bc-1395 mots-occurences

And never are they of such a nature that we could dispose of them according to the schema of, say, a pendulum continually exposed to numerous small and independent shocks.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

In order to put into relief the nature of time series and of the statistical problem they present, we will distinguish three types of variables, which we shall call theoretical, random or stochastic, and historical variables.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

We shall not, however, discuss this but merely notice the three standard instances of imperfect competition: Bilateral Monopoly, Oligopoly, and Monopolistic Competition.
1.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

Their most telling evi¬dence for the existence of Kuznets cycles consists of two circum¬stances, swings in the rate of growth of real GNP that average fifteen to twenty years, and the recurrence of deep depressions at similar intervals—there was one in the 1870s, one in the 1890s, there would (or might) have been one in the 1910s but for World War I, and there was one in the 1930s.

It superimposes itself on the disequilibrium caused by the setting up of the new plant and equipment and the expendi¬ture incident thereto.

The variations in the monetary supply of gold are never conditioned by chance discoveries alone.

Even a work like Yusif A. Sayigh's Entrepreneurs of Lebanon, which osten¬sibly takes Schumpeter's concepts as its starting point, actually deals with entrepreneurs as people—their education, religion, opinions, even the number of their children—to the neglect of what was central to Schumpeter's analysis, innovating activity and its impact.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

If we find that a system, without satisfying ligamina exactly, is as near to perfect equilibrium as it will go, and that it will not move from that position unless some event impinges upon it, we shall say that it is in imperfect equilibrium. 1 An equilibrium the imperfection of which consists exclusively in the facts that firms use more factors and keep larger stocks and balances than would be the case if they were organized according to the highest standard of efficiency possible un...

This impression is much intensified by the fact that the impact of external factors would of itself account for wavelike alterna¬tion of states of prosperity and of depression, both because some disturbances occur at almost regular intervals and because most of them induce a process of adaptation in the system which will produce the picture of a wavelike oscillation in every individual case.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

This means that the average annual rate of growth between the complete business cycle with peaks in 1869 and 1873 and the complete business cycle with peaks in 1873 and 1882 was higher than for neighboring pairs of cycles—in fact it was the highest on record for any successive pairs of cycles, in spite of the fact that the contraction included in the 1873-82 period is rated a deep depression, whereas the contraction phase of the preceding cycle was very mild.

Migra¬tions in particular are so obviously conditioned by business fluc¬tuations that no description of the mechanism of cycles can claim to be complete without including them, and including them—at least some of them—as internal factors.

Schum¬peter's concept of recession could illuminate it: previous innova¬tion must have made possible a great increase in output that imposed hardship—symptoms of depression—on all parts of the economy unable to adapt to the new conditions.

Moreover, Growth, but especially saving, owes its actual quantitative impor¬tance to another factor of change without which its modus oper¬andi in the capitalist world cannot be understood.

Schum¬peter's concept of recession could illuminate it: previous innova¬tion must have made possible a great increase in output that imposed hardship—symptoms of depression—on all parts of the economy unable to adapt to the new conditions.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

This is but a consequence of the fact that our economic system is not a pure one but in full transition to¬ward something else, and, therefore, not always describable in terms of a logically consistent analytic model.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

Among them is the mechanization of industry.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revo...

And the argument is that this somebody can, under conditions of perfect competition, get out of that loss or fully reap that profit in no other way than by decreasing or increasing the quantity of his commodity.

While the production function itself, in the case of a stationary economy, is a datum and invariant in form, the actual combinations of factors, as measured, for example, by coefficients of production, are among the variables of the problem, and must be determined by eco¬nomic considerations.

There is some reason to expect that such cases will increase in importance: on the one hand, technological research becomes increasingly mechanized and organized; on the other hand, resistance to new ways weak¬ens.

This means that the average annual rate of growth between the complete business cycle with peaks in 1869 and 1873 and the complete business cycle with peaks in 1873 and 1882 was higher than for neighboring pairs of cycles—in fact it was the highest on record for any successive pairs of cycles, in spite of the fact that the contraction included in the 1873-82 period is rated a deep depression, whereas the contraction phase of the preceding cycle was very mild.

our present argument we may thus visualize an economic process which merely reproduces itself at constant rates: a given population, not changing in either numbers or age distribution, organized for purposes of consumption in households and for purposes of production and trade in firms, lives and works in an unchanging physical and social (institutional) environment.

Again, we read a statement made by a high authority in our field, to the effect that it is not "capi¬talistic enterprise" but technological progress (invention, ma¬chinery) which accounts for the rate of increase in total output during the nineteenth century.

This is true not only of the way in which our business organism functions but also of its struc¬ture.

B. The Fundamental Question.—When we behold one of the familiar graphs of economic time series, we undoubtedly have the impression of an "irregular regularity" of fluctuations.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

Both create new possibilities and are no doubt among the most important causes of economic and social change.

Hence we arrive at the very important concept of factors acting from without {let us call them External Factors), which it stands to reason we must try to abstract from when working out an explanation of the causation of economic fluctuations properly so called, that is, of those economic changes which are inherent in the working of the economic organism itself.

But it is a fact that variations in the total supply of gold often come about in response to busi¬ness situations and in exactly the same way as variations in the supply of any other commodity.

Schum¬peter's concept of recession could illuminate it: previous innova¬tion must have made possible a great increase in output that imposed hardship—symptoms of depression—on all parts of the economy unable to adapt to the new conditions.

The decision on which our definition turns, may, but need not, result in the money leaving the saver's account and eventually reaching some commodity-market later than it would have done if retained in the service of financing consumptive expenditure.

Not only the lags envisaged in 2, but any kind of pro¬ visional equilibria, however conditioned, may create that diffi¬culty.

But if we refuse to do this, the discovery of America does not thereby become an external factor, for it was not directly relevant to the course of the economic process at all.

There will be no great effect at all if the abnormal harvest sells for the same amount of money as a normal one would, though there will be some dis¬turbance unless every individual household and firm spends the same amount on agrarian products which it spent before.

But for our purpose it is yet permissible to draw a line between the phenomena directly incident to the working of the economic system and the phe¬nomena produced by other social agencies acting on the economic system, however obviously this action may be conditioned by eco¬nomic situations or propelled by economic aim or class interest.

Finally, there are firms and industries which are forced to undergo a difficult and painful process of modernization, rationalization and reconstruction.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

Everything is financed by current receipts.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revo...

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

As common experience teaches, everything will turn out differently according as such a struggle occurs in a phase of expansion when demand curves shift upward, or in a phase of contraction when demand curves shift downward.

The most ambitious work of the trilogy setting forth "the Schumpeterian system," it has attracted less attention than his Theory of Economic Development or his Capitalism, Socialism, and Democ¬racy.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

No hypotheses enter into such concepts, which simply embody methods of description and measurement, nor into the propositions defining their relations (so-called theorems), and yet their framing is the chief task of theory, in economics as elsewhere.

This impression is much intensified by the fact that the impact of external factors would of itself account for wavelike alterna¬tion of states of prosperity and of depression, both because some disturbances occur at almost regular intervals and because most of them induce a process of adaptation in the system which will produce the picture of a wavelike oscillation in every individual case.

This impression is much intensified by the fact that the impact of external factors would of itself account for wavelike alterna¬tion of states of prosperity and of depression, both because some disturbances occur at almost regular intervals and because most of them induce a process of adaptation in the system which will produce the picture of a wavelike oscillation in every individual case.

And it is reckless or dilettantist hypothesis making which is responsible for both the dis¬credit into which theory has fallen and the contrast which for some students exists between factual (or "realistic" or "em¬pirical") and theoretic work.

After all, there is probably little that could be objected to in our recognition of the fact that it would not help us much, for instance in an analysis of the problems of foreign exchange, to deal indiscriminately with cases in which exchanges are deter¬mined by commercial factors alone and cases in which they are "pegged" as the French exchange was during the war.

The case may be put still more forcibly if we consider the railroadization and the electrifi¬cation of the whole world as single processes.

When dealing with the pure logic of the process, it is convenient to exclude savings —unless we define savings so as to cover replacement—since the man who saves obviously does something either to change his economic situation or to provide for a change in it which he foresees; and these cases violate, if we take the strictest view, the assumptions defining the stationary process.

Repayment of bank loans by entrepreneurs, annihilating balances, comes in to accentuate effects.

Even a work like Yusif A. Sayigh's Entrepreneurs of Lebanon, which osten¬sibly takes Schumpeter's concepts as its starting point, actually deals with entrepreneurs as people—their education, religion, opinions, even the number of their children—to the neglect of what was central to Schumpeter's analysis, innovating activity and its impact.

Moreover, if different ele¬ments or different sectors of the system work with different amounts of friction, lack of harmony will ensue, the more slowly and the more quickly adaptable elements getting out of step with each other.

But Abramovitz shows a "tentative" peak in the rate of growth of real GNP, after eliminating the effects of business cycles, which he dates 1874.25.9

Moreover, if different ele¬ments or different sectors of the system work with different amounts of friction, lack of harmony will ensue, the more slowly and the more quickly adaptable elements getting out of step with each other.

In this case it would be just as much an element of the business situation as is any other enterprise.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

It is primarily for this purpose that we shall now try to provide the analytic tools or a schema or model.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revo...

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

Such a process would turn out, year after year, the same kinds, qualities, and quantities of consumers' and producers' goods; every firm would employ the same kind and quantities of productive goods and services; finally, all these goods would be bought and sold at the same prices year after year.

We must go as far as possible into the past—because we have no other means of observing a large number of units of fluctuation —and hence historical research must be of paramount impor¬tance even for dealing with the most practical of contemporane¬ous problems.

Variations of crops due to natural causes, such as weather conditions or plagues, raise a problem only because of the diffi¬culty of separating them from variations due to other causes.

Their most telling evi¬dence for the existence of Kuznets cycles consists of two circum¬stances, swings in the rate of growth of real GNP that average fifteen to twenty years, and the recurrence of deep depressions at similar intervals—there was one in the 1870s, one in the 1890s, there would (or might) have been one in the 1910s but for World War I, and there was one in the 1930s.

Economic consideration can fully account for the former only; the latter must be accepted as data and all we can do about them in economic analysis is to explain their effects on economic life.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

But an entirely different question emerges behind this one.

our present argument we may thus visualize an economic process which merely reproduces itself at constant rates: a given population, not changing in either numbers or age distribution, organized for purposes of consumption in households and for purposes of production and trade in firms, lives and works in an unchanging physical and social (institutional) environment.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

Whenever a disturbance is the product of social processes, the difficult question arises whether it is not as much a consequence as a cause of economic events and situations and hence whether we are within our rights if we speak of it as "act¬ing from without the economic sphere."

The latter may even mean no more than that demand and cost conditions are more stable in some sectors than in others, or that a price holds place behind others in the time sequence of events.

The carrying into effect of the decision to acquire titles to income we shall call Investment.

Among them is the mechanization of industry.

Some even displayed hostility to it as soon as it was rigorously defined and made to stand out in all the gauntness of its abstrac¬tions.

If we scrutinize the motives and methods of Columbus's venture, we find that it would be by no means absurd to call it a business venture.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

Third, the concept of a state of equilibrium, although no such state may ever be realized, is useful and indeed indispensable for purposes of analysis and diagnosis, as a point of reference.

Economic consideration can fully account for the former only; the latter must be accepted as data and all we can do about them in economic analysis is to explain their effects on economic life.

This product differentiation must be interpreted with refer¬ence to its rationale, the creation of such a special market, hence very broadly: it comprises not only "real" but also "putative" differences, not only differences in the product itself, but also differences in the services incident to supplying it (atmosphere and location of shops included) and every device that enables the buyer to associate the thing he buys with the name of a particular firm.

our present argument we may thus visualize an economic process which merely reproduces itself at constant rates: a given population, not changing in either numbers or age distribution, organized for purposes of consumption in households and for purposes of production and trade in firms, lives and works in an unchanging physical and social (institutional) environment.

His solution starts from the observation that disequilibrium, which means deviation of at least one price or quantity from equilibrium value, neces¬sarily spells profits or losses to somebody at the spot or spots in which it occurs.

We shall, indeed, exclude from the facts on which we are to base fundamental conclusions, material which is obviously vitiated by such things as the World War, "wild" inflations, and so on.

All, or nearly all, of the difficulties we encounter will be seen to be amenable to reduction to the one fact that economic behavior cannot be satisfactorily expressed in terms of the values which out variables assume at any single point of time.

Having formulated the question as we wish it to be under¬stood, we have to admit that the answer may still be negative.

Starting from the common-sense impression that the interest rate is an important factor in business situations, we may jump to the conclusion that it is the causal factor responsible for booms and slumps.

But again as in the case of interest the introduction into our analysis of this concept of capital does not do away with the problems of what is traditionally referred to as real capital—on the contrary, they reappear though in a new garb—and results arrived at by means of a monetary theory of capital not always invalidate, but in many cases only reformulate, the proposition of "real" theories of capital.

But Abramovitz shows a "tentative" peak in the rate of growth of real GNP, after eliminating the effects of business cycles, which he dates 1874.25.9

But for obvious rea¬sons it is less easy to carry out the distinction in other cases, and great care—carried even to the extent of hairsplitting—is re¬quired in order to do justice to the endless variety of the social patterns we encounter.

This means that the average annual rate of growth between the complete business cycle with peaks in 1869 and 1873 and the complete business cycle with peaks in 1873 and 1882 was higher than for neighboring pairs of cycles—in fact it was the highest on record for any successive pairs of cycles, in spite of the fact that the contraction included in the 1873-82 period is rated a deep depression, whereas the contraction phase of the preceding cycle was very mild.

Schumpeter's style ran not only to frequent digressions, which I have tried to eliminate, but also to surplus words, to stating what is already implied, to burdening the reader with phrases that distract his attention.

We confine both concepts to decisions about monetary funds and we neglect, for convenience's sake, any similar decision that may be taken with respect to commodities.

