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OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
Schumpeter’s Venture
Money
M IC HA E L P E N E D E R , A N D R E A S R E S C H
1
OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
3
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© Michael Peneder and Andreas Resch 2021
The moral rights of the authors have been asserted
First Edition published in 2021
Impression: 1
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and you must impose this same condition on any acquirer
Published in the United States of America by Oxford University Press
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OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
Acknowledgments
We are grateful for the access and support provided by the Austrian State Archives,
the Municipal and Provincial Archives of Vienna, the Harvard University
Archives, and the Georges F. Doriot Collection at the Harvard Business School.
Ulrich Hedtke provided valuable hints and generously gave us access to numerous
documents from his private archive in Berlin. Georg Herrnstadt supplied
documents from the estate of his mother, Gundl Steinmetz-Herrnstadt. In 1999,
Wolfgang Stolper provided valuable comments on early preliminary results.
We are especially indebted to the probing questions, constructive comments,
and suggestions provided during conversations on our research, for example,
by Felix Butschek, Tom McCraw, Kurt Dopfer, Caroline Gerschlager, Christian
Glocker, Takeo Hoshi, William Janeway, Dale Jorgenson, Martin Kenney, Heinz
D. Kurz, Richard Nelson, Tom Nicholas, Atanas Pekanov, Bill Sahlman, Frederic
M. Scherer, Andrei Shleifer, and Gunther Tichy. We also thank Astrid Nolte for
her invaluable support in proofreading the text. As a matter of course, only the
authors bear responsibility for any remaining omissions, errors, or imprecisions.
The idea for this book arose from repeated meetings of the two authors at Kurt
Dopfer’s Vienna Seminar on Evolutionary Economics. Each chapter benefitted
from numerous suggestions and critical comments freely shared between both
authors. It may be worth mentioning that Andreas wrote Chapters 8 to 10, while
Michael bears the principal responsibility for the remainder of the monograph.
Finally, we want to thank our families, friends, and colleagues for their enduring
patience and support. Michael dedicates the work especially to his wife Beate and
their children, Jonas and Theresa.
OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
List of Figures
List of Tables
1
Introduction—Schumpeter’s life and vision
Ever-newer waters flow on those who step into the same rivers.
(Heraclitus, ca. 535–475 bce)
Panta rhei, everything flows, or “all entities move and nothing remains still.”1 This
notion, which Heraclitus proclaimed to be the major logos or principle of universal
order, is arguably also the most distinctive characteristic of Schumpeter’s vision
of the economy—one that Stanley Metcalfe described as “restless capitalism.”2
Beyond merely acknowledging that objects continuously change, it considers
change a basic category of existence, in which hardly anything remains constant
except change itself.
1 As quoted in Plato, Cratylus Paragraph Crat. 401 section d line 5. 2 Metcalfe (1998).
3 HEA (1954, p. 556). ⁴ Drake (2018b). ⁵ Nicolis and Prigogine (1989, p. 55).
⁶ Georgescu-Roegen (1971); Ayres (1994).
OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
There is a deep connection between Schumpeter and the above strands of thought.
For instance, from 1934 to 1936 he mentored a young Romanian mathematician
and statistician named Nicholas Georgescu-Roegen (1906–94), who is best known
for The Entropy Law and the Economic Process (1971), which became a founda-
tional work of ecological economics. Sharing his dedicated interest in economic
structure and dynamics,⁷ Schumpeter offered him a position at the economics
faculty at Harvard and planned to work on a joint treatise.⁸ The plans failed
when Georgescu-Roegen returned to Romania. However, Schumpeter apparently
had a lasting impact. In Georgescu-Roegen’s own words: “Every single one of
his distinctive remarks were seeds that inspired my later works. In this way,
Schumpeter turned me into an economist.”⁹ Among other aspects, both were
apparently influenced by the fact that the laws of thermodynamics command
irreversibility and perpetual qualitative change.1⁰
More widely known, however, are Schumpeter’s struggles with the Darwinian
principles of evolutionary change.11 At a younger age, he was highly critical of
“all kinds of evolutionary thought that centre in Darwin—at least if this means
no more than reasoning by analogy.” Associating it with the mistaken notion of a
“uniform unilinear development,” he proclaimed that “the evolutionary idea is now
discredited in our field” and that “with all the hasty generalisations in which the
word ‘evolution’ plays a part, many of us have lost patience.”12 When he later wrote
the History of Economic Analysis (henceforth HEA) Schumpeter drew a sharper
⁷ “The paramount importance of time for economics comes from the fact that it envelops every
human action, actually, all actions of every life bearing structure” (Georgescu-Roegen, 1994, p. 235).
