# Joseph Schumpeter: Pioneer of Creative Destruction and Capitalist Theories

> **Definition**
>
> Joseph Schumpeter was an economist known for his theories on entrepreneurship and creative destruction describing how innovation drives economic growth by replacing outdated practices and technologies.

Joseph Alois Schumpeter (1883–1950) was a prominent economist and intellectual from the 20th century. Also a historian and author, the Austrian is considered one of the century's top intellectuals.

Schumpeter's major contributions included the theory of creative destruction, which describes the process where new innovations replace outdated systems. His theories on [business cycles](https://www.investopedia.com/terms/b/businesscycle.asp), entrepreneurship, and capitalist development had an impact on modern economics.

Schumpeter's ideas clashed with those of his contemporaries, such as John Maynard Keynes. For example, Keynes viewed the economy as healthy when in static equilibrium, while Schumpeter saw equilibrium as unhealthy and innovation as the economy's driver.

### Key Takeaways

*   Joseph Schumpeter was a renowned 20th century economist known for his theories on business cycles and capitalism.
*   He coined the term "creative destruction," describing how old industries are replaced by innovative ones.
*   Schumpeter introduced the concept of entrepreneurship as a key driver of economic growth.
*   His work, initially overshadowed by John Maynard Keynes, is now central to modern economic thought.
*   Schumpeter believed capitalism might be undone by its own success due to the rise of an intellectual class.

![Joseph Schumpeter](https://www.investopedia.com/thmb/L2h3rwaXBc8muY_HoszLhGlRoms=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/JosephSchumpeter_final-7ab4c804568d46d6ae64dbcf0a488bbc.png)

*Joseph Schumpeter introduced the concept of entrepreneurship as a key driver of economic growth. — Alison Czinkota / Investopedia*

## Joseph Schumpeter's Early Life and Academic Background

Schumpeter was born in Moravia (now the Czech Republic) in 1883, to German parents. He studied economics from the progenitors of the [Austrian school tradition](https://www.investopedia.com/articles/economics/09/austrian-school-of-economics.asp), including Friedrich von Wieser and Eugen von Bohm-Bawerk. Schumpeter was Austria's minister of finance, a bank president, and a professor. He taught at the University of Bonn from 1925 to 1932.

As the Nazi Party rose, he moved to the United States in 1932 to teach at Harvard. Fifteen years later, in 1947, he became the first immigrant to be elected president of the American Economic Association.

In the early 20th century, U.S. and British economics grew with a focus on static, math-based equilibrium models. Schumpeter’s work differed at times, typifying the continental European approach—more nuanced and less hypothetical—although some of his theories were drawn from [Walrasian](https://www.investopedia.com/terms/w/walras-law.asp) [general equilibrium](https://www.investopedia.com/terms/g/general-equilibrium-theory.asp) as well.

## Key Theories and Contributions of Joseph Schumpeter

Schumpeter made many contributions to economic science and political theory, but he is best known for his 1942 book "Capitalism, Socialism, and Democracy," which outlines the theory of dynamic [economic growth](https://www.investopedia.com/terms/e/economicgrowth.asp) known as [creative destruction](https://www.investopedia.com/terms/c/creativedestruction.asp). He is also credited with the first German and English references to methodological individualism in economics.

### Understanding Creative Destruction in Economics

Schumpeter's most enduring legacy came from a six-page chapter in "Capitalism, Socialism, and Democracy" titled “The Process of Creative Destruction.”

In this chapter, Schumpeter presented new insights, challenging the idea that markets naturally move to [equilibrium](https://www.investopedia.com/terms/e/equilibrium.asp) until [profits](https://www.investopedia.com/terms/p/profit.asp) vanish. Schumpeter argued that economic progress is often disjointed, abrupt, and not always peaceful. The economist used the term "creative destruction" to describe the dismantling of long-standing practices in order to make way for new technologies, new kinds of products, new methods of production, and new means of distribution.