There may be monopoly gains, but they must be entirely consumed either by the monopolists themselves or by some agency which takes them away from the monopolists, for otherwise they would change the stationary flow.

They range from fundamental social recon-struction, such as occurred in Russia after 1917, down to changes of detail in social behavior or habits, such as keeping one's liquid resources in the form of a demand deposit rather than in the form of cash at home or contracting collectively rather than in¬dividually.

Thus the statistical finding about the rate of growth of real GNP collides with the judgment that 1873-78 was a deep depression; further¬more, it plays hob with Abramovitz's analysis of the way Kuznets cycles unfold, in which deep depressions and troughs in growth rates go together.

Hence we arrive at the very important concept of factors acting from without {let us call them External Factors), which it stands to reason we must try to abstract from when working out an explanation of the causation of economic fluctuations properly so called, that is, of those economic changes which are inherent in the working of the economic organism itself.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revolution"...

The output of consumers' goods will fall in any case unless there is no period of gestation at all.

But Abramovitz shows a "tentative" peak in the rate of growth of real GNP, after eliminating the effects of business cycles, which he dates 1874.25.9

In fact, it explains why new production func¬tions do not typically grow out of old businesses—if a new man takes hold of an old firm, they may—and hence, why their inser¬tion proceeds by competing the old ones out of existence or by enforcing the transformation of them.

It acquired relevance only as and when the new possibilities were turned into commercial and industrial re¬ality, and then the individual acts of realization and not the pos¬sibilities themselves are what concern us.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

In particular, reaction by decreasing output rather than by decreasing prices may suggest itself as a short-run policy, and if any given situation is expected to be short-lived, construction of a more elaborate plant than can be used to optimum point often becomes advantageous.

The assembling of a sum earmarked for the purpose of buy¬ing a durable consumers' good, or of meeting an item of expendi¬ture which cannot be covered by current receipts: "saving" in order to buy a motorcar for nonbusiness use or a house to live in, or "saving up" for holidays is not saving at all in our sense, but merely rearranging consumptive expenditure so as to fit "lumpy" items.

If we present certain concepts and propositions at the outset and in a connected argument, this is partly a mere matter of expository convenience.

We must go as far as possible into the past—because we have no other means of observing a large number of units of fluctuation —and hence historical research must be of paramount impor¬tance even for dealing with the most practical of contemporane¬ous problems.

RENDIGS Fels - Vanderbilt University

II. Chapter I
A. INTRODUCTORY
Among the factors which determine any given business situa¬tion there are some which act from within and some which act from without the economic sphere.

Including 1873-78 in the category of deep depressions at first sight seems reasonable enough, since it is generally considered not only the longest but also one of the worst business contractions on record.

The income stream, constant if we neglect such things as seasonal variation, consists of wages—payments for productive and consumptive services rendered by human beings, managers included—and rents—payments for services of natural agents.

The United States was the country Schum¬peter devoted most attention to and, particularly in the discussion of the 1930s, is the one that best illustrates the working of his model.

It acquired relevance only as and when the new possibilities were turned into commercial and industrial re¬ality, and then the individual acts of realization and not the pos¬sibilities themselves are what concern us.

Friction is an example.

But even if they do not, we readily see the two effects which define the Vicious Spiral.

When dealing with the pure logic of the process, it is convenient to exclude savings —unless we define savings so as to cover replacement—since the man who saves obviously does something either to change his economic situation or to provide for a change in it which he foresees; and these cases violate, if we take the strictest view, the assumptions defining the stationary process.

But what dominates the picture of capitalistic life and is more than anything else responsible for our impression of a prevalence of decreasing cost, causing disequilibria, cutthroat competition and so on, is innovation, the intrusion into the system of new production functions which incessantly shift existing cost curves.

our present argument we may thus visualize an economic process which merely reproduces itself at constant rates: a given population, not changing in either numbers or age distribution, organized for purposes of consumption in households and for purposes of production and trade in firms, lives and works in an unchanging physical and social (institutional) environment.

Whereas the shortcomings of the General Theory stimulated other economists to lay bare and refine and apply the model half-concealed in it, incidentally making Keynesians of them, the similar need to clarify and improve and use the Schumpeterian model repelled them.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revo...

Hence we arrive at the very important concept of factors acting from without {let us call them External Factors), which it stands to reason we must try to abstract from when working out an explanation of the causation of economic fluctuations properly so called, that is, of those economic changes which are inherent in the working of the economic organism itself.

Many even of those who do not look upon theory as "babble," are in the habit of iden¬tifying it with explanatory hypotheses.

All that was not cov¬ered by it we could comfortably stow away as atavisms.

But the position of the typi¬cal industrial or commercial or financial family directly originates in some act of innovation.

This will drive him toward equilibrium, and if all firms and households simul¬taneously react in the same manner, it will eventually bring the whole system to equilibrium, provided that all actions and reactions are performed within the bounds of familiar practice that has evolved from long experience and frequent repetition.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

While the production function itself, in the case of a stationary economy, is a datum and invariant in form, the actual combinations of factors, as measured, for example, by coefficients of production, are among the variables of the problem, and must be determined by eco¬nomic considerations.

But no other cases of quasi-rent would exist in so perfectly balanced a state of things.

This will drive him toward equilibrium, and if all firms and households simul¬taneously react in the same manner, it will eventually bring the whole system to equilibrium, provided that all actions and reactions are performed within the bounds of familiar practice that has evolved from long experience and frequent repetition.

All that we could ever prove from it is that no regular contour lines exist.

In any case they alter the rules of the economic game and hence the significance of indices and the systematic relations of the elements which form the economic world.

Therefore the term verification does not accurately describe that relation."

Beyond this there is, in fact, no managerial function—nothing that calls for the special type of activity which we associate with the entre¬preneur.

No doubt, the testimony of facts might be such as to make the existence or absence of a cyclical component inherent in the economic process a practical certainty.

A great part of industrial production was carried on in the farmer's home or by workshop crafts throughout our period, as it had been in colonial times, or it worked under conditions which practically exempted it from the repercussions described in our model: a sawmill sawing on toll, located in an agrarian neighbor¬hood, may pay or not, may work or not, but it has nothing to "compete down," nor will its processes react on other industrial organisms-—the agrarian milieu acts as a shoc...

Material exposed to so many disturbances as ours is, does not fulfill the logical requirements of the process of induction.

It is entirely immaterial whether or not such changes are embodied in, or recognized by, legislation.

Therefore the term verification does not accurately describe that relation."

The reader may think of costs incident to change of occupation or to any shift from the production of one kind or quality of commodity to the production of another kind or quality, or to the exchange, by means of selling and buying, of one asset for another, or of the resistance to change of some prices or of the difficulty of adapting long-time contracts or of persuading oneself or other people to act, and so on.

The last condition affords the basis of a rigorous definition of unemployment.

If we are to speak about price levels and to devise methods of measuring them, we must know what a price level is.

Moreover, experience acquired in dealing with other people and the possibility of profiting in each market period from the lessons taught by the preceding ones, tend to reduce the prac¬tical importance of the pattern under consideration and to make results approach those of the Walras-Edgeworth schema.

In every span of historic time it is easy to locate the ignition of the process and to associate it with certain industries and, within these indus¬tries, with certain firms, from which the disturbances then spread over the system.

Those who have made the principal efforts to explain Kuznets cycles, Mat¬thews and Abramovitz, have not seen fit to draw on Schumpeter's work but have resorted to an incomplete and essentially aggre¬gative tool, the capital-stock adjustment principle.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revo...

Yet it constitutes but a first approximation which stops far short of what we need for an analysis of processes in an incessantly disturbed economic world, and leaves out of account many facts that may be just as important as those it includes and even go far toward producing exactly opposite results.
2.

It is entirely immaterial whether or not such changes are embodied in, or recognized by, legislation.

They range from fundamental social recon-struction, such as occurred in Russia after 1917, down to changes of detail in social behavior or habits, such as keeping one's liquid resources in the form of a demand deposit rather than in the form of cash at home or contracting collectively rather than in¬dividually.

This covers the case of a new commodity, as well as those of a new form of organization such as a merger, of the opening up of new markets, and so on.

Hence, we will, for our purpose, recognize existence of equilibria only at those discrete points on the time scale at which the system approaches a state which would, if reached, fulfill equilibrium conditions.

But even so, nobody can deny that railroad con¬struction had temporarily exhausted possibilities—a formulation which is more correct than the more common phrase of things having been overdone—and it should be easy to see that this, together with the dislocating consequences immediate and ulterior, for the economic system, of new construction was what created the situation in which the Secondary Wave broke, and with it untenable credit situations and speculative bubbles all over the fi...

It is responsible for an important type of social losses and of excess capacity.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

It will also produce additional sloppiness and, in some sectors, inactivity in our sense and rigidity.

Since that boom was primarily, though by no means wholly—a matter of ability to export, the setback and America's share in the ensuing agrarian depression must be interpreted in terms of foreign conditions, falling prices, and protection in England in particular, the effects of which were, for the country taken as a whole, alleviated by the favorably developing cotton situation.

It invites a mechanistic and formalistic treatment of a few isolated contour lines and attributes to aggre-gates a life of their own and a causal significance that they do not posses.

The Marshallian structure is based upon the same conception, which it is important to emphasize in view of the fact that Marshall did not like it and almost made it disappear from the surface of his exposition.

But, on the other hand, they cannot be said to fill quite satisfactorily the function that theorists usually assign to them—the function of verification.

His experience is to the effect that the average businessman always hopes against hope, always thinks he sees recovery "around the corner," always tries to pre-' % pare for it, and that he is forced back each time by hard objec-tive fact which as long as possible he doggedly tries to ignore.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revo...

Technological data may be expressed, for every firm, by a function which links quantities of facts, such as labor, services of natural agents and means of production that are themselves produced ("intermediate products": raw material, equipment, and so on) to the quantity of the product which it is possible to produce by each of the infinite number of ways in which they can be combined for this productive task, technological practice and the whole environment being what they are.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revolution"...

Having myself spent a great deal of labor trying to master the original edition, I have nothing but sympathy for economists who felt that it was not worth the effort
In the work of abridgement, my first concern has been to preserve a complete statement of the theory, since less thorough accounts are readily available elsewhere.

Now, it is obvious that the external factors of economic change arc so numerous and important that if we beheld a complete list of them we might be set wondering whether there was anything left in business fluctuations to be accounted for in other ways.

The same effect may be brought about by change in the relative prices of factors: an increase in wages may induce agriculture to proceed from intensive to extensive methods of cultivation, or industry to replace labor by machinery which may involve complete change of technological processes or principles.

Obviously, we have here a different process before us, involving different facts and concepts such as selection or mutation or, generally, evolution.

In particular, reaction by decreasing output rather than by decreasing prices may suggest itself as a short-run policy, and if any given situation is expected to be short-lived, construction of a more elaborate plant than can be used to optimum point often becomes advantageous.

Nor did the consumers display any such initiative wish to have electric lamps or rayon stockings, or to travel by motorcar or airplane, or to listen to radios, or to chew gum.

The method of doing this is analogous to the method known in mechanics as the method of virtual displacements.

We conclude, on the one hand, that we must take account of this pattern when dealing with the process of change which it is our task to analyze in this book and which must be expected to create precisely such situations, and, on the other hand, that it does not paralyze the tendency toward equlibrium.
5.

The fall of greenback prices during the greenback "defla¬tion" after 1866, which even the prosperity of 1872 was power¬less to reverse (although it did arrest it) is an instance of the first class.

Production, in the sense relevant to economics, is nothing but combining quantities of factors, and it is, for economic purposes, exhaustively described by such a combination (productive combination).

And that state of the system in which every element conforms to its theoretical norm, however distant it may be from actual life, is what renders to the theorist the service which to the businessman is rendered by the idea of a normal business situation.

Their most telling evi¬dence for the existence of Kuznets cycles consists of two circum¬stances, swings in the rate of growth of real GNP that average fifteen to twenty years, and the recurrence of deep depressions at similar intervals—there was one in the 1870s, one in the 1890s, there would (or might) have been one in the 1910s but for World War I, and there was one in the 1930s.

In the first place, it is absurd to think that we can derive the contour lines of our phenomena from statistical material only.

It will seem to many readers as though the facts introduced later had no other role to fill than that of verifying a preexisting theory.

The nature of the theory, which includes a Kondratieff cycle sixty years in duration, calls for a long sweep of history.

In any case they alter the rules of the economic game and hence the significance of indices and the systematic relations of the elements which form the economic world.

The kind of fault that contributed to the success of Keynes's General Theory added to the neglect of Schumpeter's Business Cycles.

That the country chosen should be the United States rather than England or Germany reflects more than the national origins of editor and publisher.

And the third, the Kondratieff of electricity, chemistry, and motors, we date from 1898 on.

But if the inference is that this circumstance was an external factor, that is, something distinct from that very economic evolu¬tion and independently acting upon it, then the statement ceases to be true: our vision of the evolution of capitalism must pre¬cisely include the opening up of new countries as one of its ele¬ments and as a result of the same process which also produced all the other economic features of that epoch.

It is theoretically conceivable that it will never stop and that prices and quantities will, without any new disturbance and under conditions of perfect competition, fluctuate indefinite¬ly around equilibrium values without ever hitting them.

But it is a fact that variations in the total supply of gold often come about in response to busi¬ness situations and in exactly the same way as variations in the supply of any other commodity.

The Marshallian structure is based upon the same conception, which it is important to emphasize in view of the fact that Marshall did not like it and almost made it disappear from the surface of his exposition.

In any case, this is the process by which the effects of the entrepreneurial activity spread over the whole system, dislocating values, disrupting the equilibrium that existed before.

Their most telling evi¬dence for the existence of Kuznets cycles consists of two circum¬stances, swings in the rate of growth of real GNP that average fifteen to twenty years, and the recurrence of deep depressions at similar intervals—there was one in the 1870s, one in the 1890s, there would (or might) have been one in the 1910s but for World War I, and there was one in the 1930s.