⁸ Samuelson (1966); Heinzel (2013). ⁹ Georgescu-Roegen (1992, p. 130).
1⁰ Heinzel (2013, p. 263). 11 Nelson and Winter (1982); Metcalfe (1998).
12 Theorie der wirtschaftlichen Entwicklung (TED; 1911/34, p. 57).
OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
distinction. Yet he still forcefully denounced Social Darwinism and its infamous
proponent Herbert Spencer:
No other word but “silly” will fit the man who failed to see that, by carrying
laissez-faire liberalism to the extent of disapproving of sanitary regulations,
public education, public postal service, and the like, he made his ideal ridiculous
and that in fact he wrote what would have served very well as a satire on the
policy he advocated. Neither his economics nor his ethics […] are worth our
while. What is worth our while to note is the argument that any policy aiming at
social betterment stands condemned on the ground that it interferes with natural
selection and therefore with the progress of humanity. The reader should observe,
however, that the almost pathetic nonsense could have been avoided and that the
sound element in his argument could have been partly salvaged by adding “unless
methods more humane and more scientific than natural selection can be found.”
(HEA, 1954, p. 773f)
Panta rhei, or the “continuous stream of ever new waters,” may also be an apt
characterization of monetary history. In short, money has transformed from
being simple symbols of account to precious items that facilitate exchange, and
from there to plain social conventions increasingly cast into mere digital data.
Milton Friedman (1912–2006) and Anna J. Schwartz (1915–2012), two influential
proponents of monetarism, explained their fascination with the fact that money
“is so full of mystery and paradox.” Owing to “fiction” and “myth,” people accept
pieces of paper as means of payment, because they are confident that others will
do the same: “The pieces of green paper have value because everybody thinks
they have value, and everybody thinks they have value because in his experience
they have had value”.1⁴ Monetarism is best known for its revitalization of the
classical quantity theory. It portrays money as a veil that is detached from and
has no systematic direct impact on real production and income in the long-term.
In his influential synthesis of the classical orthodoxy, John Stuart Mill (1806–73)
expressed it as follows:
In other words, money only matters in determining the average price level, which
must vary in exact proportion to its overall quantity. As a consequence, the latter
has no systematic impact on production or real income, that is, the amount and
type of goods people will actually consume. But there is one exception: since this
“fiction” is neither fragile nor indestructible,1⁵ over expansion or contraction of
the money base can tear the veil and cause an economic crisis. Thus, the nexus
between finance and growth mainly exists in the negative and is to be contained
by sound monetary policy.
Schumpeter dissented from the classical orthodoxy in many respects. Charac-
teristically, he liked to contrast the image of money as a veil with that of money
as a skin, that is, an organ which is invariably and intimately connected to the
living organism.1⁶ The skin carries out indispensable functions, such as enabling
the sensation of touch and heat or helping to regulate body temperature, and at
the same time it reflects the overall health of an organism. Similarly, the condition
of a monetary system simultaneously has an impact on, responds to, and mirrors
the performance of the economy at large. In short, Schumpeter treated money as
endogenous to the economic system.