Existing companies must quickly adapt to a new environment (or fail). If it sounds somewhat Darwinian—it is, Schumpeter intimated: a "process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one," as he wrote. "This process of creative destruction is the essential fact about capitalism.”

### Schumpeter's Vision of Entrepreneurship

In many respects, Schumpeter saw [capitalism](https://www.investopedia.com/terms/c/capitalism.asp) as a sort of ongoing revolution that disrupts the current social and economic hierarchy. And within this system, the [entrepreneur](https://www.investopedia.com/terms/e/entrepreneur.asp) becomes the revolutionary, upsetting the established order to create dynamic change.

Schumpeter is believed to be the first scholar to introduce the world to the concept—or at least, the economic significance of—entrepreneurship. He came up with the German word "Unternehmergeist," meaning entrepreneur-spirit, adding that these individuals controlled the economy because they are responsible for delivering innovation and technological change.

Entrepreneurs drive creative destruction by introducing new products and technologies that spur change. Entrepreneurial innovation and experimentation constantly destroy the status quo and introduce new equilibria, making possible higher [standards of living](https://www.investopedia.com/terms/s/standard-of-living.asp).

### Schumpeter’s Insights on Business Cycles

These theories tie in with Schumpeter’s belief in the presence of [business cycles](https://www.investopedia.com/terms/b/businesscycle.asp).

In Schumpeter's analysis, the history of capitalism has been punctuated by [long and short waves](https://www.investopedia.com/terms/k/kondratiev.asp). A long wave is prompted by a new set of technologies and industries coming into existence. According to this theory, major advances in innovation can be predicted to occur every 50 or 100 years.

"Barring very few cases in which difficulties arise, it is possible to count off, historically as well as statistically, six Juglars \[8-10-year business cycles\] to a Kondratieff \[50-60 years\] and three Kitchins \[40 months\] to a Juglar—not as an average but in every individual case,” wrote Schumpeter in his book "The Theory of Economic Development," published in 1911.

Schumpeter noted that when entrepreneurs disrupt industries, existing workers and businesses may face temporary losses. These cycles are tolerated, he explained, because it allows resources to be freed up for other, more productive uses.

## Real-World Example: Schumpeterian Creative Destruction

The internet is one of the best examples of creative destruction, the term that Schumpeter coined to describe the dismantling of long-standing practices in order to make way for new technologies, new kinds of products, new methods of production, and new means of distribution. Existing companies must quickly adapt to a new environment (or fail).

The advent of the internet rendered many products, methods of production, and means of distribution obsolete. It also caused a drastic curtailing of many jobs, including the roles of bank tellers, secretaries, travel agents, and retail store employees. With the rise of mobile internet technology, publishers of printed material—everything from magazines to maps—also suffered.

The internet, in addition to other innovations in the field of information technology—the microprocessor, the laser, fiber optics, and satellite technologies—have all fundamentally altered the way that business is conducted.

## Joseph Schumpeter vs. John Maynard Keynes

Over his many years in public life, Schumpeter developed informal rivalries with the other great economic thinkers of the West, including [John Maynard Keynes](https://www.investopedia.com/terms/j/john_maynard_keynes.asp), Irving Fisher, [Ludwig von Mises](https://www.investopedia.com/terms/l/ludwig-von-mises.asp), and [Friedrich Hayek](https://www.investopedia.com/terms/f/friedrich-hayek.asp). His work initially was overshadowed by some of these contemporaries, especially Keynes. Although they were born just a few months apart, the pair had radically different views.

> **Fast Fact**
>
> In his early career, Schumpeter derided the use of statistical aggregates in economic theory—likely a shot at Keynes—in favor of focusing on individual choice and action.

