Oskar Morgenstern’s Review of Schumpeter’s Theorie der Wirtschaftlichen Entwicklung (1927)

Oskar Morgenstern’s journal book review assesses the revised 1926 edition of Joseph Schumpeter’s theory of economic development. Its purpose is to identify changes in exposition and evaluate their significance, rather than restate a theory already familiar to economists. Morgenstern’s central judgment is that the revision substantially improves the presentation of an important dynamic economics without resolving every objection to its substance. He distinguishes continuity of argument from changes in form: the book has contracted from 548 to 369 pages, its concluding sociological interpretation has disappeared, and several chapters have been rewritten to clarify positions that Schumpeter believes were misunderstood.

The review first considers Schumpeter’s decision to secure his own theoretical position instead of engaging extensively with critics, especially Böhm-Bawerk. Morgenstern recognizes the explanatory gains but does not regard clearer formulation as a substitute for answering objections:

He has improved the statement of his theories; but it would be desirable too that the author should discuss and analyze the objections made against him.

This reservation qualifies the review’s enthusiasm. Morgenstern nevertheless allows that scientific periodicals may provide a better setting for controversy than the treatise itself. He thus separates the book’s success as an exposition from the continuing task of testing its arguments against criticism.

His chapter-by-chapter account makes entrepreneurial initiative the connecting principle of Schumpeter’s system. The opening treatment of circulation in a static economy remains essentially unchanged, apart from an appendix on economic statics. The completely rewritten second chapter supplies the decisive transition from this baseline to economic development:

The very important second chapter, on the phenomenon of economic development, is completely rewritten; the analysis of the functions of the entrepreneur, to whose initiative Professor Schumpeter attributes economic evolution, is remarkably keen, and doubtless throws much light on problems hitherto unsolved.

Morgenstern treats this analysis as the foundation for the subsequent theories of credit and cycles, not as an isolated account of business leadership. The third chapter addresses credit and capital, emphasizing the limitations of bank credit and reformulating a banking theory he describes as already widely accepted. The largely unchanged fourth and fifth chapters connect entrepreneurial gain with interest. In Morgenstern’s account, interest derives from entrepreneurial gain and therefore depends on the entrepreneur’s functions; those same functions generate the wave movement of economic activity. Development, finance, returns, and fluctuations consequently belong to one explanatory sequence.

The rewritten final chapter draws out that sequence’s implications for business cycles. Morgenstern calls it perhaps the most interesting chapter, while stressing that its argument requires the preceding analysis:

Many new supplementary suggestions are made; Professor Schumpeter sees the inevitable character of the cyclical movement; it is bound to occur so long as there is anything like an economic development.

The consequential distinction is between fluctuations inherent in development and their abnormal manifestations. As Morgenstern presents the argument, Schumpeter rejects explanations associated with Mitchell, Keynes, and Hawtrey that locate cycles solely in monetary variations and envisage eliminating those variations. Normal cyclical movement can disappear only with a return to a static economy. Panics and crises, however, might be reduced to the normal extent of fluctuation through a still-undeveloped therapeutics involving credit policy, forecasting, and trusts or trustlike enterprises. Morgenstern cautiously places the last proposal in a European, possibly specifically German, context.

The review closes by locating Schumpeter’s innovation within the Austrian School: a revolutionary dynamic economics developed in that tradition’s intellectual spirit. Morgenstern praises the revised book’s clarity without calling it easy reading. His strongest assessment concerns its prospective influence, which he believes has only begun, whatever ultimately survives of its particular theories. The review’s significance lies in this combination of conceptual enthusiasm and critical restraint: it recognizes the reach of an entrepreneur-centered explanation of development while keeping the adequacy of its answers to critics open.