Every year when preparing for my doctoral seminar I reread (among other things) Schumpeter's Theory of Economic Development (1934). I think it is a great book with lots of insights, but also a number of problematic assumptions and conclusions. But what I find most fascinating is
how poorly it has been understood by scholars. For instance, many would refer to Schumpeter's circular flow as a modernistic equilibrium construct. It is not. Chapter 1 is very clearly a restatement of the value-based equalities per Say's Law. Schumpeter spends some time
discussing how a person's supply is his demand, that one does not have purchasing power unless one first provides value to another and thereby earns this purchasing power. Thus, (one's) demand is constituted by (one's) supply. Schumpeter interprets this as meaning there is no
saving and thus that there is no available capital for entrepreneurs to outbid others for resources. Therefore, he concludes, it is necessary that banks create credit (!) in order to provide entrepreneurs with new purchasing power so that they can procure the resources necessary
to implement their disruptive innovations. In other words, Schumpeter--a schooled Austrian--practically takes the cause of malinvestment in Mises's business cycle theory and draws the exact opposite conclusion. Both Mises and Schumpeter say how credit expansion incentivize and
facilitate entrepreneurship, but where Mises says this is not a reflection of consumers' lower time preference (increased saving) and therefore harmful (malinvestment), Schumpeter claims this is the only and proper way to break free from the strong "horizontal" value ties of the
market per Say's Law. The only way of facilitating investment that can take the economy out of its circular flow is credit expansion! Interestingly, both of the economic masters were schooled in the same tradition, both recognized the truth of Say's Law, both saw in the
entrepreneur the "driving force" of economic progress, but their interpretations of credit expansion are polar opposites. How can anyone interested in economic theory, the history of economic thought, etc. not find this curious and fascinating?