Keynes viewed the economy as healthy when in static equilibrium. Schumpeter rejected this theory, claiming that equilibrium is not healthy and that innovation is the driver of the economy. Both had contrasting views on government intervention, too. Keynes believed that a permanent equilibrium of prosperity could be achieved by central bank [monetary policies](https://www.investopedia.com/terms/m/monetarypolicy.asp). Schumpeter argued that government intervention increased [inflation](https://www.investopedia.com/terms/i/inflation.asp), destroying the economy.

## What Is Joseph Schumpeter’s 'History of Economic Analysis'?

At the time of his death, in 1950, Schumpeter was working on a new book, "History of Economic Analysis." In the book, Schumpeter attempts a complete history of the field of economics, from ancient Greece to the present day (the end of World War II). Not just limited to economics, the book also traced the history of political and philosophical ideas and served as a record of significant events.

Though unfinished, "History of Economic Analysis" is recognized for its wide scope and unique examination of key historical events. Some notable topics it addresses include the techniques of economic analysis, contemporaneous developments in other sciences, and the sociology of economics.

## What Did Joseph Schumpeter Believe Would Destroy Capitalism?

Schumpeter believed that capitalism would ultimately be destroyed by its success. He hypothesized that the economic system would eventually create a large intellectual class that survived by attacking the system of private property and freedom that was necessary for sustaining its own existence. Although Schumpeter predicted the demise of capitalism, he was an ardent supporter of it.

## What Is Joseph Schumpeter’s Innovation Theory of Profit?

Schumpeter believed that the was to introduce successful, well, innovations. The innovation theory of profit claims that the main function of an entrepreneur is to introduce, well, innovations—which Schumpeter defined as any new policy that reduces the overall cost of production or increases the demand for products. Any profit an entrepreneur receives from these efforts is a form of reward for their performance. Creating innovations was the first step on the path to success and economic profits for entrepreneurs.

## What Is Schumpeterian Growth?

Schumpeterian growth is economic growth that is driven by innovation and governed by the process of creative destruction. Formal economic models have been created that operationalize Schumpeter’s notion of creative destruction. These models of growth help economists understand the role of competition, firm dynamics, and cross-firm and cross-sector reallocation.

## The Bottom Line

Joseph Schumpeter's key contributions to modern economics include his introduction of the concept of entrepreneurship and its significance to the growth of capitalist economies.

His theory of creative destruction is important because it reshaped economic thinking regarding innovation and economic cycles. It has become the centerpiece for modern thinking on how economies evolve—especially capitalist ones.

Schumpeter had a rivalry with fellow economist John Maynard Keynes, and his ideas gained prominence over time, offering a different perspective on economic progress.

Schumpeter's theories on business cycles, capitalist development, and entrepreneurship have practical implications for understanding modern economic evolution. He introduced the concept of the entrepreneur and the influence of entrepreneurship on economic systems.

Schumpeterian growth—economic growth driven by innovation and governed by creative destruction—is relevant in today's economic context because entrepreneurs lead innovation and industry transformation. Economic models exist that run on his notion of creative destruction and help economists understand competition, firm dynamics, and reallocation.

> **Article Sources**
>
> 1.  Munich Personal RePEc Archive. "[Schumpeter, Lederer and Hilferding on Economic Development, Credit and Business Cycles](https://mpra.ub.uni-muenchen.de/74472/1/MPRA_paper_74472.pdf)." Pages 3–4.
>     
> 2.  Joseph Alois Schumpeter. "[Capitalism, Socialism, and Democracy](https://www.google.com/books/edition/Capitalism_Socialism_and_Democracy/6eM6YrMj46sC?hl=en)." Page 83. Start Publishing LLC, 2012.
>     
> 3.  Business Jargons. "[Schumpeter’s Innovation Theory of Profit](https://businessjargons.com/schumpeters-innovation-theory-of-profit.html#:~:text=Definition%3A%20The%20Innovation%20Theory%20of%20Profit%20was%20proposed%20by%20Joseph.&text=The%20innovation%20theory%20of%20profit%20posits%20that%20the%20entrepreneur%20gains,the%20demand%20for%20his%20product.)."