Ascending capitalism

In the medieval feudal societies, finance had traditionally depended on the ownership of land as the foremost source of wealth and income. Over time, however, the excessive demand for resources by rivalrous European rulers, together with the continuous expansion of trade routes and international commercial relationships, offered opportunities for financial innovation, while the growing volume of transactions also led to increased specialisation. Finance, thus, gradually evolved from auxiliary services into a sophisticated business. This chapter tracks some major developments of the era, ranging from novel instruments to the management of sovereign debt, commercial credit and the origins of modern corporations, and addresses the early theoretical contentions that were induced by the expansion of financial innovation.

Marginalism and the Austrian School

The three chapters of Part II focus on Schumpeter's monetary theory of development. To begin with, the current chapter addresses his intellectual upbringing in the midst of the marginalist revolution and how he drew the lines to his intellectual kinship of the Austrian School. Studying in Vienna with two of the main proponents of the marginalist revolution, his own method and concepts were thoroughly rooted in its fundamental premises. First, the attention turns to its founders (Jevons, Walras and Menger), then to the influence of Schumpeter's teachers Böhm-Bawerk and Wieser. This is followed by a discussion of the monetary theory of Knut Wicksell, who systematically applied the marginalist principles to monetary matters. Finally, we ask how Schumpeter related to the monetary theories of Ludwig Mises and Friedrich Hayek.

The Biedermann Bank

The three chapters of Part III focus on Schumpeter's own financial ventures. To begin with, Chapter 8 is dedicated to the history of the Biedermann Joint Stock Bank, whose president Schumpeter was from its foundation in 1921 until 1924. Since credit played an outstanding role in his development theories, the Biedermann project must be considered the most essential part of Schumpeter's practical venture finance projects. While his banking activities have so far mainly been perceived as a speculative episode, here they are examined as a serious attempt to put his theoretical considerations of credit-based entrepreneurial development into practice. Despite his efforts, the project encountered severe economic turbulence in the spring of 1924. Its failure was due to unfavourable economic conditions, contradictory strategic orientations amongst the shareholder groups, and mistakes made by those in charge (including Schumpeter). New insights are revealed based on previously inaccessible documents from the Austrian State Archives and other so long neglected sources.

A legacy lost

The final Part IV attends Schumpeter’s legacy. To begin with, this chapter examines how his monetary ideas got left behind during his lifetime and the subsequent decades. First, it addresses the success of Keynes. While his Treatise on Money had pre-empted the field by advocating some very similar ideas, the General Theory was even more detrimental to Schumpeter, precisely because Keynes had abandoned many of the very elements they had previously held in common. Next the chapter turns to the Neo-Keynesian synthesis, which attracted many of Schumpeter’s disciples at Harvard such as Paul Samuelson or James Tobin. After a brief discussion of monetarism, the attention finally turns to the evolution of modern general equilibrium models, beginning with its origin in the Real Business Cycle analysis and moving on to the New Keynesian DSGE models.

In the current stream

While the previous chapter highlighted the resurgence of Schumpeter’s concept of money in economic theory, this chapter focuses on three examples from recent economic history in which the interdependence of finance and innovation invokes a deliberate Schumpeterian interpretation. The first example is about the striking rise of modern venture capital in Schumpeter’s immediate geographical and intellectual environment during his years at Harvard, to which he contributed a consistent intellectual frame (also through his personal ties with people like David Rockefeller, Frank Taussig, or George Doriot). The second example addresses the recurrent instances of financial crises, in particular the Great Recession of 2008-09, and invokes a Schumpeterian interpretation mainly via the instability theorem of his student Hyman Minsky. Finally, we turn to the stream of innovations that relate to the increasing digitalisation of money ranging from cryptocoins to central bank digital currencies (CBDC).

The Braun-Stammfest Industrial Group

In addition to his banking activities, Schumpeter actively pursued the ‘promoter’s profit’ during his brief and unfortunate history as a proto-venture capitalist. The activities that have so far received little attention from the research community are described in Chapter 9. Schumpeter invested on a grand scale in the foundation of new industrial firms. Given the poor condition of the industrial sites after years of a war economy, the economic rationale appeared sound, but the financial scheme, timing, and practical execution were not. In addition to spending his own wealth, he borrowed heavily from his privileged bank account and raised considerable funds from third parties. Having established large leverage, he was unable to refinance short-term loans when Austria was hit with a major banking crisis in 1924. As the factories failed before they could produce any significant cash flow, Schumpeter learned the perils of high leverage the hard way.

Finance and economic evolution

The final chapter of Part II highlights Schumpeter's seminal theory of economic development as a deliberate monetary conception and its genuine account of the nexus between finance and the real economy. Innovation and creative destruction critically depend on the creation and reallocation of purchasing power through finance. The chapter offers a brief reconstruction, which assimilates Schumpeter's further elaborations on selected themes in his later publications along several basic premises, such as open opportunity sets, entrepreneurship and innovation, temporary monopoly profits, or discontinuous change. Furthermore, venture investors must trust the entrepreneurs' vision and provide them with the purchasing power needed to control the means of production in advance. Successful innovations induce imitation and their progressive diffusion annihilates the temporary monopoly surplus, thereby decreasing prices, raising demand and fostering the overall growth of real income. Moreover, innovations do not occur independently, but are clustered, generating overlapping waves of business fluctuations.

Epilogue—a Schumpeterian heritage

A brief epilogue summarises the main threads of analysis and portrays Schumpeter’s monetary theory of economic development as an old and often unattended variety, which, however, is exceptionally rich in substance. It concludes that Schumpeter’s unique and comprehensive vision has endured particularly well, offering no less than an endogenous explanation of innovation, growth and development, business cycles and crises within a monetary economy that deliberately connects finance and real production. Moreover, the longer history unfolds, the more it seems to accord with his vision.

Early origins of money

Part I provides a synopsis of the ongoing stream of innovation in monetary and financial history, as well as the scholarly struggle to understand and assimilate it in the history of monetary thought. It serves as an introduction to the non-specialist, providing the general historical background. In the first of three chapters, the focus is on the early origins of money as a social institution. It is of significance to the later discussion of Schumpeter’s monetary theory for two reasons: first, the historical account illustrates the perpetual stream of new monetary arrangements and their importance to the real economy; second, the modern historical record puts into perspective the traditional preoccupation with metallism and the coinage of money as a means of exchange, which dominated the monetary orthodoxy at Schumpeter’s time. In other words, the early history of money highlights the modernity of Schumpeter’s later vision.

Introduction—Schumpeter’s life and vision

This introductory chapter begins with a brief prologue on the logos of panta rhei, or perpetual change. Arguably it is the single most characteristic attribute of Schumpeter’s theoretical vision, while at the same time perpetual change also characterised his turbulent personal vita. The introduction therefore offers a brief synopsis of his life and work, starting with his education and studies with the founders of the Austrian School of economics at the University of Vienna, his intermittent years of disastrous political and business ventures, as well as his return to academic work first at the University of Bonn and then at Harvard University. The final section explains the aim, scope and plan of the book, laying out the individual threads that will intertwine to tell its story.