Their most telling evi¬dence for the existence of Kuznets cycles consists of two circum¬stances, swings in the rate of growth of real GNP that average fifteen to twenty years, and the recurrence of deep depressions at similar intervals—there was one in the 1870s, one in the 1890s, there would (or might) have been one in the 1910s but for World War I, and there was one in the 1930s.

The power of the economic machine is great enough to hold its own to an astonishing degree, even as it shows its working in the worst material and the most faultily constructed indices.

Although the whole process we are analyzing in this book is essentially the process of capitalist evolution—economic evolution as condi¬tioning, and being conditioned by, the institutional pattern of bourgeois society—yet the second Kondratieff has a special claim to the epitheton bourgeois.

To get at the causation of each we must analyze the facts of each and its indi¬vidual background.

Changes in the tariff policy of a coun¬try or in its System of taxation, measures of social betterment, and government regulations of all kinds we include in the same class.

If, however, the system is not adapted to the saving actually done, analysis becomes more complicated.

As long as we took no account of it, we had only two phases— Prosperity and Recession—in every unit of the cyclical process, but now we shall understand that under pressure of the break¬down of the secondary wave and of the bearish anticipation which will be induced by it, our process will generally, although not necessarily, outrun (as a rule, also miss) the neighborhood of equilibrium toward which it was heading and enter upon a new phase, absent in our first approximation which will be ch...

Changes in the tariff policy of a coun¬try or in its System of taxation, measures of social betterment, and government regulations of all kinds we include in the same class.

Many cases of frictional resistance to change arc frequently referred to as Stickiness or Rigidity.

Then we can either drop these items or try to correct them —as we sometimes do, for instance, in the case of prices dur¬ing an inflation.

But for our purpose it is yet permissible to draw a line between the phenomena directly incident to the working of the economic system and the phe¬nomena produced by other social agencies acting on the economic system, however obviously this action may be conditioned by eco¬nomic situations or propelled by economic aim or class interest.

Given a different title, it might in 1945 have profited from the growing interest in economic devlopment, for its theme is as much how the present industrial nations developed as the themes indicated by its title and subtitle.

But it is important to notice that since no losses are incurred by producers of consumers' goods owing to the failure of the households to spend their whole income for purposes of consumption, there is no reason for any producer to refuse addi¬tional "capital" on the ground that, because of such losses, he wants to contract rather than to expand operations.

But it is a fact that variations in the total supply of gold often come about in response to busi¬ness situations and in exactly the same way as variations in the supply of any other commodity.

We shall see, however, that this does not invalidate our view and that credit creation for the purpose of innovation asserts itself and supplies the chief motive power for the variations in credit outstanding, all the same.

Obviously it is not a matter of indifference whether we accept the theory underlying that state¬ment, namely that the mechanization of industry was a phenom¬enon distinct from "capitalistic enterprise" and independently in¬fluencing it—a phenomenon which could and would have come about in substantially the same way whatever the social organization—or whether we hold as we do (in this respect entirely agree¬ing with Marx) that technological progress was of the very es¬sence of capitali...

We shall, indeed, exclude from the facts on which we are to base fundamental conclusions, material which is obviously vitiated by such things as the World War, "wild" inflations, and so on.

In this sense the outcome is indeterminate.

Price then in turn reacts with a corresponding jerk, and the process repeats itself in the opposite direction.

It is, in fact, very probable that the rate which will yield the maximum sum total of real wages, the maximum being relative to the value put upon leisure and to length of period envisaged, will generally imply some unemployment.

Speaking of a disturbance of the capitalist process by a factor that arises out of that process itself obviously raises a methodological question.

I have regularly deleted references to sources of information.

C. The Stationary Flow.—The analytic treatment of the facts of autonomous change in a closed domain begins con¬veniently with the model of an unchanging economic process which flows on at constant rates in time and merely reproduces itself.

Schum¬peter's concept of recession could illuminate it: previous innova¬tion must have made possible a great increase in output that imposed hardship—symptoms of depression—on all parts of the economy unable to adapt to the new conditions.

The economic phenomena which we observe in the special case in which innovation and invention coincide do not differ from those we observe in cases in which preexisting knowledge is made use of.

Motivation is supplied by the prospect of profit in our sense which does not, be it remembered, presuppose either an actual or an expected rise in prices and expenditure.

Also the period saw the rise and decay of the tendency toward complete vertical integration—although integration to the extent of combining mining, railroads, docks, and fleets proved successful and may be considered responsible for part of the great increase in productive efficiency that occurred—and several attempts at reorganization of the trade.

But the influence of external factors is never absent.

It is, therefore, misleading to reason on aggregative equilibrium as if it displayed the factors which initiate change and as if disturbance in the economic system as a whole could arise only from those aggregates.

In order to harness our equilibrium concept to this service, which is fundamental for our analytic technique, we will not postulate the existence of states of equilibrium where none exist, but only where the system is actually moving toward one.

Since inserting a new condition into a determinate system spells overdcterminateness, some other condition has to be dropped.

But if the inference is that this circumstance was an external factor, that is, something distinct from that very economic evolu¬tion and independently acting upon it, then the statement ceases to be true: our vision of the evolution of capitalism must pre¬cisely include the opening up of new countries as one of its ele¬ments and as a result of the same process which also produced all the other economic features of that epoch.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

After 1878 progress toward full ratification of the gold standard, which eventually came in 1900 (Gold Standard Act of March 14), need not have been difficult.

And something of the kind is suggested by the fact that residential building in the United States precedes the Harvard barometer's curve B by a few months—'which makes it in the short run roughly inverse to the money curve C. This is somewhat more significant than it looks because, apart from the influence of interest, we should, if anything, expect a lag.

Technological data may be expressed, for every firm, by a function which links quantities of facts, such as labor, services of natural agents and means of production that are themselves produced ("intermediate products": raw material, equipment, and so on) to the quantity of the product which it is possible to produce by each of the infinite number of ways in which they can be combined for this productive task, technological practice and the whole environment being what they are.

This has meant retain¬ing most of Chapters II, HI, and IV and parts of Chapters I and V. Even in Chapters II-IV, however, I have not hesitated to cut footnotes, paragraphs, and whole pages where the discus-sion seemed to go pretty far afield, as well as deleting superfluous sentences and phrases.

In order to make headway, we must locate the sources of the trouble.

It is the rationale of the idea of variables that do not vary, the justification of the schema of a stationary eco¬nomic process.

Barring the waves which can easily be shown to result from the properties of the adaptive mechanism, this does not point to any internal cause of cycles.

And it is reckless or dilettantist hypothesis making which is responsible for both the dis¬credit into which theory has fallen and the contrast which for some students exists between factual (or "realistic" or "em¬pirical") and theoretic work.

As soon as we try to find such precise meaning for them and to fit them for the task of identifying definite states of the economic organism, the necessity of falling back on equilibrium relations becomes apparent.

Those acts, the forma¬tion of companies for the exploitation of the new opportunities, the setting of the new countries, the exports into and the imports from them, are part of the economic process, as they are part of economic history, and not outside of it.

If supply in a perfect market, i.e., in a market in which there can, owing to perfect homogeneity of the commodity and perfect mobility and indifference of buyers, be only one price, is controlled by firms that are in a position to influence that price by their individual action (oligopoly or, if there are but two of them, duopoly), it is easy to see that we lose the conditions which enforce determinatcness of behavior in the perfectly competitive case as well as those which account f...

No hypotheses enter into such concepts, which simply embody methods of description and measurement, nor into the propositions defining their relations (so-called theorems), and yet their framing is the chief task of theory, in economics as elsewhere.

In the case of households we shall mainly think of the acquisition of shares and bonds (includ¬ing mortgages and the like) and of land or buildings, if intended for business purposes.

There will always be such cases, although, they can become as frequent as we know them to be only when the evolutionary process is in full swing and when it has brought into existence a machinery for selling assets which we cannot assume now.

Whether these fluctuations display increasing or decreasing or constant amplitudes—whether they arc explosive, damped or stationary —depends on the constants of the demand and supply functions.

If a firm does the same thing with an element of its net receipts from the sale of products and services, we shall speak of Accumulation.

Obviously it is not a matter of indifference whether we accept the theory underlying that state¬ment, namely that the mechanization of industry was a phenom¬enon distinct from "capitalistic enterprise" and independently in¬fluencing it—a phenomenon which could and would have come about in substantially the same way whatever the social organization—or whether we hold as we do (in this respect entirely agree¬ing with Marx) that technological progress was of the very es¬sence of capitali...

our present argument we may thus visualize an economic process which merely reproduces itself at constant rates: a given population, not changing in either numbers or age distribution, organized for purposes of consumption in households and for purposes of production and trade in firms, lives and works in an unchanging physical and social (institutional) environment.

The criterion is whether or not the change occurs within the given horizon of businessmen.

Techno¬logical facts which entail this are data.

The roots of this idea reach very far into the past and are clearly discernible in the English monetary discussions of the fourth and fifth decades of the nine¬teenth century.

As an example we will mention the devel¬opment of the cotton and woolen mills in New England and Pennsylvania—the Beverly Cotton Manufactory was chartered in 1789—which in the nineties culminated in the "cotton mania," the most striking single phenomenon of what might be be termed the positive phase of the American industrial revolu¬tion.

But however completely we master all their details, and however satisfactorily we suc¬ceed in linking them up with each other, this will not help us to describe or understand how such things as dogs have come to exist at all.

The last condition affords the basis of a rigorous definition of unemployment.

Schumpeter's style ran not only to frequent digressions, which I have tried to eliminate, but also to surplus words, to stating what is already implied, to burdening the reader with phrases that distract his attention.

We may do so because, in any case, the increase in the balance of the payee is compensated by the decrease in the balance of the bor¬rower.

The commonsense of this tool of analysis may be formulated as follows: first, if we deal with, say, the organism of a dog, the interpretation of what we observe divides readily into two branches.

But a significant reaction to a pace, particu¬larly in the financial sphere, which was clearly abnormal and very strongly displayed the features that we subsume under the head¬ing Secondary Wave, occurred as early as February 1899, and liquidation, not quite confined to the financial sphere, lasted to the end of May (death of Flower, May 12).

Accordingly, railroad construction, increasingly set¬tling into a predetermined framework and exploiting preexisting investment opportunities, became during the period under dis¬cussion much more (though not yet entirely) a function of rail¬road business and, hence, of the rest of the business organism than it had been before, and the relation became substantially one of mutual dependence.

The same is true of all inventions as such, witness the inventions of the antique world and the middle ages which for centuries failed to affect the current of life.

In every span of historic time it is easy to locate the ignition of the process and to associate it with certain industries and, within these indus¬tries, with certain firms, from which the disturbances then spread over the system.

A Law of Increasing Cost comes in, however, if we admit that some factor is in absolutely inelastic supply even in the long run—the factor management for instance.

Tools, mechanical objects of use, and machinery are among the things which it is very difficult to quantify and the import¬ance of which would not be adequately rendered by quantity even if we could quantify them.

Those who have made the principal efforts to explain Kuznets cycles, Mat¬thews and Abramovitz, have not seen fit to draw on Schumpeter's work but have resorted to an incomplete and essentially aggre¬gative tool, the capital-stock adjustment principle.

The two may, nevertheless, differ of course or be made to differ by monetary policy or by an expansion or con¬traction of bank credit, but this constitutes a disturbance from which a definite string of consequences, among them the busi¬ness cycle itself, has been deduced.

Prices and quantities must also fulfill the following conditions if Walrasian equilibrium is to prevail.

Inasmuch as that freedom of choice is not absolute and substitution is possible only according to certain rules and within certain limits, the production function which embodies these rules and limits may be looked upon as a condition or constraint imposed by the technological horizon and the structure of the economic environment on economic decision or on the maxima of economic advantage or profitable¬ness which economic decision strives to attain.

Since that is not possible, McGraw-Hill is to be commended for deciding on its own initiative to publish an abridged edition.

Since Schumpeter's sources ace now obsolescent, if not obsolete, very few readers would be interested in them.

Barring indivisibility or lumpiness, the physi¬cal marginal productivity of every factor must, in the absence of innovation, montonically decrease.

But it is obvi¬ous that this kind of equilibrium is compatible with most violent disequilibria in every other sense.

As an instance which enters into the class of lag effects and which will call for attention at later stages of our analysis, we will mention the cases in which producers' reactions to changes in price do not take effect at all for some time—say, in the case of many agricultural commodities, not until the next harvest and then all take effect at once.

The "turn" need not come, i.e., the situation described before need not give way to the situation we are trying to characterize now, until entrepreneurial activity slackens and eventually stops.

No hypotheses enter into such concepts, which simply embody methods of description and measurement, nor into the propositions defining their relations (so-called theorems), and yet their framing is the chief task of theory, in economics as elsewhere.

Innovation breaks off any such "curve" and replaces it by another which, again except for indi¬visibility, displays higher increments of product throughout, although, of course, it also decreases monotonically.

It cannot prove such a proposition, because one and the same behavior of a time series can ana¬lytically be accounted for in an indefinite number of ways.

Sup¬pose that the firms of a competitive industry in the act of decid¬ing what quantities of their product they are to produce take account of the past, present, and expected future values of any economic variables they believe to be relevant, weighting those values by weights that in general rapidly decrease to zero in function of distance from the time of the decision.

Much more important is it that "external economies must usually take their ultimate origin in the internal economics of some subsidiary industry" (R. F. Kahn, Economic Journal for March 1935, p. 11).

The same is true of all inventions as such, witness the inventions of the antique world and the middle ages which for centuries failed to affect the current of life.

Including 1873-78 in the category of deep depressions at first sight seems reasonable enough, since it is generally considered not only the longest but also one of the worst business contractions on record.

Instead, it appeared just as the outbreak of World War II raised economic problems to which Keynes's tools, but not Schumpeter's, could be readily adapted.

