Guest Speaker: Mapping the Entrepreneurial Psyche

What leads a person to start a company? "The impulse...to prove oneself superior to others."

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If this magazine decided to choose a patron saint, I'd nominate the economist Joseph A. Schumpeter. Born near Prague in 1883, Schumpeter (pronounced SHOOM-pay-ter) was one of the most astute business thinkers who ever lived, and--luckily for me as his biographer--an electrifying personality besides. He liked to say that he aspired to be the greatest economist, lover, and horseman in the world. Then he'd pause for a second before delivering his punch line: Things weren't going well with the horses.

I'll leave it to other historians to assess his way with women. But when it comes to economic matters, Schumpeter's self-regard seems close to the mark. In his classic book of 1911, The Theory of Economic Development, Schumpeter broke with traditional thinking about business, enthroning the entrepreneur as the source of all economic progress. The book made him famous in academic circles at age 28, although his ideas didn't fully catch on until recently, when the vital importance of entrepreneurship became obvious to everybody.

One of the hallmarks of Schumpeter's 1911 book is that he ventured into territory where no economist had gone before--namely, the psychology of entrepreneurs. Entrepreneurs, he insisted, are not propelled solely by a wish to grow rich or by any "motivation of the hedonist kind." Instead, they feel "the will to conquer: the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself…There is the joy of creating, of getting things done, or simply of exercising one's energy and ingenuity."

Celebrating entrepreneurship was a radical idea in 1911, a time of turbulent economic change that nobody seemed to understand. In Europe, socialism was rapidly on the rise. In the United States, business success was often viewed warily, with muckraking journalists accusing robber barons of taking over the economy. Schumpeter's insistence that entrepreneurial capitalism was the only system that could create a better life for the masses went directly against the prevailing tide. The argument was all the more remarkable coming from a young professor working at a school in the middle of nowhere--the University of Czernowitz, then part of the Austro-Hungarian Empire and now part of Ukraine.

Schumpeter was not just an academic, however, which may explain his unusual views. He interrupted his teaching career on three occasions. For a year he practiced law in Egypt, where he made a small fortune managing a wealthy family's investments. In 1919, he served for seven months as the first finance minister of the Republic of Austria. Next he became president of a small investment bank in Vienna. In that job he traded and invested for his own account and amassed another fortune, which he lost almost overnight in the Vienna stock market crash of 1924. He then returned to teaching, and forever after held the view that failure was a phase through which nearly all people must pass on the way to success. The ability to take a punch, and then get up off the canvas to win the fight was, he thought, one of the defining characteristics of entrepreneurs.

Ultimately, Harvard came calling, making an offer Schumpeter couldn't refuse. Notwithstanding his international reputation, he was flat broke. He had to make paid speeches to raise the money for his transatlantic steamship ticket. It took him 11 years to pay his debts from 1924.

Schumpeter was not the only person to struggle during those years, of course. During the long period of the Great Depression, many people were disillusioned about the apparent failures of capitalism, especially in light of the seeming economic vitality of communist and fascist regimes. Schumpeter feared that people did not understand what was really happening. He acknowledged that wealth and income would always be distributed unevenly. But he also argued that individuals would rise and fall according to their entrepreneurial talents. New entrepreneurs, new products, new services and business strategies would replace older ones, and progress would result.

But people seemed much more convinced by Schumpeter's main rival, John Maynard Keynes. In 1936, Keynes published The General Theory of Employment, Interest, and Money, a book that charted a way out of the Depression, principally through deficit spending by governments to stimulate both investment and consumption. For the rest of their lives, Keynes would overshadow Schumpeter.

Keynes, who was also born in 1883, was a brilliant writer, a great intellectual salesman, and an original thinker. He identified many important new concepts: the multiplier effect, the division of national income between consumption and investment, and a series of analytical measures that added up to a new way of thinking that the world came to call "macroeconomics." Keynes's was an aggretative, top-down way to analyze national economies as whole entities. Indeed, Keynes's book, 403 pages long, does not contain the name of a single firm or individual businessperson. Schumpeter's book Business Cycles, published in 1939, mentions dozens.

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