Having experienced the times of hyperinflation in Austria and therein lost a
fortune, Schumpeter clearly acknowledged the dangers of a mismanaged currency.
However, in contrast to the classical orthodoxy, along with monetarism and other
followers of the quantity theory, he refused to throw the baby out with the bath
water. Instead, he deliberately embraced the historical evolution and growing
speciation of money and finance into increasingly complex social institutions that
are malleable to the various needs of entrepreneurial finance. He absorbed it into a
deliberately monetary theory of development, in which “credit”—defined broadly
as any form of pre-financing of new ventures—is the indispensable alter ego of
entrepreneurial initiative, jointly fostering innovation, structural change, and the
growth of real income.
1⁵ Friedman and Schwartz (1963, p. 696). 1⁶ Das Wesen des Geldes (WDG; 1970, p. 2).
OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
Finally, panta rhei, the principle of perpetual change, offers a succinct description
of Schumpeter’s eventful life story. Living during a time of great political and
social transformation, two world wars, and deep economic crisis, his path was
one of professional struggles, alternating triumphs and defeats, personal drama,
and exceptional endurance (Tables 1.1 and 1.2). Having grown up as a half-
orphan, he would marry three times and even be accused of bigamy. In addition
to his numerous travels, he resided in Moravia, Graz, Vienna, Chernivtsi, Cairo,
and Bonn before finally settling down in Cambridge, Massachusetts, at Harvard
University. Among his many professional activities, he worked as a lawyer, state
secretary for finance, bank president, and “proto-venture capitalist.” Yet despite
these temporary distractions from his main calling to pursue an academic career,
his scientific output was exuberant. It comprised various extensive monographs
in addition to innumerable articles and speeches. It is no wonder that his life
and work has been the subject of numerous biographies and treatises which have
regularly found new angles to explore. Given the wealth of existing monographs
Year Milestones
Adolescence
1883 Born in Třešt
1887 Death of his father (a textile manufacturer)
1888 Relocation to Graz
1893–901 Education at an elite highschool in Vienna
1901–6 Studies and PhD at the University of Vienna
1902–5 Management studies at the Export Academy
1906–7 Study trips (Berlin, London, Cambridge, etc.)
1907–20 First Marriage with Gladys Ricarde Seaver
1907 Practice of law in Cairo
Science prodigy
1908 Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (WHN)
1909–11 Professor at the University of Czernowitz
1911 Theory of Economic Development (TED)
1911–21 Professor at the University of Graz
1913 Visiting professor at Columbia University
1917–18 Money and the Social Product (MSP)
1918 Die Krise des Steuerstaates (KSS)
OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
Year Milestones
Schumpeter was born in 1883 in the Moravian town of Třešt, which at the
time belonged to the Habsburg Empire and is now part of the Czech Republic.
His mother came from a town near Vienna, while his father was a local textile
manufacturer who belonged to the German-speaking minority of the region. His
father died as a result of a hunting accident when Josef was only 4 years old.
Taking her son and moving to Graz, his mother then married a retired army
officer and member of the Austrian nobility. Her marriage enabled Schumpeter
to attend the Theresianum, an elite secondary school in Vienna. There, he received
a rigorous education, not only in mathematics, science, and history, but also in
Latin, Greek, English, Italian, and French. His knowledge of many languages was
clearly instrumental to his later career. It not only compelled him to practice his
1⁷ See, for instance, März (1983/91); Allen (1991); Swedberg (1991); Stolper (1994); Shionoya (1997);
Hanusch (1999); McCraw (2007); Andersen (2011); Cantner and Dopfer (2015); or Sturn (2016).
OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
skills by reading, but enabled him to directly source literatures from exceptionally
varied historical and geographical origins.
