert Loring Allen, who came under Schumpeter’s influence as a student at Harvard in 1947, and who has since performed prodigies of research on him. He has written a two-volume exploration of Schumpeter’s life and work that helps clear up some of the mysteries that have surrounded him. A second biography by the Swedish economic sociologist Richard Swedberg, takes account of Allen’s work in giving its own perceptive view of Schumpeter, and has the advantages of being less than half its length and price.¹

For all their value, however, both biographies fail to make clear connections between the elusive private person and the legendary scholar. Even Allen, who probes deeply into this relationship, fails, I think, to demonstrate the ways in which the private Schumpeter—aristocratic poseur, anti-Semite, mystic—is related to the economic theorist. In the opening pages of his Schumpeter, Swedberg writes that “to appreciate Schumpeter’s work, a knowledge of his life is [not] absolutely necessary.” It is true that biographical details often do not add much to our understanding of intellectual work. Schumpeter’s case, however, is unusual. For what is ultimately important about his work is not so much its analysis of economic dynamics as its “vision”—a word that Schumpeter himself made much of in his extraordinary History of Economic Analysis, written at the end of his life.

“In every scientific venture,” he wrote,

the thing that comes first is Vision. That is to say, before embarking upon analytic work of any kind we must first single out the set of phenomena we wish to investigate, and acquire “intuitively” a preliminary notion of how they hang together or, in other words, of what appear from our standpoint to be their fundamental properties.²

Schumpeter’s vision is so self-consciously dramatic, so explicitly based on subjective generalizations, that sometimes we feel at a loss to grasp its meaning. It is his previously undisclosed life that helps us here, adding coherence to what is otherwise only a powerful but puzzling social perspective.

The vision is already apparent in Schumpeter’s second book, The Theory of Economic Development, published in 1911, when he was twenty-eight years old and widely celebrated as a Wunderkind. Although it would not be translated into English until 1926, the book made an immediate impression in the German-speaking world because it contained a stunning explanation of an economic problem that had always given the classical and postclassical theorists a difficult time—a nonexploitative explanation of profits.

Here is where the concepts of circular flow and heroic entrepreneurs make their initial appearance. Like many economists before him, Schumpeter describes the economy as tending under the pressure of competition toward a condition in which profits are gradually eliminated. To this he adds the further assumption that the central aspect of life in such an increasingly profitless society will be its domination by routine. It is not a restless search for “maximizing” income that describes the temper of circular flow capitalism, but the overriding pressure of inertia:

All knowledge and habit once acquired becomes as firmly rooted in ourselves as a railway embankment in the earth…. Everything we think, feel, or do often enough becomes automatic, and our conscious life is unburdened of it…. This holds good likewise for economic daily life. ³

Into this stationary system now enters the entrepreneur. He possesses no capital—he will have to borrow the funds he will eventually need; he typically owns no resources, and commands no labor force. His contribution is principally that of intellect and character. Thus the entrepreneur organizes and sets into motion undertakings that create new products and processes. The activity needed to realize these projects brings life and growth to the circular flow. The rewards that accrue from such projects, being outside the previous channels of distribution of such a system, bring to their creator a form of remuneration absent from them—profit.⁴

Already in the counterpoint between the static circular flow and the entrepreneur we encounter the distinction between Schumpeter the economic theorist and Schumpeter the visionary. From an analytical point of view, the concept of a capitalism based on a circular flow of economic activity without profit has always seemed to me on a par with that of a monarchical society without kings. But there is no denying the power of Schumpeter’s vision of capitalism as a system driven by a creative, disruptive process of innovation. Moreover, his vision also offers us a plausible, if somewhat disquieting explanation of that innovative impulse. It is lodged in one of the “fundamental properties” that figure prominently in Schumpeter’s idea of how social phenomena hang together. This is the uneven distribution of human capacities.

The connection is explicitly stated in a passage from The Theory of Economic Development, in which Schumpeter writes about the range of “aptitudes” in an “ethnically homogeneous population”:

[A] quarter of the population may be so poor in those qualities, let us say here provisionally, of economic initiative that the deficiency makes itself felt by poverty of their moral personality, and they play a wretched part in the smallest affairs of private and professional life in which this element is called for. We recognize this type and know that many of the best clerks, distinguished by devotion to duty, expert knowledge, and exactitude, belong to it.