But for our purpose it is yet permissible to draw a line between the phenomena directly incident to the working of the economic system and the phe¬nomena produced by other social agencies acting on the economic system, however obviously this action may be conditioned by eco¬nomic situations or propelled by economic aim or class interest.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

Whenever a disturbance is the product of social processes, the difficult question arises whether it is not as much a consequence as a cause of economic events and situations and hence whether we are within our rights if we speak of it as "act¬ing from without the economic sphere."

Of course the reverse would not be true: not every new plant embodies an innovation; some are mere additions to the exist¬ing apparatus of an industry bearing either no relation to inno¬vation or no other relation than is implied in their being built in response to an increase in demand ultimately traceable to the effects of innovations that have occurred elsewhere.

This impression is much intensified by the fact that the impact of external factors would of itself account for wavelike alterna¬tion of states of prosperity and of depression, both because some disturbances occur at almost regular intervals and because most of them induce a process of adaptation in the system which will produce the picture of a wavelike oscillation in every individual case.

It constitutes the response by the system to the results of entrepreneurial activity—adapta¬tion to the new things created, including the elimination of what is incapable of adaptation, resorption of the results of innova-tion into the system, reorganization of economic life so as to make it conform to the data as altered by enterprise, remodeling of the system of values, liquidation of indebtedness.

If we fur¬ther assume that in payment of the former, bonds (or preferred shares, or bonds with common shares thrown in as a bonus, to supply the motive for selling out) are issued to vendors and that profit expectations are embodied in common shares, we have the rationale of a method which in itself but expresses the economic logic of the situation.

And never are they of such a nature that we could dispose of them according to the schema of, say, a pendulum continually exposed to numerous small and independent shocks.

But when we take account of the phenomena which constitute the secondary wave, we realize at once that there is much more to liquidate and to adjust.

It acquired relevance only as and when the new possibilities were turned into commercial and industrial re¬ality, and then the individual acts of realization and not the pos¬sibilities themselves are what concern us.

Clemence and Doody accorded it its proper place in The Schumpeterian System, but they preferred defending their former teacher against criticism to paying him the higher com¬pliment of building on his work.

As soon, however, as an invention is put into business practice, we have a process which arises from, and is an element of, the economic life of its time, and not some¬thing that acts on it from without.

Given a different title, it might in 1945 have profited from the growing interest in economic devlopment, for its theme is as much how the present industrial nations developed as the themes indicated by its title and subtitle.

The source of trouble is not adequately described by saying that expectations are uncertain or that they have to be currently revised or that different people form expectations differing in range and reasonableness.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

And these disequilibria will assert themselves by changing the given situation, including the aggregative quantities themselves.

B. The Fundamental Question.—When we behold one of the familiar graphs of economic time series, we undoubtedly have the impression of an "irregular regularity" of fluctuations.

It is primarily for this purpose that we shall now try to provide the analytic tools or a schema or model.

Schum¬peter's concept of recession could illuminate it: previous innova¬tion must have made possible a great increase in output that imposed hardship—symptoms of depression—on all parts of the economy unable to adapt to the new conditions.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

The typical courses that arc, in practice, resorted to in order to effect this, therefore, matter more to us than does the pure logic of oligopoly.

Credit creation by bankers' banks stands at one remove from this and the two are not additive.
3.

This means that the average annual rate of growth between the complete business cycle with peaks in 1869 and 1873 and the complete business cycle with peaks in 1873 and 1882 was higher than for neighboring pairs of cycles—in fact it was the highest on record for any successive pairs of cycles, in spite of the fact that the contraction included in the 1873-82 period is rated a deep depression, whereas the contraction phase of the preceding cycle was very mild.

If we present certain concepts and propositions at the outset and in a connected argument, this is partly a mere matter of expository convenience.

First, major innovations and also many minor ones entail con¬struction of New Plant (and equipment)—or the rebuilding of old plant—requiring nonnegligible time and outlay.

It has been stated above that our assumption about New Firms carrying the new things into effect against resisting strata of old firms, which was to embody the characteristically different behavior in the face of new possibilities, may occasionally fail us.

This will drive him toward equilibrium, and if all firms and households simul¬taneously react in the same manner, it will eventually bring the whole system to equilibrium, provided that all actions and reactions are performed within the bounds of familiar practice that has evolved from long experience and frequent repetition.

When, for instance, existing states are in the act of being disturbed, say, by a war financed by government fiat, or by a "mania" of railroad building, there is very little sense in speak¬ing of an ideal equilibrium coexisting with all that disequilibrium.

I. INTRODUCTION; 1786-1842 147
A- The Fondamental Importance of the Historical Approach to the Problems of the Cyclical Process of Evolution.— 147
B. Questions of Principle.—A few questions of principle must be disposed of first. 149
C. The Long Wave from 1787 to 1842 151
VIII.

In our heart of hearts, we prefer the aggregates of Keynes, Harrod, Domar, etc.; despite Walras's earlier and better claim to a general theory, we per¬mitted Keynes to take over the term, Schumpeter's objections notwithstanding.

The stories of the American sugar refining industry, which, for the time being, culminated (1887) in a combination that controlled 90 per cent of the production, and of the American Tobacco Company (1890), highly interesting though they are cannot be dealt with here.

The term Monopolistic Competition will be used to connote product differentiation.

Professor Tinbergen even goes so far as to regard them as the only type of "endogenous" waves and as the main object of exact business-cycle analysis.

If we find that a system, without satisfying ligamina exactly, is as near to perfect equilibrium as it will go, and that it will not move from that position unless some event impinges upon it, we shall say that it is in imperfect equilibrium. 1 An equilibrium the imperfection of which consists exclusively in the facts that firms use more factors and keep larger stocks and balances than would be the case if they were organized according to the highest standard of efficiency possible un...

But in other cases we find that, while the system is not constitutionally incapable of reaching perfect equilibrium, changing conditions or disturb¬ing events require adaptations which can be made only in time.

Therefore, no monotonically declining cost curves can be deduced from exter¬nal economies.

Those who have made the principal efforts to explain Kuznets cycles, Mat¬thews and Abramovitz, have not seen fit to draw on Schumpeter's work but have resorted to an incomplete and essentially aggre¬gative tool, the capital-stock adjustment principle.

It may mitigate or accentuate depressions or prosperities and thus often help to turn the tide.

In addition, the reader is welcome to insert here a whole chapter on the innumerable incidents and accidents, errors, frictions, and lags, by which savings may be lost or stopped on their way or misdirected or dissaved again and which will account for imper¬fect coordination between saving and investment.

The first reason for the present edition lies in the conviction that it can yet stimu¬late significant research.

Yet all these prices and quantities are "variables" in the sense that they are not uniquely determined by extra-economic constraint but may, ordinarily, vary within wide limits imposed by the physical and social environment.

One of the reviews that appeared not long after the 1939 edition was published criticized it for not having a serviceable statistical technique.

Having myself spent a great deal of labor trying to master the original edition, I have nothing but sympathy for economists who felt that it was not worth the effort
In the work of abridgement, my first concern has been to preserve a complete statement of the theory, since less thorough accounts are readily available elsewhere.

Yet Schumpeter's concept of recesssion could be exceedingly helpful in interpreting the 1870s, a pe¬riod which raises a problem ignored by Matthews and Abramovitz in the works cited in the footnote above.

"Evi¬dently debt and deflation go far toward a great mass of phenom¬ena in a very simple logical way" (p. 342).

An instance is the small-scale production of the artisan type, in which it would not pay to use costly machinery.

At any given time, some indus¬tries move on, others stay behind; and the discrepancies arising from this are an essential element in the situations that develop.

Technological data may be expressed, for every firm, by a function which links quantities of facts, such as labor, services of natural agents and means of production that are themselves produced ("intermediate products": raw material, equipment, and so on) to the quantity of the product which it is possible to produce by each of the infinite number of ways in which they can be combined for this productive task, technological practice and the whole environment being what they are.

Quantitative expansion and qualitative improvement, fall¬ing costs, prices, and rates of profit are obviously the expected as well as the actual characteristics of this industry's history during our decade.

Again, we read a statement made by a high authority in our field, to the effect that it is not "capi¬talistic enterprise" but technological progress (invention, ma¬chinery) which accounts for the rate of increase in total output during the nineteenth century.

The motive, as well as the justification, for speaking in such cases of a theoretical type and a deviating reality lies in the diagnostic value of this distinction, and will be exemplified in our historical survey.
4.

Hence we arrive at the very important concept of factors acting from without {let us call them External Factors), which it stands to reason we must try to abstract from when working out an explanation of the causation of economic fluctuations properly so called, that is, of those economic changes which are inherent in the working of the economic organism itself.

The reader need only recall what they are in order to make the discovery that they are precisely the phenom¬enon which he associates with "prosperity" and "recession": our model reproduces, by its mere working, that very sequence of events which we observe in the course of those fluctuations in economic life which have come to be called business cycles and which, translated into the language of diagrams, present the pic¬ture of an undulating or wavelike movement in absolute figures or...

our present argument we may thus visualize an economic process which merely reproduces itself at constant rates: a given population, not changing in either numbers or age distribution, organized for purposes of consumption in households and for purposes of production and trade in firms, lives and works in an unchanging physical and social (institutional) environment.

There are instances covering considerable stretches of our ma¬terial, in which effects of external factors entirely overshadow everything else, cither in the behavior of individual elements of business situations or in the behavior of business situations as a whole.

The impression that firms moving in intervals of decreasing costs are often in the center of the vicissitudes of industrial fife is not wrong.

The best examples of what we mean by an external factor are offered by such events as the great Tokyo earthquake, the virtue of which from our standpoint consists in the fact that no one has thought of attributing responsibility for them to our indus¬trial system.

Readers who hold any theory of interest according to which that phenomenon would be present also in a perfectly stationary state (which the writer does not believe) are free to insert here also interest as a payment for the productive service which the par¬ticular theory chosen holds to be responsible for it.

But if we refuse to do this, the discovery of America does not thereby become an external factor, for it was not directly relevant to the course of the economic process at all.

Those attempts to evaluate the limit of credit creation are usually concerned with the effects of such legal restrictions only and hardly ever posit the fundamental problem.

As soon as we realize the necessity of starting our analysis of economic change from a stationary state in perfect equilibrium, exclusion of savings as a major factor in bringing about that change follows logically, for whatever the definition of saving the reader adopts, it is clear that most of its sources, as well as most of the motives for it, would be absent in a stationary state.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revoluti...

They range from fundamental social recon-struction, such as occurred in Russia after 1917, down to changes of detail in social behavior or habits, such as keeping one's liquid resources in the form of a demand deposit rather than in the form of cash at home or contracting collectively rather than in¬dividually.

Many factors, however, are not infinitely divisible but available only in such large minimum units—think, for example, of a railroad track or even a steel plant—that product responds to addition of a unit not by a small variation but by a jump, which means that the production function is discontinuous in such points.

Occasionally it was convenient to alter the punctuation.

But it must be em¬phasized that what will be said in this chapter and those fol¬lowing is, in part, nothing but a generalized formulation of some of the facts presented later.

Some have frankly held the cycle to be a "sham" or a random fluctuation.

This product differentiation must be interpreted with refer¬ence to its rationale, the creation of such a special market, hence very broadly: it comprises not only "real" but also "putative" differences, not only differences in the product itself, but also differences in the services incident to supplying it (atmosphere and location of shops included) and every device that enables the buyer to associate the thing he buys with the name of a particular firm.

We have once more an in¬stance of "business deflating itself" without any serious outside pressure, and we see again that this could have been prevented only by continuing government expenditure at the war level or a level still higher.

In such a sentence as, "It is surely not too much to ask economists to realize that behavior in human societies differs from behavior in animal societies or in physical systems " (p. 1046 of the 1939 edition), I have deleted the italicized words without using dots to so indicate.

However right, therefore, it may sometimes be to enter solemn protests against preconceived ideas, speculation, and metaphysics, no argument of weight can be gained from the physical analogy for the view that the right way to go about our task is to assemble statistics, to treat them by formal methods, and to present the results as the solution of a problem.

The ways of production and usances of commerce are optimal from the standpoint of the firms' interest and with respect to existing horizons and possibilities, hence do not change either, unless some datum changes or some chance event intrudes upon this world.

In almost everv major instance, promoters might have plagiarized the Duke of Wellington's (alleged) saying at Waterloo, "Blücher or the night."

Although some of the highest authorities in the field, par¬ticularly Cournot and Wicksell, and many recent writers could be quoted to the contrary, this is the opinion of the majority of students and particularly of Professor Bowley.

The distinction between the entrepreneur and the mere head or manager of a firm who runs it on established lines or, as both functions will often coincide in one and the same person, between the entrepreneurial and the managerial function, is no more diffi¬cult than the distinction between a workman and a landowner, who may also happen to form a composite economic personality called a farmer.

This is the reason why we shall deal with postwar cycles separately and try, as far as possible, to work out fundamentals from prewar material, although sources of facts and figures flow much more freely since 1919 than they did before 1914.

This will drive him toward equilibrium, and if all firms and households simul¬taneously react in the same manner, it will eventually bring the whole system to equilibrium, provided that all actions and reactions are performed within the bounds of familiar practice that has evolved from long experience and frequent repetition.

Whatever their importance, those subcases in which bilateral monopoly yields determined equilibrium may be used to show that perfect equilibrium may, outside of the perfectly competitive case, be compatible with the existence of unemployed resources.

But the framing of hypotheses, although sometimes as necessary in our science as it is in all others, is neither the sole nor the main function of a theory in the sense in which it is synonymous with "analytic apparatus."

Material exposed to so many disturbances as ours is, does not fulfill the logical requirements of the process of induction.

But if the tâtonnement consists in people's actually buying and selling at the initial price, this will absorb part of the supply and satisfy part of the demand and the equilibrium price for the rest will be different from what the equilibrium price for the whole would have been, which argument can be repeated for any subsequent price that is not yet an equilib¬rium price.

This would amount to a theory of the cycle which may be very simply stated: a crisis or depression occurs whenever there is an un¬favorable event of sufficient importance.

