Schumpeter on Economic Science

Throughout his career, Schumpeter reflected on what it meant for economics to be scientific, these reflections culminating in his posthumous History of Economic Analysis (1954). The most fully developed statement of Schumpeter's approach to science came in his earliest book.

[T]he expressions “explanation” and “description” are generally synon­ymous for us, or in other words, we do not want and cannot contribute anything other than description to the explanation and understanding of economic facts.... A theory constructs a scheme for facts; its aim is to give a brief representation to an immense amount of facts and to achieve as simply and completely as possible what we call understand­ing.. I want to talk not about the “cause” of phenomena but only about functional relationships between them. This brings greater pre­cision. The concept of function is carefully elaborated by mathematics and has clear, unquestionable contents, but that is not the case with the concept of cause.²⁸

This perspective led Schumpeter to be skeptical of providing psychological explanations for theoretical assumptions; he preferred the subjective theory of value, not because it could be justified using arguments from psychology, but because it fitted the economic facts better.²⁹

Schumpeter's first book, with its instrumentalist approach to economic theory, though little known in the English-speaking world, was widely debated in Germany.

After arriving at Harvard, Schumpeter continued to think systematically about the scientific method, his later views finding expression in his post­humously published A History of Economic Analysis (1954), on which he had been working since 1940.³¹ In that book, Schumpeter argued that economics had progressed in fits and starts, experiencing repeated “classical situations” in which synthetic works usher in periods of consensus that are eventually shattered.³² Underlying this was the view that scientific knowledge had to be understood in relation to the practitioners who created it.^g Science was “tooled knowledge,” produced by a community of professionals with shared problems and methods of inquiry.

Economic analysis was, for Schumpeter, synonymous with economic science, covering economic history, statistics, and economic sociology, as well as economic theory. However, it was economic theory to which he attached the greatest importance. He tried to argue that economic theory

f. Schumpeter was later to criticize Keynes, as well as Ricardo, for the sin that he had mentioned in his lectures—for piling up assumptions until the conclusions they wanted followed inexorably from their assumptions, creating the illusion that the policies he supported had firmer foundations than was in fact the case (Schumpeter 1954, p. 1171; Triffin 1950, p. 415).

g. This view of science was rooted in the interdisciplinary Pareto Circle, discussed in chapter 21 this volume, which formed part of what Isaac (2012) has termed Harvard's interstitial academy. Schumpeter's view of how economics developed exhibits parallels with that found in Thomas Kuhn's Structure of Scientific Revolutions (1962), a book that arose out of the same environment (on Schumpeter and Kuhn, see Backhouse 1998b, chapter 14; on Kuhn and Harvard, see Isaac 2012). could do more than simply generate explanatory hypotheses. Citing math­ematician Henri Poincare’s argument that “tailors can cut suits as they please; but they try to cut them to please their customers,” he argued that economic theories, though they might be framed in the light of observa­tions, were “arbitrary creations of the analyst.”³⁴ Economic theorists used this freedom to create tools—concepts, relations between concepts, and methods for handling them—that could then be used to solve problems. Economic theory was, as Joan Robinson had argued, “a box of tools.

Schumpeter will have reinforced the view that Samuelson was to hear even more forcefully from Wilson that there was nothing specifically physi­cal about the mathematics used in physics, even if it had been developed with physics in mind. It was simply mathematics, and it should be used in economics if it fit the problems economists were trying to solve. What econo­mists must not do was pretend that the successful use of mathematical tools in physics gave them authority in economics—the sin that Hayek termed “scientism.”³⁶ Most economists were not guilty of scientism, even if some of them had made near-meaningless programmatic statements that described only poorly what they were actually doing. It was true, Schumpeter admit­ted, that physical analogies were frequently used in the classroom, but this simply reflected human thought processes.

It therefore seems as though the things we are accused of borrowing are merely the reflexes of the fact that all of us, physicists or econo­mists, have only one type of brain to work with and that this brain acts in ways that are to some extent similar whatever the task it tackles.³⁷

Schumpeter’s belief that the future lay with mathematical economics is shown clearly in a letter he wrote to Haberler in March 1933, in which he compared himself with Moses: he knew that the Promised Land of a more exact eco­nomics required the use of mathematics, but he knew that he was too old to enter it. In contrast, Haberler was young enough to enter, and Schumpeter encouraged him to overcome his reluctance to engage in mathematical analy­sis. “Forgive my preaching,” he wrote, “if we confine ourselves to telling each

h.

other that it is impossible, we shall never get beyond what is a rather uncom­fortable transition stage. It is supreme courage that is wanted just now.”³⁸ In the same terms, Schumpeter encouraged Samuelson, “Moses-like” to enter “the Promised Land of Pareto, Hotelling, Tinbergen and Frisch” through discovering and using new mathematical tools.³⁹