Then comes the “half,” the “normal.” These prove themselves to be better in the things that even within established channels cannot simply be “dispatched,” but must also be “decided” and “carried out.” Practically all business people belong here, otherwise they would never have attained their positions; most represent a selection—individually or hereditarily tested….

From there, rising in the scale we come finally into the highest quarter, to people who are a type characterized by super-normal qualities of intellect and will. Within this type are not only many varieties (merchants, manufacturers, financiers, etc.) but also a continuous variety of degrees of intensity in “initiative”…. So also the great political leader of every kind and time is a type, not yet a thing unique, but only the apex of a pyramid from which there is a continuous variation down to the average and from it to the subnormal values.⁵

The entrepreneur now appears in a special light—not merely the agent of a particular task of rearranging society’s inputs, but as a bearer of natural gifts, genetically or racially destined—or at least favored—to prevail. As we shall see, this idea will be a strategic part of Schumpeter’s prognosis for both capitalism and socialism.

First, however, we must ask how he came to conceive such views. The Schumpeters were a bourgeois Viennese family of no particular distinction, although a Baron von Schumpeter who fought with Rudolph of Habsburg in the thirteenth century was part of family legend. Schumpeter’s father—no “von”—was a prosperous but not rich local manufacturer. When he died in 1887, his four-year-old only child was left in the care of his handsome, talented, and adoring mother, who had large ambitions for Joseph and for herself. She realized the latter six years later when she married Lieutenant Field Marshall Sigmund von Keler, thirty years her senior, who was high enough in the Viennese establishment to warrant being addressed as Excellenz.

This provided the necessary visa for Joseph’s matriculation at the Theresianum, the most prestigious school in Vienna, which would otherwise have been entirely out of social reach. Here Schumpeter acquired his lifelong identification with “aristocratic” ways, including a cavalier attitude toward money and women, and a deep-rooted racism. Many years later, at Harvard, he told a fellow professor of walking in the Austrian countryside with a landowner,and meeting an attractive peasant girl. The landlord interrupted his walk to have sexual relations with her, and thereafter invited his guest to do the same. Afterward they continued their walk, without so much as a word about the matter. As for his racial feeling, the conversation with a longtime friend, as the friend later related it in a letter to Allen, is merely one of countless examples:

Of course, [it is Schumpeter speaking] the Nazis have a point when they deny that all races are equal. The question is only: which are the master races? Now, what is the greatest achievement of our civilization? Modern capitalism! Which race has made perhaps the largest contribution to that achievement? The Jews! If only the Nazis had recognized that the Jews belong to the master race, they’d have been all right.

By 1911, Schumpeter seemed launched on a meteoric career. He was the youngest full professor in the Austrian realm, and certainly the most arrogant. Allen describes his first faculty meeting at the University of Czernowitz, where the professors, formally attired in high collars and dark woolen suits, somberly awaited the entrance of their new colleague. Schumpeter arrived unpardonably late, dressed in smartly tailored riding clothes. “After the dean sputtered that members of the faculty ordinarily wore their normal working habit to meetings,” Allen writes, “Professor Schumpeter cheerily retorted to the effect that the important meeting with his esteemed fellow professors had been called so close to the time of his equally important daily ride that he did not have time to change.”

Between roughly 1908 and the end of the First World War, Schumpeter published four books and numerous articles. He cultivated the acquaintance of economists in many countries including England and the United States, and was well on the way to fulfilling what he described many times as his lifelong ambitions: to be the greatest economist, the greatest lover, and the finest horseman in Austria. As for the last, he said, God had vouchsafed him the first two out of the three.

Shortly thereafter came a period of misery and failure. In 1919 he rashly took on the post of state secretary of finance for the newly created Republic of Austria. Always politically naive, haughty as ever, and inclined to meddle in others’ affairs, he was soon unpopular, and was quickly dismissed. As a consolation prize he was given the right to form a private bank, which he used to become the chairman of the Biedermann Bank in Vienna. Schumpeter was as poor a judge of business as he had been of his political prospects, and before long he found himself seriously in debt, to no small degree as a consequence of spending money on women (an Englishwoman he had married in 1907 remained in England) and on horses. When the Biedermann Bank found itself in deep trouble, it turned to a subsidiary of the Bank of England for support, which was granted on condition that Schumpeter be let go.

