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Modern Prophets: Schumpeter or Keynes? - Page 5
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Schumpeter was himself a student of the great men of Austrian economics and at a time when Vienna was the world capital of economic theory. He held his teachers in lifelong affection. But his doctoral dissertation - it became the earliest of his great books, The Theory of Economic Development (which in its original German version came out in 1911, when Schumpeter was only twenty-eight years old) - starts out with the assertion that the central problem of economics is not equilibrium but structural change. This then led to Schumpeter's famous theorem of the innovator as the true subject of economics.
Classical economics considered innovation to be outside the system, as Keynes did, too. Innovation belonged in the category of "outside catastrophes" like earthquakes, climate, or war, which, everybody knew, have profound influence on the economy but are not part of economics. Schumpeter insisted that, on the contrary, innovation - that is, entrepreneurship that moves resources from old and obsolescent to new and more productive employments - is the very essence of economics and most certainly of a modern economy.
He derived this notion, as he was the first to admit, from Marx. But he used it to disprove Marx. Schumpeter's Economic Development does what neither the classical economists nor Marx nor Keynes was able to do: It makes profit fulfil an economic function. In the economy of change and innovation, profit, in contrast to Marx and his theory, is not a Mehrwert, a "surplus value" stolen from the workers. On the contrary, it is the only source of jobs for workers and of labour income. The theory of economic development shows that no one except the innovator makes a genuine "profit"; and the innovator's profit is always quite short-lived. But innovation in Schumpeter's famous phrase is also "creative destruction." It makes obsolete yesterday's capital equipment and capital investment. The more an economy progresses, the more capital formation will it therefore need. Thus what the classical economists - or the accountant or the stock exchange - considers "profit" is a genuine cost, the cost of staying in business, the cost of a future in which nothing is predictable except that today's profitable business will become tomorrow's white elephant. Thus, capital formation and productivity are needed to maintain the wealth-producing capacity of the economy and, above all, to maintain today's jobs and to create tomorrow's jobs.