In 1901 he enrolled at the University of Vienna to study jurisprudence (eco-
nomics was not yet an independent branch of study). There, he attended the
classes of Eugen Böhm-Bawerk, Friedrich Wieser, and other proponents of the
Austrian School of economics. Furthermore, he had to take a substantial number
of courses in philosophy, a field in which the positivist legacy of the physicist
and philosopher of science Ernst Mach still exerted a strong influence. According
to Andersen, Schumpeter additionally “designed for himself an extensive and
fairly advanced programme of mathematics courses.”1⁸ This rendered Schumpeter
distinctly capable of absorbing modern developments in economic theory and
embracing an open perspective on methodology—especially when compared to
his peers from the Austrian and German Schools, who displayed little inclination
for and often hostility toward the use of mathematical tools in economics.
Schumpeter also signed up to study management at the Export Academy, the
precursor of today’s Vienna University of Economics and Business. Between 1902
and 1905 he took classes that included economic geography, commercial law,
and accounting, as well as the handling of business correspondence in German,
English, and French. Yet, according to our findings and judging from the quite
poor grading, he seems not to have taken these studies very seriously. For example,
on a scale ranging from one (“excellent”) to five (“failed”) he barely passed his
introductory courses in business accounting and bookkeeping with a grade of four
(“sufficient”) in his first semester, and then failed both in the subsequent courses.1⁹
In retrospect, one could consider these poor grades a bad omen for his business
ventures during the 1920s.
After earning his PhD at the University of Vienna in 1906, Schumpeter set out
on educational journeys to Berlin, Paris, London, Oxford, and Cambridge. In 1907,
he married his first wife, Gladys Ricarde Seaver (1871-1932). The couple moved to
Cairo, where Schumpeter represented clients at the International Mixed Tribunal
and made a certain fortune. Simultaneously, he managed to write his habilitation
thesis: Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (hence-
forth WHN, 1908).2⁰
Habilitation made Schumpeter eligible to hold a chair at a university. He
initially became an associate professor at the University of Cernivtsi,21 where he
1⁸ Andersen (2011, p. 22f). Andersen estimated that mathematics “covered nearly 30 per cent of the
half of Schumpeter’s syllabus that was not dedicated to jurisprudence.”
1⁹ Schumpeter’s studies at the Export Academy went largely unnoticed by his biographers, but was
pointed out by Hedtke and Swedberg (2000, p. 5). Our recent findings on his grading originate from the
Archive of the Vienna University of Economics and Business, Report Cards of Josef Schumpeter, 1902/3
to 1904/5, and First Main Catalogue, First Volume, Colloquia (from 1901 to 1908/9).
2⁰ The title translates as “The Nature and Content of Theoretical Economics.”
21 Then called Czernowitz, located in the Habsburg Empire’s eastern provinces (now western
Ukraine).
OUP CORRECTED PROOF – FINAL, 3/12/2020, SPi
authored what is arguably his most original and important work:22 the Theory of
Economic Development (henceforth TED; translated to English in 1934). In 1911,
Schumpeter became a full professor at the University of Graz. When in 1913 he left
for Columbia University to work as visiting professor for a year, his wife Gladys
chose to return to England. After Schumpeter came back to Graz, the outbreak of
the First World War made her return unlikely and the communication between
them increasingly difficult. According to McCraw, by 1920 he considered himself
unmarried, without ever having bothered to get a formal divorce.23 More recently,
however, new evidence confirmed that the spouses were formally divorced on
December 24, 1920, at the district court “Innere Stadt” in Vienna.
During the First World War Schumpeter was a pronounced pacifist opposing
attempts at a custom union with Germany, since he feared this would be the
first step toward a further consolidation of the German-speaking territories.2⁴
In private communication, he advocated a separate peace treaty of the Austro-
Hungarian Empire with the Allied forces, anticipating that the Habsburg monar-
chy would in the end suffer the greatest losses among any war participants.