Schumpeter was now more or less forced to return to university teaching. Both his professional and his personal life again took a favorable turn. During the years of disgrace and failure, Schumpeter had gradually come to know Annie Reisinger, the young daughter of the concierge in his mother’s apartment building. Allen tells us that she was a “normal, happy girl from a respectable, modest working class family.” Schumpeter became Annie’s friend, and some years later, when she was twenty-two and he forty-two, fell deeply in love with her.

In The Worldly Philosophers, relying on Schumpeter’s often repeated account, I wrote that “[Schumpeter] had sent [Annie] to schools in Paris and Switzerland to equip her to be his wife.” From interviews with people who knew Schumpeter, and from his research in Schumpeter’s private papers, Allen has pieced together a quite different story. Allen writes,

He could not bring himself to reveal that she was from a working class family, [and] led his friends to believe that during Annie’s time in France, she was going to school, and that he and his mother paid for her education and upbringing as a young lady in French and Swiss schools, ostensibly in preparation for their planned forthcoming marriage. None of this was true.

Annie had in fact worked in France as a maid and as a clerk, and had had an abortion the year before she and Schumpeter began their serious relationship.

All of this was preamble to the tragedy that followed. Joschi (as Annie called him) and Annerl (as he called her) were married in November 1925. The never officially divorced English wife threatened to sue, but did not pursue the matter. Ten months later Annie died in childbirth, the child dying almost immediately after. His mother had died the previous June, and Schumpeter now fell into a profound and lasting melancholy—a mood of despair, concealed by surface bonhomie.

His response, Allen shows, was to retreat into a private world in which he continued to receive support and guidance from his two departed Hasen—literally rabbits, but Viennese slang for darlings—to whom he literally prayed for guidance, salvation, and relief. Coming across his wife’s diary, he set to work to copy it, imitating her handwriting and faithfully reproducing her entries, mistakes in grammar and all. Each day’s copying was accompanied by an attempt to vicariously relive that day in Annie’s life, and gradually he enlarged this fantasy with recollections of his own. The ritual consumed an entire year; and was then started over again after a few years’ hiatus. Thus a kind of secret haven was created in which Schumpeter could both adore, and receive protection from, his tutelary deities.

Each page began with the plea “O Herrin und Mutter, O seid uber mir! [sic]” (“O Mistress and Mother, protect me!”). He continued these compulsive copyings even after he married, in 1937, Elizabeth Boody, a handsome American divorcée, who had been trained as an economist and faithfully protected, helped, and sustained him until his death. His marriage notwithstanding, Schumpeter’s compulsive rituals persisted, now augmented by entries into a private diary—a pastiche of almost daily “gradings” of his own performance, shorthand references to events, plans, and moods, and aphorisms of a rather heavy-handed, cynical kind:

Democracy is government by lying.

Dishonesty is the most human of all characteristics.

The Essence of Position is the Power to abuse it.

Both Allen and Swedberg devote much attention to Schumpeter’s private fantasies and writings. Allen’s view is that they reveal a previously concealed but essential religiosity, a reliance on external powers to give meaning to his life: “I think,” he writes, “[Schumpeter] needed his religious beliefs for the maintenance of his mental health.” Swedberg’s interpretation is closer to my own:

When one reads through Schumpeter’s aphorisms one is immediately struck by how few values there were in his universe. Love, victory, revenge and hate—that was pretty much all…. All human motivation, Schumpeter said, boiled down to this: “To hunt for food and women and to kill enemies that is and always was what man wanted and was fitted for, and this is the greatest happiness for the greatest number [sic].”

“A certain elitism,” Swedberg continues, “was also part of Schumpeter’s worldview, where people were firmly divided into leader and mass…. Time and time again Schumpeter came back to the ‘subnormals’ and the danger they represented to society.”

Yet Schumpeter cannot be easily categorized by these beliefs, for his actual behavior was full of contradictions. His contempt for “sub-normals” is offset by his inspired teaching; he took as much trouble with run-of-the-mill students as he did with the most gifted. His disdain for money, evidenced in his personal extravagance, is contradicted by his concern for investors who lost money in a Biedermann venture, and whose losses he personally repaid over twenty years, painfully and voluntarily. His anti-Semitism did not prevent him from expressing outrage when Paul Samuelson was denied an appointment to the Harvard faculty because he was Jewish. For all his posturing as an aristocrat, he had adored a young woman of working-class background.