Even a work like Yusif A. Sayigh's Entrepreneurs of Lebanon, which osten¬sibly takes Schumpeter's concepts as its starting point, actually deals with entrepreneurs as people—their education, religion, opinions, even the number of their children—to the neglect of what was central to Schumpeter's analysis, innovating activity and its impact.

It is responsible for an important type of social losses and of excess capacity.

Within fifty or sixty, or even nine years—which, as we shall see, are for us impor¬tant periods—the cumulative change due to Growth will assert itself in many of our figures.

The power of the economic machine is great enough to hold its own to an astonishing degree, even as it shows its working in the worst material and the most faultily constructed indices.

But if the inference is that this circumstance was an external factor, that is, something distinct from that very economic evolu¬tion and independently acting upon it, then the statement ceases to be true: our vision of the evolution of capitalism must pre¬cisely include the opening up of new countries as one of its ele¬ments and as a result of the same process which also produced all the other economic features of that epoch.

One need not take issue with Schumpeter's criticism of Marshall for lavish-ing too much time on the eight editions of the Principles to hold that he himself made the opposite error.

He is then likely to complement his apparatus by a system of relations between social aggregates—such as total output, total income, net total of profits—and to reason 011 these, together with elements of outstanding importance for the system as a whole—such as quantity of money, rate of interest, and price level.

In itself it is trivial, for all it teaches is that a violent change in the rate of saving causes trouble which may go on intensifying itself so that the new rate of saving and the new rate of investment may diverge for a considerable time.

Price then in turn reacts with a corresponding jerk, and the process repeats itself in the opposite direction.

Hence, much more interest and importance than most of us are inclined to admit attach to the endeavors of some statisticians and economists to distill from the statistical material of an eco-nomic world which is chronically in a state of disequilibrium, the time sequence of equilibrium values.

Those acts, the forma¬tion of companies for the exploitation of the new opportunities, the setting of the new countries, the exports into and the imports from them, are part of the economic process, as they are part of economic history, and not outside of it.

He approaches these tasks with attitudes which differ characteristically from each other.

We now go on to postulate that each Kon-dratieff should contain an integral number of Juglars and each Jugular an integral number of Kitchins.

No hypotheses enter into such concepts, which simply embody methods of description and measurement, nor into the propositions defining their relations (so-called theorems), and yet their framing is the chief task of theory, in economics as elsewhere.

To have stressed it, at least by implication, is one of the chief merits of the commer¬cial theory of banking, just as it is one of the chief demerits of the investment theory—which is a typical outsider's idea and could never, like its rival, have grown out of practical banking experience—to have overlooked it and to have made banking a mechanical function which might just as well be filled by some government department Even if he confines himself to the most regular of commodity bil...

For, although there would be rents and quasi-rents of factors owned by firms (also in the case of a manager-proprietor, his "earnings of management" or wages, to which we may for the sake of argument add various interest items), and although there may be monopoly gains and if we admit external disturbances) also windfalls and possibly speculative gains, all these items would, in the conditions of a stationary or even of a growing economy, sum up to much smaller totals than they do in ...

However right, therefore, it may sometimes be to enter solemn protests against preconceived ideas, speculation, and metaphysics, no argument of weight can be gained from the physical analogy for the view that the right way to go about our task is to assemble statistics, to treat them by formal methods, and to present the results as the solution of a problem.

However, as we shall not deal with this group of problems in this volume— although the writer is alive to the seriousness of this breach in our wall—it will be convenient to consider migration over the frontiers of the territories to which our statistics refer, provi-sionally, as an external factor, while migration within those ter¬ritories, which it would be imposible so to consider, will be no¬ticed but incidentally.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revolution"...

We may pro¬ceed to notice some of the industries of metal consumers' goods in which innovation consisted in successful standardization, spe¬cialization, and mass production—locks (New Haven), clocks and watches (also Connecticut, and Waltham, the dollar watch competing successfully all over the world), and small arms (for example, Colt) were all in their innovating stages either in the first or in the second Juglar and became established in the next one.

There we had a multiplicity of cycles each of which was an independent entity.

It ratified the temporary defeat of inflationism and substantially settled monetary matters until the Civil War.
5- In the United States the production of agricultural raw ma¬terials in general followed rather than preceded the development of the industries that use them.

The same effect may be brought about by change in the relative prices of factors: an increase in wages may induce agriculture to proceed from intensive to extensive methods of cultivation, or industry to replace labor by machinery which may involve complete change of technological processes or principles.

We are then left not only with zones but with shifting zones.

If the element which has been made rigid is the price of an original or nonproduced factor of pro¬duction and if that price is higher than the equilibrium price, the condition violated is that of full employment of resources.

If the elements of the economic system exactly satisfy all the relations, conditions, or ligamina constitutive of the system, we shall say that the system is in perfect equilibrium.

The use of petroleum for other purposes than lighting is, like electricity, a "carrying" innovation of the next Kondratieff, and was in the incubating stage during the second.

And it is reckless or dilettantist hypothesis making which is responsible for both the dis¬credit into which theory has fallen and the contrast which for some students exists between factual (or "realistic" or "em¬pirical") and theoretic work.

Since Schumpeter's sources ace now obsolescent, if not obsolete, very few readers would be interested in them.

Whatever the nature of the struggle, while it lasts there cannot be an equilibrium, of course.

Those acts, the forma¬tion of companies for the exploitation of the new opportunities, the setting of the new countries, the exports into and the imports from them, are part of the economic process, as they are part of economic history, and not outside of it.

When it has ceased to act, and when we observe that readjustment sets in which we interpret as a movement toward equilibrium, then and only then the ideal equilibrium becomes the goal of an economic process, the nature of which can be elucidated by reference to it.

But if the inference is that this circumstance was an external factor, that is, something distinct from that very economic evolu¬tion and independently acting upon it, then the statement ceases to be true: our vision of the evolution of capitalism must pre¬cisely include the opening up of new countries as one of its ele¬ments and as a result of the same process which also produced all the other economic features of that epoch.

The same often holds true of new specialties within each great line of advance, as within the field of electrical industries, partly at least, in the cases of the radio and of the refrigerator.
1.

We confine both concepts to decisions about monetary funds and we neglect, for convenience's sake, any similar decision that may be taken with respect to commodities.

But temporary necessity, consciously planned strategy, and fluctuating anticipation of the general course of events acquire a very much wider scope than was assumed in the foregoing analysis.

On the stock exchange, for instance, bulls and bears will from time to time consolidate their positions and cover before they go on.

This ability to decide in favor of untried possibilities or to choose not only between tried but also between tried and untried ones, may, however, be distributed in the population according to the Gaus¬sian—though more plausibly a skew—law, and should not be thought of as confined to a few exceptional cases.

Moreover, it is not denied that in some professions and in many branches of retail trade, the consequences predicated by some authorities on monopolistic competition may even in the long run prevail: if newcomers flock into the legal profession and fees are being kept up, all lawyers will be underemployed and feel unable to make what they consider a decent living.

This is the truly fascinating problem, although it hardly ever enters into the ordinary mental operations of medical prac¬tice, which arc always concerned with one or another of the innumerable patterns of the actual occurrence of death.

Some equilibrium, however, will be reached: barring the case to be noticed below (6), reaction to the various inter¬mediate situations that arise is corrective and not disruptive.

But to treat in this way variations in the number and age distribution of populations is less easy to justify.

And to the difficulty of defining—wo might facilitate the task by considering Rigidity as the limiting case of Stickiness— corresponds the difficulty of measuring them.

Technologically, iron-ore mining was a simple affair.

What matters is the fact that its quan¬titative importance would be exceedingly small if the economic process in any way approximated the equilibrium picture: Saving would be a "trickle" and by virtue of this fact alone could not give rise to any troubles.

Rela¬tions between aggregates being entirely inadequate to teach us anything about the nature of the processes which shape their variations, aggregative theories of the business cycle must be inadequate, too; and it is not a valid objection against an analy¬sis of business cycles that it deals "only" with partial situations.

The comparatively long periods of gestation, both of the individual line—each is an innovation within our meaning of the term—and of the sec¬tional or national system—which, as such, constitute innova¬tions of a higher order—the quantitative importance of the ex¬penditure involved, the consequent dislocation of all the data of economic life, the new investment opportunities and the new possibilities that are created for further innovation, and the (cyclical) disturbances in turn cause...

But for our purpose it is yet permissible to draw a line between the phenomena directly incident to the working of the economic system and the phe¬nomena produced by other social agencies acting on the economic system, however obviously this action may be conditioned by eco¬nomic situations or propelled by economic aim or class interest.

Hence he can, if he should choose, go on doing so indefinitely, and there may be reasons for it other than error, indolence, and benevolence.

It does not give to prosperity and recession, relatively to each other, the welfare connotations which public opinion attaches to them.

The outlines of an economic and sociological analysis of both types and both functions have been given elsewhere.

In such a sentence as, "It is surely not too much to ask economists to realize that behavior in human societies differs from behavior in animal societies or in physical systems " (p. 1046 of the 1939 edition), I have deleted the italicized words without using dots to so indicate.

B. The Fundamental Question.—When we behold one of the familiar graphs of economic time series, we undoubtedly have the impression of an "irregular regularity" of fluctuations.

C. The Stationary Flow.—The analytic treatment of the facts of autonomous change in a closed domain begins con¬veniently with the model of an unchanging economic process which flows on at constant rates in time and merely reproduces itself.

The model devised in order to display the phenomenon was this: Series consisting of purely random items, such as the last digits of the numbers drawn in Russian lotteries, were turned into series con-sisting of correlated items by the operation of moving summa¬tion of the nth order, so that in the latter "each of two adjacent items has one particular cause of its own and n — 1 causes in common with the other."

We cannot dismiss this view a priori.

In order to make the principle stand out clearly, we wish in particular to assume, in the first instance, absence of certain elements which in reality are very important—notably, errors in diagnosis or prognosis and other mistakes.

It implies the view that financing innovation from funds that have been saved or accumulated, presupposes previous profits, hence previous waves of evolution, and therefore has no claim to a place on the ground floor, as it were, of a model that is to display logical essentials.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibriu...

For our system is logically selfcontained only if this is the case: we can be sure that we understand the nature of eco¬nomic phenomena only if it is possible to deduce prices and quantities from the data by means of those relations and to prove that no other set of prices and physical quantities is com¬patible with both the data and the relations.

We must go as far as possible into the past—because we have no other means of observing a large number of units of fluctuation —and hence historical research must be of paramount impor¬tance even for dealing with the most practical of contemporane¬ous problems.

In England the income tax reappeared for good, but throughout the period behaved with the restraint of a newcomer not quite certain of his right to a place.

The failure of a concern may cause the failures of other con-cerns, but part of its liabilities will be to firms which can stand the loss and which therefore act as buffers.

Occasionally it was convenient to alter the punctuation.

But if the tâtonnement consists in people's actually buying and selling at the initial price, this will absorb part of the supply and satisfy part of the demand and the equilibrium price for the rest will be different from what the equilibrium price for the whole would have been, which argument can be repeated for any subsequent price that is not yet an equilib¬rium price.

"
There are severe limits to what an editor may properly do.

III. Chapter II
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES
A. The Meaning of a Model.—Much can be done by the mere survey of those facts which we designate by the expression business situation and by the common-sense discussion of them.

Though a quarter of a century has elapsed since the first edi¬tion of Business Cycles, the opportunities it opened up for fur¬ther research remain largely unexploited.

Secrecy regarding processes, patents, judicious differentiation of products, advertising, and the like, occasionally also aggression directed against actual and would-be competitors, are instances of a familiar strategy, which in the public, as well as in the pro¬fessional, mind have done much to veil the source and nature of profits in our sense, especially because that strategy may be resorted to in other cases as well.

In the case of households we shall mainly think of the acquisition of shares and bonds (includ¬ing mortgages and the like) and of land or buildings, if intended for business purposes.

As for the United States, the free trade that really mattered was the free trade within the country.

If this friction be strong enough, it may in the limiting case annihilate, in many other case materially reduce, that interrelation of demands for the products of individual firms which is responsible for the olipololistic difficulty, and thus create monopoly situations or, at all events, situations which are acceptable approximations to straight monopoly.

Yet he invests.

It is, in particular, possible to argue that if some such event has once set into motion a self-reinforcing process of prosperity, this will go on of itself—each increase in demand for, say, consumers' goods increasing the demand for equipment goods, production of which increases again con¬sumer's purchasing power, and so on—and thereby create in¬creasingly precarious situations, so that the longer it lasts the smaller tie influence will be which is required to bring about a crash whe...

Alloys (chrome and nickel steel) put in an appearance in the seventies and eighties, but more effectively in the last Juglar, in which also the Harvey armor-plate process was developed in works built for the purpose.

It would certainly not do to define correctness of expectation by means of congruent event, or by means of an assumption that correct expectation necessarily works toward equilibrium.

Those producers are supposed to have doubled their capacity, and the firms in the higher stages above the hobby-horse producers, to have expanded correspondingly—this is the intensification or multiplication of effects—and the con-sequences are obvious.

In fact, since decreasing total unit costs are mere interruptions of the fundamental property of any given total unit cost curve either to rise or to be horizontal, increasing and decreasing costs are not coordinated alternatives.

It is important for the functioning of the system that the banker should know, and be able to judge, what his credit is used for and that he should be an independent agent.

The use of petroleum for other purposes than lighting is, like electricity, a "carrying" innovation of the next Kondratieff, and was in the incubating stage during the second.

If we do so on the finding alone, we are performing an operation void of sense, although it may be clothed in terms that look exact.
4.

Whoever works with partial equilibria soon discovers the necessity of an instrument that will enable him to handle processes going on in the system as a whole which escape his "partial" tools.

Cumulation of effects is as obvious a reality in many economic processes as are acceleration, self-reinforcement, multiplication.

We cannot stress this point sufficiently.

The former exerts influence of its own independently of investment and the latter can be financed, as we shall see, from sources other than saving.

