This file is a single-author economic theory article, reprinted from the Review of Economic Statistics. Its scope is methodological and substantive: Schumpeter proposes an apparatus for studying capitalist fluctuations by coordinating history, statistics, and theory.
The purpose of this paper is to explain the main features of an analytic apparatus which may be of some use in marshaling the information we have and in framing programs for further research.
Schumpeter begins by separating “outside factors”—wars, political shocks, legal changes, weather, gold discoveries—from fluctuations generated by business life itself. He does not deny the force of external disturbances; rather, he brackets them to ask whether capitalism has an endogenous wave-form. This is the paper’s governing question:
This being so, the question arises whether there are any fluctuations at all which arise out of the behavior of business communities as such and would be observable even if the institutional and natural framework of society remained absolutely invariable.
The central conceptual move is to distinguish growth from innovation. Growth is continuous, absorbable change: population increase, savings, ordinary expansion. Innovation is discontinuous alteration in the economic organism itself.
This historic and irreversible change in the way of doing things we call "innovation" and we define: innovations are changes in production functions which cannot be decomposed into infinitesimal steps.
Schumpeter’s famous example gives the point its sharpest form:
Add as many mail-coaches as you please, you will never get a railroad by so doing.
The article’s main thesis follows from this distinction. A purely economic business cycle cannot be explained by mere growth, nor by exogenous shocks, nor by money and credit alone. It arises from the capitalist insertion and absorption of innovations.
If there be a purely economic cycle at all, it can only come from the way in which new things are, in the institutional conditions of capitalist society, inserted into the economic process and absorbed by it.
Prosperity begins when clustered innovations pull the system away from a neighborhood of equilibrium. Credit creation expands expenditure before the new commodities or services fully arrive. When they do arrive, they displace older firms, techniques, and investments, compelling liquidation and readjustment. Depression is thus not simply accidental collapse but part of the mechanism by which capitalist development is digested. Secondary waves—expectations, errors, speculative psychology, reactions to rates of change—intensify the movement but do not constitute its primary cause.
Schumpeter’s model yields a four-phase cycle, while insisting that revival and prosperity must not be confused.
Hence we have as a rule four phases: prosperity, recession, depression, and revival.
A further move is the hypothesis that innovations cluster. Once resistance to a new practice is overcome, imitation and related ventures multiply; specific industries ignite broader movements. This leads Schumpeter away from a single-cycle theory toward superimposed cycles.
But there is no ground to believe that there should be just one wave-like movement pervading economic life.
He therefore proposes a “three-cycle schema”: Kondratieff long waves of roughly fifty-four to sixty years, Juglar cycles of nine to ten years, and shorter Kitchin cycles of about forty months. These are not offered as formal laws but as historically meaningful working hypotheses. Long waves are interpreted through industrial epochs: the so-called industrial revolution, steam and steel with railroadization, and later electricity, chemistry, and motor cars.
The article is also a critique of monetary and purely statistical explanations. Credit expansion matters, but only as the monetary complement of innovation; to treat it as an autonomous cause mistakes symptom for mechanism. Likewise, trend fitting and extrapolation are suspect when trends are themselves results of clustered cyclical change.
Schumpeter closes with a research program. Adequate cycle theory requires better “systematic” series, detailed industrial monographs, and quantitative evidence about investment, credit contraction, wages, consumption, and sectoral response. The relevance of the essay lies here: it makes economic dynamics inseparable from industrial history, and it treats capitalism not as equilibrium disturbed from outside but as a system whose progress normally takes wave-like, disruptive form.
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