Theoretical Problems of Economic Growth

Schumpeter’s 1947 essay is a methodological program for studying economic growth, not a completed theory of growth itself. He asks how economists and historians should define, measure, and explain long-run economic change without turning theory into metaphysics or history into mere description. Theory, for him, is legitimate only as an empirical aid to inquiry.

It will be understood, I trust, that in this paper the term theory means nothing that in any way transcends the domain of empirical analysis, that is to say, nothing that is in any way dependent upon “philosophical” or “metaphysical” or “speculative” premises.

The first problem is conceptual. “Economic growth” seems obvious in ordinary speech, but becomes unstable once the investigator asks what is growing: total output, output per head, output per worker, consumption, leisure-adjusted welfare, or something else. There is no single all-purpose measure; the appropriate concept depends on the historical question being asked. Schumpeter’s point is not skeptical but disciplinary: historians must define their object through the index, criterion, or comparison they choose.

Historians and economists seem to know well enough what they mean by economic growth or contraction.

The second problem is explanatory. Schumpeter surveys the many factors commonly invoked in accounts of growth: geography, institutions, political structures, war, inflation, technology, population, social attitudes, and human capacities. He does not deny their relevance, but he warns against merely naming them. A factor becomes explanatory only when the historian specifies the mechanism by which it operates and the circumstances under which it matters. Hence a history of growth must be causal without being monocausal.

Economic growth is not an autonomous phenomenon, that is to say, it is not a phenomenon that can be satisfactorily analyzed in purely economic terms alone.

This anti-reductionism is directed both against purely economic explanations and against simple reversals of them. Schumpeter rejects any view that makes economic life the master cause of all history, but he also rejects the idea that noneconomic forces can be treated as external causes acting on a passive economy. Growth belongs to an interdependent historical system in which political arrangements, institutions, inventions, demographic change, habits, opportunities, and economic structures mutually affect one another.

The essay’s strongest methodological insistence is that historians must move from lists of factors to analyses of process. To say that war, inflation, or population growth affected development is only a beginning. The real task is to trace channels, sequences, delays, alternatives, and feedback effects. Economic theory is useful here not as a supplier of universal laws, but as a set of tools for clarifying possible mechanisms and distinguishing plausible from empty explanation.

Schumpeter then criticizes the classical growth tradition associated with Smith, Mill, and Marshall. In that tradition, growth tends to appear as a continuous, quasi-natural process: population increases, saving accumulates, markets widen, division of labor deepens, productivity rises, and inventions are absorbed. Schumpeter objects to the automatism of this picture. It understates discontinuity, agency, and novelty; it makes capitalism appear to expand as though opportunities automatically called forth appropriate responses.

Against this, he introduces the distinction between adaptive and creative response. Adaptive response means adjustment within an existing pattern. Creative response means the formation of new combinations, new methods, new markets, or new forms of organization. This is where entrepreneurship enters the theory of growth.

I suggest that we take account of this by recognizing two, instead of only one, types of responses and that we may label them, respectively, adaptive and creative.

Creative response is historically decisive because it cannot be predicted simply from prior conditions. The same opportunity may produce routine adjustment in one setting and entrepreneurial transformation in another. Growth theory therefore cannot be complete unless it studies the social, institutional, and psychological conditions that make creative response possible.

Schumpeter’s closing emphasis falls on economic history itself. Historians, not abstract theorists alone, must identify actual mechanisms of growth in concrete settings. The essay’s enduring value lies in its disciplined middle position: it rejects philosophy of history, single-factor causation, and purely formal economics, while insisting that historical inquiry still needs theory to define concepts, organize evidence, and explain change.