Inserting immigration of capital and men—about 14 millions immigrated, from the end of the Civil War to 1900—harvests, and the Civil War, we would get practically all the fluctuations and trends there are.

Clemence and Doody accorded it its proper place in The Schumpeterian System, but they preferred defending their former teacher against criticism to paying him the higher com¬pliment of building on his work.

It is the rationale of the idea of variables that do not vary, the justification of the schema of a stationary eco¬nomic process.

Personal aptitudes—primarily intellectual in the case of the inventor, primarily volitional in the case of the businessman who turns the invention into an innovation—and the methods by which the one and the other work, belong to different spheres.

In order to produce new phenomena and to impair seri-ously the usefulness of the Walras-Marshall description, reaction to the intermediate situations created by such partial adaptation would have to counteract or to reverse that tendency and to lead away from instead of toward full equilibrium.

But to treat in this way variations in the number and age distribution of populations is less easy to justify.

Finally, we have had examples (changes in tariff policy, taxa¬tion, and so on) of what we may term changes in the institu¬tional framework.

III. Chapter II
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES
A. The Meaning of a Model.—Much can be done by the mere survey of those facts which we designate by the expression business situation and by the common-sense discussion of them.

Since then a large amount of statistical and a small amount of analytical work has gone forward.

This impression is much intensified by the fact that the impact of external factors would of itself account for wavelike alterna¬tion of states of prosperity and of depression, both because some disturbances occur at almost regular intervals and because most of them induce a process of adaptation in the system which will produce the picture of a wavelike oscillation in every individual case.

Now it is easy to construct a case in which the sudden with¬drawal of the savers' demand from the market of the consumers' goods which they used to buy before their decision to double their rate of saving, causes catastrophe.

It is partly explained by the fact that previous ownership of the requisite producers' goods or of assets that may serve as collateral, or of money, makes it easier to become an entrepre¬neur, and the additional fact that successful entrepreneurship leads to a capitalist position for the entrepreneur and, normally, his descendants, so that we find successful entrepreneurs very soon in possession of a plant and the other paraphernalia of a going concern.

II. 1843-1913 167
A. The Period 1843-1897.— 167
B. The Agricultural Situations of the Period 174
C. Railroadization. 178
D. Some Features of the Development of Manufactures 190
E. The First Sixteen Years of the Third Kondratieff ( 1893-1913) 202
IX. Chapter VIII 227
A. 1919-1929 227
A. Postwar Events and Postwar Problems 227
B. Comments on Postwar Patterns 228
C. Further Comments on Postwar Conditions. 236
D. Outlines of Economic History from 1919 to 1929.— 239
E. The "Industrial Revo...

The continuity of the latter is in this case no more serious a restriction than it is in others.

The Marshallian structure is based upon the same conception, which it is important to emphasize in view of the fact that Marshall did not like it and almost made it disappear from the surface of his exposition.

Outside of such processes however, hori¬zons of different people differ according to the criterion that the horizons of some are and the horizons of others arc not confined to the range of possibilities tried out in business practice.

We find, rather, that the intense competition of the recession and depression periods will, with a qualification for the prostration and paralysis of deep de¬pression, in general force firms to install the newest available types.

In fact, it would be possible to write, without any glaring ab¬surdity, a history of business fluctuations exclusively in terms of external factors, and such a history would probably miss a smaller amount of relevant fact than one which attempts to do without them.

Schum¬peter's concept of recession could illuminate it: previous innova¬tion must have made possible a great increase in output that imposed hardship—symptoms of depression—on all parts of the economy unable to adapt to the new conditions.

And this is all that our distinction amounts to so far.

However right, therefore, it may sometimes be to enter solemn protests against preconceived ideas, speculation, and metaphysics, no argument of weight can be gained from the physical analogy for the view that the right way to go about our task is to assemble statistics, to treat them by formal methods, and to present the results as the solution of a problem.

All, or nearly all, of the difficulties we encounter will be seen to be amenable to reduction to the one fact that economic behavior cannot be satisfactorily expressed in terms of the values which out variables assume at any single point of time.

The inference seems to be unavoidable that stabilization of the dollar at the peak of the gold premiumor, in fact, any devalua¬tion, would have enforced continuance of inflation, still more excesses, and a still more severe crisis.

For, first, abnormal liquidation destroys many things which could and would have survived without it (in particular, it often liquidates and weeds out firms which do not command adequate financial support, however sound their business may be, and it leaves unliquidated concerns which do command such support, although they may never be able to pay their way), and hence produces a partem more or less different from that which the normal proc¬ess would have evolved.

If a monopolist charges a higher or lower price than the one that maximizes his gain, he will also lose but only in the sense that he will, within limits, gain less than he could.

The effects of technological lags, for instance, will be reduced if the change has been expected, and the Hog Cycle, as far as it is really due to inability to foresee the mass effect of "improvident" reaction to a favorable fodder-pork ratio, would entirely disappear if the time range of farmers' expectations increased.

If we succeed in describing the economic system by means of a general schema embodying certain properties of it, there is ob-viously much practical utility in asking the question whether the system, as thus depicted, will by its own working produce booms or crises or depressions, and, if so, under what circumstances.

We confine both concepts to decisions about monetary funds and we neglect, for convenience's sake, any similar decision that may be taken with respect to commodities.

On the one hand, there will be what we may term diffusion or dilution of effects.

Their most telling evi¬dence for the existence of Kuznets cycles consists of two circum¬stances, swings in the rate of growth of real GNP that average fifteen to twenty years, and the recurrence of deep depressions at similar intervals—there was one in the 1870s, one in the 1890s, there would (or might) have been one in the 1910s but for World War I, and there was one in the 1930s.

Second, it is important to keep in mind that what we know from experience is not the working of capitalism as such, but of a distorted capitalism which is covered with the scars of past injuries inflicted on its organism.

It is incessant change in the data of the situations, rather than the inadequacy of the data of any given situation, which creates what looks like indeterminateness of pricing.

Obviously it is not a matter of indifference whether we accept the theory underlying that state¬ment, namely that the mechanization of industry was a phenom¬enon distinct from "capitalistic enterprise" and independently in¬fluencing it—a phenomenon which could and would have come about in substantially the same way whatever the social organization—or whether we hold as we do (in this respect entirely agree¬ing with Marx) that technological progress was of the very es¬sence of capitali...

Although the result of much more complex social, econom¬ic, and fiscal motivations, the American tariffs of 1789 and 1816 may, from our standpoint, be looked upon as attempts to pro¬long the conditions that prevailed during the preceding wars and to preserve the industrial war structures.

Third, most people feel an inhibition when the possibility of treading a new path offers itself.

An instance is the small-scale production of the artisan type, in which it would not pay to use costly machinery.

Nothing is foreseen but repetition of orders and op¬erations, and this foresight is ideally borne out by events.

We shall, indeed, exclude from the facts on which we are to base fundamental conclusions, material which is obviously vitiated by such things as the World War, "wild" inflations, and so on.

If we succeed in describing the economic system by means of a general schema embodying certain properties of it, there is ob-viously much practical utility in asking the question whether the system, as thus depicted, will by its own working produce booms or crises or depressions, and, if so, under what circumstances.

Both its commercially successful methods of production are branches of electrical metallurgy (the brothers Cowles; Héroult-Hull).

Whereas the shortcomings of the General Theory stimulated other economists to lay bare and refine and apply the model half-concealed in it, incidentally making Keynesians of them, the similar need to clarify and improve and use the Schumpeterian model repelled them.

The history of the recent world crisis could almost be written in terms of ineffectual attempts to stem the tide, undertaken in a belief, fostered in this case by all the prophets, that business , would be "humming" in a few months.

Though a quarter of a century has elapsed since the first edi¬tion of Business Cycles, the opportunities it opened up for fur¬ther research remain largely unexploited.

One need not take issue with Schumpeter's criticism of Marshall for lavish-ing too much time on the eight editions of the Principles to hold that he himself made the opposite error.

If this were enough to establish causal connection, this proposition would be one of the safest of our science.

To illustrate this by an example: modern economic processes are to a great extent contingent upon agglom¬erations of population in cities and upon the facilities put at the disposal of the business community by public action.

On the one hand, there will be what we may term diffusion or dilution of effects.

We will notice only those contribution to this line of advance which are directly relevant to our own work.

No firm which is merely ran on established lines, however conscientious the management of its routine business may be, remains in capitalist society a source of profit, and the day comes for each when it ceases to pay interest and even depreciation.

But Abramovitz shows a "tentative" peak in the rate of growth of real GNP, after eliminating the effects of business cycles, which he dates 1874.25.9

It is entirely immaterial whether an innovation implies scientific novelty or not.

Its usefulness for some purposes we do not deny.

And for the static theory of the competitive case there is no more reason to bother about the former than there is to bother about the latter.

This is so also in a capital-.ist society; and that the harvest is gathered under recessive symp-turns and with more anxiety than rejoicing is easily accounted for and does not alter the principle.

To have stressed it, at least by implication, is one of the chief merits of the commer¬cial theory of banking, just as it is one of the chief demerits of the investment theory—which is a typical outsider's idea and could never, like its rival, have grown out of practical banking experience—to have overlooked it and to have made banking a mechanical function which might just as well be filled by some government department Even if he confines himself to the most regular of commodity bil...

No other price, either of consumers' or of producers' goods will be affected at this stage.

And the third, the Kondratieff of electricity, chemistry, and motors, we date from 1898 on.

But sound diagnosis cannot be expected from denying its existence or from setting up such entities as "opti¬mism," "pessimism," "saving instinct," or from simply asserting that people elect to act in such a way that maladjustment will ensue and that saving and investment can each go its own way indefinitely.

It helps to localize the sources and effects of those downward shifts of cost curves which we saw were inadequately described by the device of monotonically descending curves, and to describe the way in which the system reacts to them.

It is, hence, no more justifiable to call the systems of Walras and Pareto timeless than to charge them with the absurdity of assuming omniscience.

It may imply recognition of the fact that there are equilibrium relations between economic quantities, departure from which creates difficulties and unten¬able situations, and comparison with which is the obvious method to be followed in order to estimate the nature and extent of actual deviations.

It is no chance coincidence that the epoch in which this decrease in importance of the entrepreneurial function first aserted itself is also the epoch in which the social and political position of the bourgeoisie first began to dis¬play obvious symptoms of weakness and to be attacked with success.

Each of them, however, yields a determinate result and supplies an equilibrating mechanism.

In a deeper sense, the answer is undoubtedly in the negative.

As a result, there were 194 refineries by 1865, mostly in Ohio (the biggest enterprise being that of Rockefeller, Andrews, and Flagler), Pennsylvania and New York.

How can the paradox of a rapid rate of growth in a period encompassing deep depression be resolved?

This product differentiation must be interpreted with refer¬ence to its rationale, the creation of such a special market, hence very broadly: it comprises not only "real" but also "putative" differences, not only differences in the product itself, but also differences in the services incident to supplying it (atmosphere and location of shops included) and every device that enables the buyer to associate the thing he buys with the name of a particular firm.

But in any such discussion of economic fact we run up against a wall which blocks the road toward precise answers to many of our questions.

Although company promoters are not as a rule entrepreneurs, a promoter may fill that function occasionally and then come near to presenting the only instance there is of a type which is entrepreneur by profession and nothing else.
2.

In particu-lar, it should be clearly realized that no argument follows from our theory against banks' specializing in the current business of discounting commercial paper or against the proposition, laigely though not wholly true, that this business, together with lending surplus funds on the stock exchange, will produce that amount of deposits which will equally avoid "inflationary" and "defla¬tionary" impulses being imparted to the system.

Perhaps it would have been desirable to have cut them heavily, retaining the parts most useful for throwing light on the implications of the theory, but the abridged edition is quite long enough as it is.

As a matter of fact, it paved the way to consolidation, efficient administration, and sound finance, thus ushering in the last step of America's railroadization.

The simplest case in point arises from technological lags which would in themselves suffice to account for the fact that in prac¬tice we never observe any but those provisional or short-time equilibria mentioned above.

This ability to decide in favor of untried possibilities or to choose not only between tried but also between tried and untried ones, may, however, be distributed in the population according to the Gaus¬sian—though more plausibly a skew—law, and should not be thought of as confined to a few exceptional cases.

Consequently, a theory of business fluctuations to the effect that they are caused by external factors would not lack verifying evidence; indeed, it might be the first to suggest itself to an unprejudiced mind.

BUSINESS CYCLES

A Theoretical, Historical and Statistical Analysis of the Capitalist Process


Joseph A. Schumpeter


Abridged, with an introduction, by Rendigs Fels
McGraw-Hill Book Company New York Toronto London



TABLE OF CONTENT

I. EDITOR'S INTRODUCTION 4
II. Chapter I 9
A. INTRODUCTORY 9
III. Chapter II 14
A. EQUILIBRIUM AND THE THEORETICAL NORM OF ECONOMIC QUANTITIES 14
A. The Meaning of a Model.— 14
B. The Fundamental Question.— 16
C. The Stationary Flow.— 18
D. Equilibrium and t...

In a sense, therefore, we may within the limited range of our in¬vestigation look upon wars, danger of war, revolutions, and social unrest as external factors.

Cotton textile and paper mills, the metallurgical and the chemical industries installed electricity.

We sometimes read that in the nineteenth century the open¬ing up of new countries was the background on which economic evolution achieved what it did.

If on the strength of this we say, "People produce too much, hence they are, from time to time, unable to sell what they produce," we are saying something for which there is really no warrant in the factual finding itself.

This, how¬ever, would blur the specific character of our case: not every generalization is profitable to the analyst—any more than every innovation is to the innovator.

But there is, nevertheless, a distinct group of facts which has some claim to a name of its own, viz., what we might call willful stickiness.

Producers, becoming familiar with the recurrent shifts of demand in the course of the cyclical phases, learn to provide for the peak demand of prosperity.

In the atmosphere of secondary prosperity there will also develop reckless, fraudulent, or otherwise unsuccessful enterprise, which cannot stand the tests administered by reces¬sion.