Is this life of often tormented inconsistency reflected in his work? I turn for an answer to Capitalism, Socialism, and Democracy. Its theoretical structure, like that of The Theory of Economic Development, does not seem as impressive on second look as it did at first. Schumpeter first builds a model of a “plausible” capitalism (his phrase) impelled by self-generated energies along an apparently limitless path of economic expansion. He delights in discrediting the barriers to growth offered by the faint of heart—Keynes was high on this list. But having dismissed such standard problems of capitalism as a drying-up of investment opportunities—“Technological possibilities are an uncharted sea,” he wrote—Schumpeter introduces an enemy that cannot be so easily circumvented. This is the civilization of capitalism itself. First the entrepreneurial function is rendered superfluous by the bureaucratization of management. Then the bourgeois mentality itself is devalued by the rationalist attitude of its own bourgeois order:

Capitalism creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own; the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole scheme of bourgeois values.⁶

Thus capitalism digs its own grave, preparing the way for socialism, which “of course” can work. Schumpeter has in mind here a “managerial” socialism administered by a Central Planning Board—a concept whose technical feasibility was the center of a fierce debate during the 1930s between Ludwig von Mises, who declared that such a form of socialism could not work, and the Polish economist Oscar Lange, who declared it could. To many economists Lange seemed to win the highly abstract argument; and the logic of his case convinced Schumpeter along with many others.

With Schumpeter’s socialism, as with his capitalism, we must once again distinguish between analysis and vision. The Schumpeterian analysis of capitalist growth and decline may be “plausible,” but it is surely not unchallengeable. There were, after all, other logical possibilities that could either inhibit the dynamic development of capitalism—inflationary disasters, for example, or ecological constraints—or that could stimulate it—the emergence of new international markets, to cite only one possibility. All of these implied futures very different from that of an entrepreneurial capitalism succumbing to a loss of will. As for Schumpeter’s analysis of socialism as a system of public ownership that could fairly easily be administered by a central planning authority, we now see that it was deeply flawed.

But the vision is something else again. Here Schumpeter rises to extraordinary heights, creating narrative dramas of the contest between the swashbuckling entrepreneurial drive and the numbing counterforce of the “rationalist attitude” that rival the class struggle in Marx, with the impressive difference that they arrive at conclusions unwelcome to their author. Of course, all this was served up in Schumpeterian style. Capitalist civilization may be dying, but it is not dead. The entrepreneurial style is under attack, but it continues to manifest itself. Thus there is still a chance for capitalism to survive in the short run, to which he casually adds, “and in these things, a century is a ‘short run.”‘

All this brings us to one final question: How can it be that someone who regards capitalism as the “greatest achievement of our civilization” can be so detached before its fate, so unperturbed by its impending demise? The answer once again lies in Schumpeter’s elitist conception of society. Capitalism may give way to socialism, but the elites who have become leaders under capitalism will not perish in the process. On the contrary,

Here is a class which, by virtue of the selective process of which it is the result, harbors human material of supernormal quality…[fulfilling vital functions that will have to be fulfilled also in socialist society.] [H]ence [it] is a national asset which it is rational for any social organization to use.⁷

It is this social group that Schumpeter expects to make the passage intact from one civilization to the next. It is also the social group that most clearly embodies Schumpeter’s conception of himself. For this charmed company is not the aristocracy of lineage or wealth, in which Schumpeter was always a parvenu. It was the aristocracy of talent, where his claims were better than those of any of his classmates in the Theresianum.

Do such speculations add depth to our understanding of Schumpeter? Here we must distinguish between analysis and vision. The aim of analysis, for Schumpeter as for all economists, is to find structure within the confusion of daily life: this whether by means of Adam Smith’s invisible hand imparting a Newtonian order to the marketplace; or Marx’s labor theory of value imparting tension to that same marketplace; or Schumpeter’s circular flow setting the stage for the entrepreneurial impetus. But along with analysis comes vision—not only the great dramas of capitalist evolution to which analysis leads, but equally the fundamental conceptions of “human nature” from which analysis itself proceeds. The visions that Smith, Marx, Mill, Veblen, Marshall, and certainly Schumpeter bequeathed to us endure along with their analytical contributions. These visions project worlds, not models; historical tendencies, not rational choices. Here the visionary is integrally part of the vision. Our understanding of Schumpeter’s vision is not the same after having read these biographies as before. Schumpeter’s work not only reflects his vision. It is his self-vindication.