Joseph A. Schumpeter [1883-1950] Économiste autrichien classique, professeur à l'Université de Harvard, aux États-Unis, à partir de 1932, 1883-1950 (1939) BUSINESS CYCLES A Theoretical, Historical and Statistical Analysis of the Capitalist Process Abridged, with an introduction, by Rendigs Fels Un document produit en version numérique par Didier LAGRANGE, bénévole, Chef de projets dans une entreprise du secteur automobile, France Courriel: lagrange2@free.fr Dans le cadre de: "Les classiques des sciences sociales" Une bibliothèque numérique fondée et dirigée par Jean-Marie Tremblay, professeur de sociologie au Cégep de Chicoutimi Site web: http://classiques.uqac.ca/ Une collection développée en collaboration avec la Bibliothèque Paul-Émile-Boulet de l'Université du Québec à Chicoutimi Site web: http://bibliotheque.uqac.ca/ Joseph Schumpeter, Business Cycles. (1939) 2 Cette édition électronique a été réalisée par Didier LAGRANGE, bénévole, Chef de projets dans une entreprise du secteur automobile, France à partir de : 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 Polices de caractères utilisée : Pour le texte: Times New Roman, 14 points. Pour les citations : Times New Roman, 12 points. Pour les notes de bas de page : Times New Roman, 12 points. Édition électronique réalisée avec le traitement de textes Microsoft Word 2004 pour Macintosh. Mise en page sur papier format : LETTRE (US letter), 8.5’’ x 11’’) Édition numérique réalisée le 14 juillet 2007 à Chicoutimi, Ville de Saguenay, province de Québec, Canada. Fichier revu et corrigé le 31 mars 2008. 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, 1 st 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 [...]... the rationale of the idea of variables that do not vary, the justification of the schema of a stationary economic process The values of prices and quantities which are the only ones, the data being what they are in each case, to satisfy those relations, we call equilibrium values The state of the system which obtains if all prices and quantities take their equilibrium values we call the state of equilibrium... could arise only from those aggregates Such reasoning is at the bottom of much faulty analysis of business cycles It keeps analysis on the surface of things and prevents it from penetrating into the industrial processes below, which are what really matters It invites a mechanistic and formalistic treatment of a few isolated contour lines and attributes to aggregates a life of their own and a causal significance... nature of economic phenomena only if it is possible to deduce prices and quantities from the data by means of those relations and to prove that no other set of prices and physical quantities is compatible with both the data and the relations The proof that this is so is the magna charts of economic theory as an autonomous science, assuring us that its subject matter is a cosmos and not a chaos It is the. .. setting of the new countries, the exports into and the imports from them, are part of the economic process, as they are part of economic history, and not outside of it Again, the invention of, say, the Montgolfier balloon was not an external factor of the business situation of its time ; it was, indeed, no factor at all The same is true of all inventions as such, witness the inventions of the antique... however, there is some freedom of choice between combinations, which means that it is possible to produce the bushel of wheat either with, say, a certain quantity of land and a certain quantity of labor or with more land and less labor or less land and more labor, other factors remaining constant, then the economic problem emerges in the shape of considerations about costs and values This is what is usually... hostility to it as soon as it was rigorously defined and made to stand out in all the gauntness of its abstractions This was attempted by the physiocrats and definitely achieved by Leon Walras The Marshallian structure is based upon the same conception, which it is important to emphasize in view of the fact that Marshall did not like it and almost made it disappear from the surface of his exposition The commonsense... listed in the same category as far as they may be considered, from the standpoint of the business organism, to be chance events But it is a fact that variations in the total supply of gold often come about in response to business situations and in exactly the same Joseph Schumpeter, Business Cycles (1939) 15 way as variations in the supply of any other commodity The variations in the monetary supply of gold... either by the monopolists themselves or by some agency which takes them away from the monopolists, for otherwise they would change the stationary flow As far as monopoly gains are due to the peculiar quality of some factor or to a monopolistic organization of those who own the factor, these gains will simply appear as wages or rents and may be entered into the appropriate category If there are appliances,... become an external factor, for it was not directly relevant to the course of the economic process at all It acquired relevance only as and when the new possibilities were turned into commercial and industrial reality, and then the individual acts of realization and not the possibilities themselves are what concern us Those acts, the formation of companies for the exploitation of the new opportunities, the. .. and of its application to one country dictated omitting virtually all the statistical 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 serviceable statistical technique The criticism was just, and omitting the statistical chapters may be deemed no great . contains a dis- 1 The full citation is Joseph A. Schumpeter, Business Cycles : A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, 1 st edition (New York and London. 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. Central Bank in Europe may be itself an act of business behavior and an element of the mechanism of cycles, as well as an external factor ; and so may collective measures taken by the business