We may, in an given situation, try to appraise the extent of existing maladjustments, of the presence of fraudulent schemes, "unsound credit," and so on; but beyond such indications it is impossible to go.

Ordinarily, I deplore abridgements, but in the present case there is every reason to believe that a shorter version will prove more useful, especially since the longer one will always be available in li¬braries.

Schum¬peter's concept of recession could illuminate it: previous innova¬tion must have made possible a great increase in output that imposed hardship—symptoms of depression—on all parts of the economy unable to adapt to the new conditions.

Hence we arrive at the very important concept of factors acting from without {let us call them External Factors), which it stands to reason we must try to abstract from when working out an explanation of the causation of economic fluctuations properly so called, that is, of those economic changes which are inherent in the working of the economic organism itself.

Our objection to the commercial theory rests on its failure to reach down to the sources of the process of which it describes part of the sur¬face, and to diagnose correctly the nature of credit creation for other purposes than that of financing current commodity trade.

When, for instance, existing states are in the act of being disturbed, say, by a war financed by government fiat, or by a "mania" of railroad building, there is very little sense in speak¬ing of an ideal equilibrium coexisting with all that disequilibrium.

The modem money market offering the facility, our man may decide to buy, say, treasury certificates as his motorcar fund grows and to sell them when the time has arrived to buy the car.

Now, disregarding the effects of lumpiness or smoothing them out by drawing a monotonie curve through the alternating stretches of rising and falling average costs, we should, strictly speaking, get a curve which would for a small individual firm, be parallel to the quantity axis, i.e., con¬stant unit costs.

As far as changes in taste go, this is entirely irrelevant to the mechanics of the processes we are to analyze.

Since it is poor method to try to cover a wide variety of different patterns by one term and one argument, we should avoid speaking simply of cutthroat competition in all cases of such attacks: the intrusion of a new and superior method of production for instance, an event of particular importance to the subject of this book, identifies a special case which should be treated differently and distinguished from the genuine case in which there is or may be "wasteful" competition, overpro...

If it were not for this, the space that decreasing costs fill in the economists' thought would rapidly dwindle to very modest proportions.

The very fundaments of the industrial organisms of all na¬tions have been politically shaped.

Instead, we note the relative frequency of the occurrence of different values of a quantity in the course of experiments or observations carried out under con¬ditions under which a theoretical variable would display a con¬stant value.

There is some danger in generalizing from familiar facts about stock exchange or land speculation—observation of which, however, also clearly teaches that its moods are not inde-pendent causes but consequential phenomena.

For instance, the answer to the question how far the fall in gold production which occurred after 1873 can have had any effect on prices, largely depends on our estimate of the immigration of legal tender into banks which coincided with it.

There is no difference between them, except, one of technique (which is responsible for difficulties concerning the interpretation of sta-tistics), the note being a balance embodied in a perfectly negotiable paper and the balance being a note which is transferable, not bodily but by check.

Instead, it appeared just as the outbreak of World War II raised economic problems to which Keynes's tools, but not Schumpeter's, could be readily adapted.

The motive, as well as the justification, for speaking in such cases of a theoretical type and a deviating reality lies in the diagnostic value of this distinction, and will be exemplified in our historical survey.
4.

If all factors were infinitely divisible, the production function would be continuous and we could move about on it by infinitesimal steps.

Such industries are assets of doubtful value, in any case a source of weakness and often the immediate cause of breakdowns or depressive symptoms.

In fact, since decreasing total unit costs are mere interruptions of the fundamental property of any given total unit cost curve either to rise or to be horizontal, increasing and decreasing costs are not coordinated alternatives.

To sum up, we shall designate by the term Growth changes in population and in the sum total of savings plus accumulations corrected for variation in the purchasing power of the monetary unit.

If we are to speak about price levels and to devise methods of measuring them, we must know what a price level is.

Second, it is important to keep in mind that what we know from experience is not the working of capitalism as such, but of a distorted capitalism which is covered with the scars of past injuries inflicted on its organism.

But temporary necessity, consciously planned strategy, and fluctuating anticipation of the general course of events acquire a very much wider scope than was assumed in the foregoing analysis.

Change of prac¬tice by the Federal Reserve System or by any Central Bank in Europe may be itself an act of business behavior and an element of the mechanism of cycles, as well as an external factor; and so may collective measures taken by the business world itself.

For brevity's sake we will consider the perfectly competitive case only, although there is nothing to prevent us from extending the following remarks to all other cases.

We shall not, however, discuss this but merely notice the three standard instances of imperfect competition: Bilateral Monopoly, Oligopoly, and Monopolistic Competition.
1.

My second concern was to retain a full account of the interpre¬tation of the cyclical history of one country, in preference to partial accounts of the three countries that Schumpeter discussed at length.

The process takes time and may display oscillations and relapses.

Economic consideration can fully account for the former only; the latter must be accepted as data and all we can do about them in economic analysis is to explain their effects on economic life.

It is incessant change in the data of the situations, rather than the inadequacy of the data of any given situation, which creates what looks like indeterminateness of pricing.

Creation of excess capacity as a war reserve or simply for the sake of its nuisance value is particularly characteristic of this case, for which the cartel is as typical as is the "trust" of the first case.

This means that the average annual rate of growth between the complete business cycle with peaks in 1869 and 1873 and the complete business cycle with peaks in 1873 and 1882 was higher than for neighboring pairs of cycles—in fact it was the highest on record for any successive pairs of cycles, in spite of the fact that the contraction included in the 1873-82 period is rated a deep depression, whereas the contraction phase of the preceding cycle was very mild.

Speculation of the type described by classical theory—buying in advance of a rise in price that is foreseen, selling in advance of a fall—works the same way.

In any case they alter the rules of the economic game and hence the significance of indices and the systematic relations of the elements which form the economic world.

Yet it is so, not only in the case exempli¬fied by costly machinery, but also in the cases of more rational division of labor or, more generally, better "organization" of factors which is held to occur when output expands.

Immediate cost ad¬vantage was at first small, in many cases negative—as it was, for example, in the case of the all-steel ship—and reciprocating and similar steam engines kept often more than their own, a most in¬teresting case, in its complexity, of reaction to innovation.

Similar considerations apply to the increase in the stock of durable producers' goods which would ordinarily follow from the presence in a society of a positive rate of net savings.

How considerable, nevertheless, industrial enterprise must already have been before the Revolution is proved by the fact that em¬bargoes and actual war with the mother country caused so little serious embarrassment, and that, in particular, domestic furnaces and forges were quite up to the requirements of cannon casting and of the other kinds of demand incident to the military oper¬ations.

Both peaks and troughs may easily mislead and it is hardly an exag¬geration to say that, as far as information about fundamental processes goes, they are precisely the most unreliable items in an array.
2.

However, the sector of concerns which are "big," not only in the usual sense of the writers who figure out what percentage of the total national capital of the United States is controlled by the 20 biggest concerns, but in the sense required by the present argument, is as yet not great enough to dominate the picture in any country.

Second, it is important to keep in mind that what we know from experience is not the working of capitalism as such, but of a distorted capitalism which is covered with the scars of past injuries inflicted on its organism.

But America, as far as it was not a farming nation, would then have been primarily a seafaring and trading nation an any case, and her farming interest would have felt the impulse of England's industrial development—which made her a wheat-importing country in the eighties—even with¬out the obstacles that impeded exports from the continent of Europe.

Although this term is objectionable on several counts, it comes nearer to expressing our meaning than does any other, and it has the advantage of avoiding the associations sug¬gested by the cognate term Progress, particularly the compla¬cency the latter seems to imply.

These quantities fluctuate cyclically and, particularly if the technological superiority of a new machine varies with the degree of utilization and if the price of the machine is inflexible, replacement may often figure out more advantageously in prosperity than in recession.

In itself the decision to save is not a decision not to spend or to defer spending, and the latter decision may equally well occur with respect to sums which are and remain earmarked for consumptive use or, in the case of a firm, for expenditure in the ordinary run of business.

First, any indeterminate situations that might arise if "pure" oligopoly actually persisted for some time, must not be confused with that indeterminateness which owes its existence to incessant variation of data that confront a firm in a world full of actual and expected change and are imperfectly known for this very reason.

In general, though not universally, this is equivalent to saying that we move on an invariant production function as long as variations in the quantity of product either can be decom¬posed into infinitesimal steps or cannot be so decomposed exclusively because of lumpiness in factors.

Obviously, such a model will present the fundamental facts and relations of economic life in their simplest form, and it is hardly possible to bring them out satisfactorily without it.

It must also affect the importance of the social function, and in consequence the economic and social position, of that stratum of capitalist society which exists by entrepreneurial achievement as the knights of the Middle Ages existed by virtue of a certain technique of warfare.

The last condition affords the basis of a rigorous definition of unemployment.

The ways of production and usances of commerce are optimal from the standpoint of the firms' interest and with respect to existing horizons and possibilities, hence do not change either, unless some datum changes or some chance event intrudes upon this world.

The quantity-theory aspect or, as we might also say, the aggregative aspect of the practice is entirely secondary.

Borrowing by consumers, particularly governments, is of itself sufficient to enforce a positive rate of interest also for industry and trade, and the writer has no wish to exclude such cases or to minimize the quantitative importance of consumers' credit.

Simultaneously, Mr. Joseph Kitchin, by a less rigorous but more pliable method, showed that cycle also in bank clearings and wholesale prices, as well as in interest rates, for both Great Britain and the United States, during the period 1890 to 1922, moreover contrasted it with the Juglar cycle and a longer swing which can be roughly identified with SpiethofF's spans and which he linked up with gold production.

Ultimate equilibrium will in general depend on the path by which it is reached, i.e., on the whole series of transactions that are usually carried out at varying prices as the situation unfolds.

No firm which is merely ran on established lines, however conscientious the management of its routine business may be, remains in capitalist society a source of profit, and the day comes for each when it ceases to pay interest and even depreciation.

Whether this be secret or Open, tacit or explicit, complete or restricted to certain regions, products, practices (such as credit to customers), whether it is aimed and arrived at directly or after struggle for shares in the trade, does not affect the principle.

Railroads, for instance, could be expected to know that depression do not last forever, yet they often order new rails or new rolling stock late in revival or even in prosperity.

Including 1873-78 in the category of deep depressions at first sight seems reasonable enough, since it is generally considered not only the longest but also one of the worst business contractions on record.

Except for the purposes of the theory of static equilibrium, the economic proc¬ess ought really to be thought of as an infinitely complex com¬posite of many synchronous waves of different nature, quite apart from the class which interests us here.

Excavation of basements by means of power shovels improved by the caterpillar tread and belt and bucket con¬veyors, the use of power hoists, of power concrete and mortar mixers, and of pneumatic riveting machines, rapidly became a matter of course for contractors in all lines of building— typical downgrade developments, all of them.

C. The Stationary Flow.—The analytic treatment of the facts of autonomous change in a closed domain begins con¬veniently with the model of an unchanging economic process which flows on at constant rates in time and merely reproduces itself.

And there is simply no such thing as a homogeneous motorcar or liver pill.

Third, although government borrowing, chang¬ing premiums for risk bearing, currency troubles, extra-economic pressure, and varying organization of the markets for loans can- not fail to distort the picture, facts are more favorable to that theory than theorists have been so far—so much so that there is, if we accept the ordinary rules of scientific procedure, no reason to use any other.

This case has some bearings on situations which actually arise in the course of the phases of business cycles: momentary situations emerge that are very imperfectly under¬stood by the actors on the business stage and often lead to erratic actions more or less conforming to that type.

Finally, there are firms and industries which are forced to undergo a difficult and painful process of modernization, rationalization and reconstruction.

Moreover, older doctrine seems in general to have exaggerated the regulative and smoothing effects of speculation, as we shall see later on.

Though a quarter of a century has elapsed since the first edi¬tion of Business Cycles, the opportunities it opened up for fur¬ther research remain largely unexploited.

Although, of course, we do not, as a matter of principle, postulate either in¬ternal regularity or sine form, there is some use in presenting (Chart I) the graph of the sum of three sine curves the ampli¬tudes of which are proportional to their duration and (Chart II) the graph of the first differences of the composite curve.

The effects of technological lags, for instance, will be reduced if the change has been expected, and the Hog Cycle, as far as it is really due to inability to foresee the mass effect of "improvident" reaction to a favorable fodder-pork ratio, would entirely disappear if the time range of farmers' expectations increased.

Proof of this proposition is very laborious, because it involves showing why all the theories which lead to a different result are logically unsatisfactory.

In our schematic exposition, each phase is credited with what we conceive to be its most characteristic features and this never does justice to real life.

Rare, indeed, are the cases in which a campaign of this kind can be embarked upon irrespectively of the general business situation: as a rule, the phase of the cycle will provide us with determining conditions for the outcome.

It should be observed (sec above, Sec E, 4) that under those conditions even perfect competition would not yield determinate results, particularly if parties have no experi-ence with each other and if there are experimental transactions at the beginning of the market.

For instance, quantity demanded or supplied at any time is not merely a func¬tion of the price that prevails at the same time, but also of past and (expected) future values of that price: we are, there¬fore, driven to include in our functions values of variables which belong to different points of time.

Soon after the turn of the century long-distance transmission, the triphase current, the spread of the steam turbine, improve¬ment of hydroelectric motors, construction of hydroelectric and thermoelectric plants of ever-increasing capacities, and the vic¬tory of the big power stations over the plants of individual in¬dustrial consumers became the leading features of the period, which also persisted, on the much larger scale characteristic of Kondratieff recessions and depressions, in ...

But although they may often temporarily counteract it, they do not in themselves disprove the existence of an equilibrium tendency or the proposi¬tion that at times it prevails in such a way as actually to draw the system toward equilibrium.

Conversely, first the war of independence and then the war of -1812 to 1814 together with its antecedents, affected industry much as prohibitive tariffs would have done and encouraged in-vestment that was bound to become unremunerative as soon as those conditions were removed.