Mathematics was important because it was a concomitant of the focus on the formal structure of economic theory that was necessary in order to show that seemingly inconsistent theories were, in fact, compatible with each other, thereby revealing the terminological humbug with which econo­mists sought to differentiate their theories. This attitude toward economic theory, which fits well with the attitude Samuelson was to adopt, explains why Schumpeter was such an enthusiast for mathematical economic theory. Economics was quantitative because certain aspects of economics, notably prices, were inherently numerical and hence mathematics was required for many problems, for it was the only language for dealing with more than the most primitive quantitative arguments.⁴⁰ This did not mean that economics had to be mathematical, for there was much that could be done without its help: mathematics was not needed to study “the history of business organiza­tion, the cultural aspects of economic life, economic motive, the philosophy of private property, and so on.”⁴¹ History and sociology were essential.

However, despite his enthusiasm for mathematics, his attitude toward it was far from simple. As Bergson noted, Schumpeter was not a proficient mathematician, which was why he had been replaced after two years by Leontief as the lecturer on Ec. 8a (Mathematical Economics).⁴² However, Haberler claimed that Schumpeter acquired great mathematical knowledge and that he was an effective expositor even of material that mathematical economists found difficult.⁴³ He used little mathematics in his own work in which economic theory was combined with history and sociology.

Similar remarks could be made concerning his attitude toward empiri­cal work. His first publications, in 1905, had been in statistics—on pop­ulation measurement and index numbers.⁴⁵ Business Cycles, the book on which he was working for much of the 1930s, was packed with statistics. However, rather than trying to test a specific model, his use of statistics resembled what one reviewer, Simon Kuznets, called “an intellectual diary” in which theoretical ideas were discussed alongside historical facts.⁴⁶ Jan Tinbergen, who in the 1930s was constructing macroeconometric mod­els for the League of Nations, explained Schumpeter's attitude in terms of the distinction, introduced by Ragnar Frisch, between the mechanism that generates cycles and the exogenous shocks that keep fluctuations going. “Schumpeter,” he wrote, “shows a scarcely-hidden preference for the shocks to be the ‘true’ ‘causes' and tends to belittle the importance of the mechanism.”⁴⁷ For example, Schumpeter focused on the innovations that disturbed equilibrium rather than on the mechanics of how innovations diffused through the economy. In contrast, for the most economists who came after him, the mechanism, amenable to mathematical modeling, was more important than the shocks.

The complexity of Schumpeter’s attitude toward mathematics—something about which he had thought carefully since his first publication on the sub­ject in 1906—was explained in a letter he wrote to Wilson in May 1937, after auditing his course. The economist, he wrote, should not try to copy arguments from physics, but should “learn from physics how to build up an argument.”⁴⁸⁷ Schumpeter believed that there were methods and procedures that, while not pure mathematics, were sufficiently general that they were applicable to many fields and should be taught to all students. He suggested that part of what Wilson was teaching, presumably including its discussions of thermodynamics and economics, could be developed into such a course.

Samuelson remembered having been very much influenced by what he described as Schumpeter’s “off-the-cuff general methodological remarks,” such as that “You never in economics kill a theory by a fact; you kill a theory by a better theory.”⁴⁹ However, Schumpeter’s influence may have gone deeper, for he would have exposed Samuelson to an instrumentalist, practice-oriented view of science that was consistent with what he was to learn from Wilson, and that would be reinforced by the scientists he would meet when he entered the Society of Fellows. Of particular interest is what Schumpeter might have taught about how individual behavior should be analyzed. Haberler has claimed that Schumpeter had changed his views on the so-called psychological method, in that “in his theory classes at Harvard and in conversation he often argued on ‘psychological grounds,’ using intro­spection in favor of cardinal utility or, occasionally, even for the possibility of inter-individual comparison of utility.”⁵⁰ However, this remark needs to be treated with caution, given Schumpeter’s penchant for taking competing positions seriously and given that utility measurement was widely debated by his colleagues. It is important to note that echoes of the instrumentalist

i. These remarks by Schumpeter are discussed in relation to Wilson’s views on mathematics in chapter 8 this volume.

position on utility theory found in Schumpeter’s Das Wesen (1908) can also be found in his posthumous History of Economic Analysis (1954). What is per­haps most significant here is less his intense dislike of utilitarianism than that he made a very clear distinction between utilitarianism as a normative system, in which all human values were reduced to utility, and utilitarianism as a system of social science. Thus, he wrote that “it is logically possible to despise utilitarianism, root and branch, both as a philosophy of life and as a political program and yet to accept it, as an engine of analysis, in all or some of the departments of the social sciences.”⁵¹ Though expressed very differ­ently, this was an expression of the clear separation of welfare analysis and consumer theory that Samuelson was making when he started publishing. Also, as noted previously, Schumpeter was an early exponent of the method of comparative statics.