Schumpeter's Theory of Interest

This file is a single-author scholarly essay in economic theory and history of economic thought. Haberler’s subject is Schumpeter’s theory of interest as part of the theory of capitalist development. His thesis is discriminating rather than dismissive: the zero-interest doctrine is untenable, but Schumpeter’s more moderate dynamic account remains a major correction to static capital theory.

A thorough understanding of Schumpeter's views on the problem of the interest rate requires, I believe, that we distinguish between an extreme and a less extreme version of his theory.

That distinction structures the essay. In the “extreme” version, a stationary circular-flow economy has no interest; the positive rate observed in capitalism arises wholly from innovation financed by bank credit. Haberler treats this as a contingent appendage to Schumpeter’s system, not its foundation.

The extreme version of his theory is hardly acceptable.

Haberler reconstructs the logic behind the extreme claim. It requires two assumptions: no systematic time preference and zero marginal productivity of capital in the absence of entrepreneurial innovation. Transcribed into Fisher’s diagram of present and future income, those assumptions do yield a zero rate. But the translation also shows why the argument is fragile. Haberler doubts that people are indifferent between present and future consumption, especially over long spans, and he resists the view that all productive investment depends on new entrepreneurial breakthroughs.

But I personally do not doubt that the majority of people do have a positive time preference in the proper sense, at least for more distant periods.

The second premise fares no better. Haberler distinguishes the exhaustion of investment opportunities from the specifically Schumpeterian claim that major investment requires the entrepreneur financed by inflationary bank credit. He sides broadly with the “optimists” who think that even if technical progress stopped, many routine outlets for capital would remain. This is his central move against the zero-interest thesis: capitalism can contain non-revolutionary investment that static managers can undertake, so a stationary or quasi-stationary economy need not have a zero rate.

In my opinion, he could have made even greater concessions without damage to his main argument.

That sentence marks Haberler’s charitable reconstruction. Once ordinary time preference and routine investment are admitted, Schumpeter’s extreme theory collapses; but his main theory of capitalism does not. The “less extreme” version concedes a positive stationary rate, while insisting that capitalist development qualitatively transforms the interest problem. Static theorists assume uniform rates, certainty, and free access to capital markets. Schumpeter’s world is instead one of uncertainty, new combinations, banks creating purchasing power, and outsider entrepreneurs forcing projects into the circular flow.

The essay’s most important historical claim appears in Haberler’s comparison with Mises and Hayek. They see credit expansion as unable permanently to enrich the capital stock because boom investments must be liquidated in busts. Schumpeter, by contrast, treats inflationary bank credit as a vehicle through which genuine innovations become real additions to the productive apparatus.

There can be hardly a doubt that there is much truth in his theory and that his dynamic, "disequilibrium" approach to the problem of development and of the business cycle is much more realistic and fruitful than the excessively static "equilibrium theory" of Mises and Hayek.

The final section deliberately reduces the importance of the rate itself. Dynamic capitalism may raise interest by increasing demand for funds, uncertainty, and prices; yet bank credit expands investible funds, and innovation-generated incomes become major sources of saving. Schumpeter’s anti-Keynesian view that saving is normally tied to investment intention further complicates any prediction.

This is, however, quite natural and proper because the rate of interest becomes a comparatively unimportant detail in the dynamic picture.

Haberler’s conclusion is that asking whether dynamic capitalism makes interest higher or lower than a hypothetical stationary benchmark is largely idle. The real significance of Schumpeter’s theory lies elsewhere: it relocates interest from a timeless equilibrium model into an economy transformed by credit, innovation, and entrepreneurial disruption. Schumpeter’s zero-interest proposition should be abandoned, but his less extreme theory remains powerful because it shows why static interest theory must be altered under realistic dynamic conditions.