Such a fall must occur by the working of our process and is, in fact, an essential part of the mechanism which spreads the fruits of progress and redistributes productive resources in accordance with the requirements of the new situation.

Only the former is a genuine 'law"; the latter expresses but a modification of it by an acci¬dental technical circumstance, which while it acts will indeed prevent perfectly competitive equilibrium from emerging but can¬not do so indefinitely, because it must ultimately surrender.

Everywhere we find indus¬tries which would not exist at all but for protection, subsidies, and other political stimuli, and others which are overgrown or otherwise in an unhealthy state because of them, such as the beet-sugar industry in Europe and shipbuilding all over the world.

In fact, it would be possible to write, without any glaring ab¬surdity, a history of business fluctuations exclusively in terms of external factors, and such a history would probably miss a smaller amount of relevant fact than one which attempts to do without them.

Another such deus ex machina, closely related to error, is "anticipation."

The income stream, constant if we neglect such things as seasonal variation, consists of wages—payments for productive and consumptive services rendered by human beings, managers included—and rents—payments for services of natural agents.

Hence we have here a case of mixed character not always easy to interpret.

Changes in the tariff policy of a coun¬try or in its System of taxation, measures of social betterment, and government regulations of all kinds we include in the same class.

The source of trouble is not adequately described by saying that expectations are uncertain or that they have to be currently revised or that different people form expectations differing in range and reasonableness.

Third, the limit is, particularly over time, extremely elastic.

Still more instructive is the "harvest cycle," because it is com¬monly spoken of as a cycle and because it has by some authors been made the basis of a theory of the (medium-length) general business cycle (W. St. Jevons and H. L. Moore).

The analogy may, hence, serve to illustrate still more clearly the impossibility of representing marginal costs in function of output as falling (whether continu¬ously or not) and total costs as falling or rising less than they otherwise would, under the influence of successive innovations.

And something of the kind is suggested by the fact that residential building in the United States precedes the Harvard barometer's curve B by a few months—'which makes it in the short run roughly inverse to the money curve C. This is somewhat more significant than it looks because, apart from the influence of interest, we should, if anything, expect a lag.

The only one of first-rate importance was the Whitney cotton gin, though there were many minor ones, particularly in the field of agricultural imple¬ments.

Or, to put it in another way, whether or not firms would have from the outset adopted the method which they actually adopt when their output has increased sufficiently, had the output been at that figure from the outset, or whether or not firms would have adopted production by, say, machinery from the outset, had wages also stood at their higher figure from the outset.

However, as we shall not deal with this group of problems in this volume— although the writer is alive to the seriousness of this breach in our wall—it will be convenient to consider migration over the frontiers of the territories to which our statistics refer, provi-sionally, as an external factor, while migration within those ter¬ritories, which it would be imposible so to consider, will be no¬ticed but incidentally.

However right, therefore, it may sometimes be to enter solemn protests against preconceived ideas, speculation, and metaphysics, no argument of weight can be gained from the physical analogy for the view that the right way to go about our task is to assemble statistics, to treat them by formal methods, and to present the results as the solution of a problem.

And there is no rhythm or cycle if we choose to define either of them with refer¬ence to periodicity in that sense.

Whoever works with partial equilibria soon discovers the necessity of an instrument that will enable him to handle processes going on in the system as a whole which escape his "partial" tools.

In the very limited field it entered, it first competed out kerosene (made from shale and coal) as well as other illuminants (for example, whale oil).

Those attempts to evaluate the limit of credit creation are usually concerned with the effects of such legal restrictions only and hardly ever posit the fundamental problem.

Eliminating digressions and the less valuable parts of the original two volumes, which ran to more than a thousand pages, will enable the reader, I hope, to spend his time more profitably.

In 1883 for instance, when "overpro¬duction" began to show itself, some firms were losing and re¬stricting, others paying high dividends and working overtime (the young worsted industry was booming).

The Goodyear welt-sewing machine (invented in 1862), which became practical in 1877, was 54 times as fast as welt sewing by awl and needle.

It seemed more important to get quickly the home one wanted—or the skyscraper the prospec¬tive rents of which in any case compared favorably with the rate on mortgage bonds—than to bother whether it would cost a few thousand dollars—or in the case of the skyscraper, a million or so—more or less, provided money was readily forth¬coming at those rates.

Sound money men of all times, hence, threw and still throw away the baby with the bath by condemning the principles of that prac¬tice, however understandable their clamor for policing and con¬trolling the practice itself may have been.

In such a sentence as, "It is surely not too much to ask economists to realize that behavior in human societies differs from behavior in animal societies or in physical systems " (p. 1046 of the 1939 edition), I have deleted the italicized words without using dots to so indicate.

However, as we shall not deal with this group of problems in this volume— although the writer is alive to the seriousness of this breach in our wall—it will be convenient to consider migration over the frontiers of the territories to which our statistics refer, provi-sionally, as an external factor, while migration within those ter¬ritories, which it would be imposible so to consider, will be no¬ticed but incidentally.

If all factors were infinitely divisible, the production function would be continuous and we could move about on it by infinitesimal steps.

Hence it is as unreasonable to expect the economist to forecast correctly what will actually happen as it would be to expect a doctor to prognosticate when his patient will be the victim of a railroad accident and how this will affect his state of health.

Finally, a point properly pertaining to the realm of general methodology must be touched upon in order to eliminate an apparent contradiction between our way of looking at economic or social change and the principle of historic continuity which tends to assert itself in historical analysis pari passu with in¬creasing material and improving methods of research.

But temporary necessity, consciously planned strategy, and fluctuating anticipation of the general course of events acquire a very much wider scope than was assumed in the foregoing analysis.

In the case in which saving issues in real investment, however, there is a lag between decision to effect the latter and the emergence of the corresponding equipment goods.

How can the paradox of a rapid rate of growth in a period encompassing deep depression be resolved?

(It is ironic that a generation of economists that tegards disaggregation as a shining virtue has underestimated the theory of such a staunch opponent of aggregation as Schumpeter.

Had it appeared three years before Keynes's General Theory sent economists scurrying off in other directions instead of three years' afterwards, it would have gained from the enor¬mous interest everyone had in business cycles in 1933 and might have been accorded a reception second only to that later re-ceived by the General Theory itself.

It is in no case easy to discern the element of innovation under the mass of induced, derivative, and adventitious phenomena that overlies it.

There is no need for any comment on the nature of the pro¬ceedings which thus inaugurated the colonization of a great part of the country, or for explanation of what the entrepreneurial function so far consisted in.

The history of the recent world crisis could almost be written in terms of ineffectual attempts to stem the tide, undertaken in a belief, fostered in this case by all the prophets, that business , would be "humming" in a few months.

In fact, since decreasing total unit costs are mere interruptions of the fundamental property of any given total unit cost curve either to rise or to be horizontal, increasing and decreasing costs are not coordinated alternatives.

This side of credit creation may also be clarified by means of the analogy with the issue of government fat, although in all other respects the differ¬ences are much more important than the similarities.

Our cyclical schema lends itself to this view, not only because of the length of its longest wave, which brings long-run social changes within the reach of business-cycle analysis, but also because it stresses that kind of economic change that is particularly likely to break up existing patterns and to create new ones, thereby breaking up old and creating new positions of power, civilizations, valuations, be¬liefs, and policies which from this standpoint are, therefore, no longer "ext...

It also serves to show that their final course will not be determined by any automatic result of mere drag¬ging.

(It is ironic that a generation of economists that tegards disaggregation as a shining virtue has underestimated the theory of such a staunch opponent of aggregation as Schumpeter.

Inasmuch as that freedom of choice is not absolute and substitution is possible only according to certain rules and within certain limits, the production function which embodies these rules and limits may be looked upon as a condition or constraint imposed by the technological horizon and the structure of the economic environment on economic decision or on the maxima of economic advantage or profitable¬ness which economic decision strives to attain.

These we shall now exclude from consideration, recalling once more, however, not only that they are always important and some¬times dominant, and that the response of the system to their impact must always be expected to account for a great part of the economic changes we observe, but also that their occurrence may and often does condition changes of the kind which we are about to consider.

There will be more room for individual strategy, moves and counter-moves which may impede, although they may also facilitate, the system's struggle toward equilibrium.

That interpretative schema is, of course, entirely independent from actual financial practice.

Profit, in our sense, is a functional return, but it would not always be safe to locate the entrepreneurial function according to the criterion of accrual.

C. The Stationary Flow.—The analytic treatment of the facts of autonomous change in a closed domain begins con¬veniently with the model of an unchanging economic process which flows on at constant rates in time and merely reproduces itself.

Whatever our opinion might be if we placed ourselves on other possible stand¬points, however strongly we may feel it our duty to condemn both the misconduct involved and the public opinion that not only condoned but fostered it, the fact still remains that we have before us the clearest historical instance by which to illustrate the function of credit creation.

This is in fact one of the main differences in the functioning of an industrial and of a speculative market
But though it may thus be shown that a restorative tendency will develop to work against the spiral, there is nothing to prove that it will prevail against it.

These "momentary" or "provisional" or "short-time" or "tentative"equilibria may usefully be contrasted with "definitive" or with "long-time" equilibria.

Surely, nothing can be more plain than the proposi¬tion that innovation, as conceived by us, is at the center of practically all the phenomena, difficulties, and problems of eco¬nomic life in capitalist society and that they, as well as the extreme sensitiveness of capitalism to disturbance, would be absent if productive resources flowed every year through substan¬tially the same channels toward substantially the same goals, or were prevented from doing so only by external influences.

By this test, it is doubtful if Schumpeter's Business Cycles would merit rescue from the limbo of "out of print."

First, that development which quantitativly outstripped the one of the forties and fifties as it was outstripped by the development in the eighties (the all-time peak in miles added comes in 1887) was a typical downgrade development within the meaning of our model.

For the households, this means that, under the existing circumstances, tastes and economic horizon included, no household feels able to improve its situation by transferring any element of its money income from the commodity on which it is actually spent to any other commodity.

Saving and Accumulation will thus be treated as elements of a monetary process: the complementary processes in the world of goods constitute a distinct problem.

Owing both to inadequate information and to the presence of serious political disturbance (mainly the troubles associated with the American Revolution and its aftermath), dating is very uncertain at the beginning.

They "circulate" in the same sense that any others do, only they do so with a longer period {lower "velocity," to be denned later) than others.

The technical reason for this has an important counterpart in real life: wherever taxes are so small as to be amenable to analyt¬ical treatment by the calculus, they are also too small to affect the fundamental contours of economic behavior as reflected in the budgets of firms and households and, hence, to interfere significantly with economic processes in general and the cyclical process of evolution and its permanent results in particular.

Even so, American shipping, shipbuilding, and its subsidiaries reaped considerable windfall gains from abnormally high freight rates and a profitable transit trade.

If we succeed in describing the economic system by means of a general schema embodying certain properties of it, there is ob-viously much practical utility in asking the question whether the system, as thus depicted, will by its own working produce booms or crises or depressions, and, if so, under what circumstances.

Second, the mechanical effect, as distinguished from the effect on anticipations, of the silver actually bought was to jeopardize the gold position of the country, which but for this would have been very favorable throughout.

I have generally re-sisted the temptation to substitute a word or two of my own, even where doing so could have saved a good deal of space, on grounds that my words would have to be in square brackets which would distract the reader; but I have, on rare occasions, taken the liberty of rearranging Schumpeter's own words.

First, our entrepreneurs may, under the circumstances envisaged, be relied on to spend their deposits promptly, excepting a minimum reserve.

It was the financing of innova¬tion by credit creation—the only method available, as we have seen in the course of our theoretical argument, in the absence of sufficient results of previous evolution—which is at the bot¬tom of that "reckless banking."

In this case the customer acquires an "owned" balance, as he does when he deposits legal-tender money or newly mined or imported monetary metal—thus acquiring balances which are owned but not created—the only cases in which the term deposit (in the sense of deposition irregulare) is appropriate.

Moreover, it derives some support from traditional economics.

This product differentiation must be interpreted with refer¬ence to its rationale, the creation of such a special market, hence very broadly: it comprises not only "real" but also "putative" differences, not only differences in the product itself, but also differences in the services incident to supplying it (atmosphere and location of shops included) and every device that enables the buyer to associate the thing he buys with the name of a particular firm.

There is, however, no trend: the cyclical movements represented are, in our terminology, "clean."

But the writer must have been sadly lacking in expository skill if the reader does not recognize the common sense and the realistic counterpart of this theoretical world, every element of which links up with a fact of everyday experience.

Whereas the shortcomings of the General Theory stimulated other economists to lay bare and refine and apply the model half-concealed in it, incidentally making Keynesians of them, the similar need to clarify and improve and use the Schumpeterian model repelled them.

The real trouble to the theorist comes from the fact that introducing expected values of his variables changes the whole character of his problem and makes it technically so difficult to handle that he may easily find himself unable to prove an equilibrium tendency which, nevertheless, may exist, or even the existence and stability of the equilibrium position itself.

But those rates will not, in general, be equal.

No attempt at technical improvement—for instance, insertion of a consider-able lag between the effect of the new expenditure for invest¬ment goods on the prices of consumers' goods and the effect of the consequent increase in the supply of investment goods—can do away with the fact that a picture of business behavior is being drawn, not from reality, but from the needs of the theorist.

From the business situations which necessarily obtain in recession, depression may easily develop, but in all its essential aspects the cyclical process would be logically complete without it Whether it occurs or not is a question of fact and depends on accidental circumstances, such as the mentality and temper of the business community and the public, the prevalence of get-rich-quick morals, the way-conscientious or otherwise—in which credit is handled in pros¬perity, the ability of ...

Moreover, no theoretical expecta¬tion can be formed about the occurrence and severity of depres¬sions.

This has meant retain¬ing most of Chapters II, HI, and IV and parts of Chapters I and V. Even in Chapters II-IV, however, I have not hesitated to cut footnotes, paragraphs, and whole pages where the discus-sion seemed to go pretty far afield, as well as deleting superfluous sentences and phrases.