According to McCraw, his political vision at the time was to save the empire
through a gradual transformation toward constitutional monarchy, similar to the
British example.2⁵
Yet with the end of the First World War the political order in which Schumpeter
had grown up inevitably fell apart. Immersing himself first in politics and then
business, in the war’s aftermath he also found his private life shattered by a series
of spectacular failures. Schumpeter later referred to this period as the gran rifiuto
or “great waste” of his life.2⁶ It began quite innocuously with an economic text
on the crisis of public finance (Die Krise des Steuerstaates; henceforth KSS, 1918),
in which Schumpeter addressed the challenges of economic reconstruction. On
recommendation of Rudolf Hilferding2⁷ he became state secretary for finance in
the coalition government headed by the socialist Karl Renner in March 1919. How-
ever, lacking any party affiliation, independent power base, political experience or
skills, he was forced to resign by August of the same year when the cabinet refused
to support his first financial plan.
To make a brief story2⁸ even shorter, within five months Schumpeter had
managed to alienate the socialist members of the cabinet (in particular the foreign
minister Otto Bauer) by openly opposing unification with Germany, advocating
the complete repayment of the state’s debts, and impeding nationalization by
supporting the sale of industrial shares to foreign investors. At the same time, he
lost the support of the conservative party by demanding a capital levy on all liquid
assets of companies and private citizens in order to curb the post-war inflation.
While the economics behind his proposals seem reasonable, Schumpeter lacked
the awareness and skills with which to form political alliances and antagonized
the cabinet with his solitary, know-it-all demeanor, which bordered on disloyalty.
In light of these shortcomings, few people appreciated his economic principles. Of
those who did, one was his former teacher at the University of Vienna, Friedrich
Wieser. In his diaries he acknowledged that Schumpeter was “not misled by
prevalent sentiment” and “has courage, an asset which cannot be over-praised.”2⁹
After Schumpeter dropped out of the cabinet he had no inclination to return to
his academic position at the University of Graz. Instead, he was keen to live out his
theoretical vision by actively participating in the post-war reconstruction effort,
both as president of the Biedermann Bank and as the co-founder of an industrial
group investing in new, mostly technology-oriented start-up companies. Both
ventures, however, failed, leaving Schumpeter with a large personal debt to pay
off throughout many years to come. Still, he was fortunate to be cleared of any
legal accusations.
In 1925, Schumpeter escaped his inevitable social decline in Vienna by accept-
ing an appointment to hold a chair at the University of Bonn. With the prospect
of another prestigious social position and regular income, he rushed to propose
marriage to Anna Josefina Reisinger (1903–26).3⁰ Yet, according to Austrian law,
Schumpeter’s earlier divorce was considered an obstacle to (re-)marriage and
required formal special permission.31 In Catholic Austria this permission was
— Jos te olisitte sotilas junkkeri tai nuori husaari, niin ette puhuisi
noin, vaan vetäisitte sapelin tupesta ja puolustaisitte koko Venäjää.
— Miten niin?
— Siihen juuri.
— Aljoša, voitko heti tulla tänne luokseni vai etkö? Tekisit suuren
palveluksen.
3.
Veljekset tutustuvat
— Sinä siis muistat sen? Anna tulla vain hilloakin, pidän siitä
vieläkin.
— Pidän, Ivan. Veli Dmitri sanoo sinusta: Ivan on kuin hauta. Minä
sanon sinusta: Ivan on arvoitus. Sinä olet vieläkin minulle arvoitus,
mutta jonkin verran olen jo päässyt sinusta selville, senkin vasta tänä
aamuna!
— No?
— Sitä vain, että sinä olet aivan samanlainen nuori mies kuin
kaikki muutkin kolmenkolmatta vuoden ikäiset nuorukaiset,
samanlainen nuori, perin nuori, raikas ja kelpo poika, no,
sanokaamme keltanokka! Mitä, enhän vain loukannut sinua kovin
pahasti?
— Matkustan.
— Luullakseni ei.
— Jos sinä matkustat huomenna pois, niin mikä iäisyys tässä on?