For most of his life, Joseph Schumpeter, the prophet of
innovation, was seeking an exact science. It would be a science that would precisely
predict the economic developments including innovations. However, Schumpeter’s
quest for exact economics ended quietly in the penultimate year of his life in
1948. How did this transformation happen? Let’s look in this article.
“Despite all his
pioneering work of integrating other disciplines into economics, Schumpeter in
the mid-1940s was still looking for a key to ‘exact economics’ in the sense of
a determinate and predictive science”. Thus begins the penultimate chapter (Chapter
27) of Schumpeter’s biography “Prophet
of Innovation” written by Thomas McCraw. What, according to Schumpeter, was
the key hurdle in creating such an exact science?
One hurdle Schumpeter felt was mathematics. He performed daily
exercises in calculus and tried to master advanced techniques such as matrix
algebra. In fact, he thought that a new type of mathematics may be needed for
the exact science. However, as Schumpeter delved more into the business
history, he started discovering a completely different barrier in creating a
predictive science.
As Schumpeter studied business history he asked the
question – “Who was it that acted, how and why and what may be the effects that
may be traced to such actions?” As he analysed various innovations he realized
that a creative response which is “outside the range of existing practice” can
never be predicted and is therefore indeterminate. He called this insight –
Principle of Indeterminateness. He announced the verdict of his quest in his
presidential address at the annual meeting of the American Economic Association
on December 30, 1948 (see the picture above).
Schumpeter had realized that social location of
individuals plays a significant role in shaping their intuition which in turn
determines their creative response. In fact, he felt that psychology is at the
heart of all social sciences. And he noted with regret that economists did not
consult or work with professional psychologists. Instead they preferred to
invent their own assumptions about the mental processes of producers, consumers
and people in general.
It would take another half a century before a
psychologist (Daniel Kahneman) would get a Nobel Prize in Economics.
Incidentally, the first cognitive illusion Kahneman would discover – the illusion
of validity – would be closely linked to the principle of indeterminateness. Kahneman
writes in the chapter titled “The illusion of validity” in his book “Thinking, fast and
slow” – The main point is not that people who attempt to predict the future
make many errors… it is that the errors of prediction are inevitable because
the world is unpredictable.
Joseph Schumpeter,had views to inculcate entrepreneurial zeal, which is very important fora nation to grow,
ReplyDeletethanks for bringing him in people's memory, n out of school n college books.