On Schumpeter as an economist, sociologist and prophet

I guess we are on a history of thought week. I wrote about Adam Smith being misinterpreted. Now it is about Schumpeter, who is often celebrated as the great theorist of innovation, the dynamic force behind capitalism according to him, being overrated. In this longer post (link to substack below), I argue that this reputation is largely overstated. While Schumpeter offered an influential narrative centered on entrepreneurs and technological change, his economics remained firmly within the marginalist tradition and added little analytically beyond earlier authors like his teacher Böhm-Bawerk. His real insights lay elsewhere, particularly in fiscal sociology in his famous essay on the tax state, but he was not much of a sociologist of technology, surprisingly. I discuss Schumpeter as economist, sociologist, and prophet (his approach to Marx in Capitalism, Socialism and Democracy), showing that he was a conventional theorist of growth, an interesting but limited sociologist, and a failed prophet about the fate of capitalism, especially when contrasted with Keynes, whose more modest proposals for managing capitalism proved far closer to historical reality. Read the whole thing here.

Argentina, Economic Science and this year's "Nobel"

Trump wanted the Peace one, Milei the one in Economics

A few random thoughts about some recent news. Today, Javier Milei met with Donald Trump at the White House. Trump reportedly warned that the United States “will not be kind” to Argentina if Milei does not win the upcoming elections. That statement seems to suggest that the much-discussed “rescue” of the Argentine peso may be tied to domestic electoral results — something that Treasury Secretary Bessent had already hinted at when he announced the possibility of a US Treasury rescue package for Argentina.

No surprise there. But the situation brings back memories of earlier crises — particularly the 2001–2002 collapse, when Argentina defaulted after a long neoliberal experiment of liberalization, deregulation and privatization under the Menem administration. The current crisis, which began with the 2018 IMF program, is in many ways a continuation of that same process.

Back in 2002, the crisis caught one economist in particular by surprise: Rudi Dornbusch. Writing in the Financial Times, Dornbusch argued that Argentina could not be trusted to govern itself and proposed that its fiscal and monetary policy should be overseen by a foreign board of central bankers — a shockingly neocolonial suggestion, even for that time ["I'm shocked, shocked I tell you"]. I wrote a short letter to the Financial Times in response, which you can find here, mocking this absurd idea.

Two decades later, we are still dealing with the same problems. The “cleanup” of the 2002 mess took place under the so-called populist governments of Néstor and Cristina Kirchner, through two major debt renegotiations in 2005 and 2010. During that period, Argentina’s debt-to-export ratio — a measure of repayment capacity — improved significantly [see my piece on Challenge on that and the Vulture Fund negotiations that Macri ended up finishing in a favorable way to the Vultures; you know on what side he is]. Yet the Macri administration (2015–2019) more than doubled the foreign debt once again, setting the stage for the current crisis [on the doubling of debt see this piece with Matias De Lucchi; whole issue, scroll down].

In short, the same set of economic elites have crashed the economy multiple times. Domingo Cavallo, Menem’s finance minister and architect of the 1990s convertibility plan, reappeared at the end of the De la Rúa government in 2001. Federico Sturzenegger, who was at the central bank during Macri’s failed experiment in 2018, is now serving as Milei’s Minister of Deregulation. This revolving door of orthodox technocrats has brought Argentina back to the IMF, and now possibly to a US Treasury rescue, for the third time in a generation.

What’s frustrating is how the narrative never changes. The mainstream explanation — repeated recently by a well-known economist from the Di Tella University — is that Argentina’s problems are caused by irresponsible “populists.” In his version, written in academic jargon about sunspots and expectations, the blame somehow always falls on Peronists, whether they are in power or not. If the economy collapses, it’s because investors fear a Peronist comeback; if it booms, it’s despite them. Don't worry, it won't.

This kind of argument says a lot about the state of the economics profession, perhaps more than about Argentina’s actual economy. Instead of looking at straightforward indicators — who increased the foreign debt, how exports performed, whether external repayment capacity was sustained — many economists hide behind highly subjective assumptions disconnected from reality.

This is part of a broader problem in Latin American economics: what my colleague Franklin Serrano calls “brain damage” — not “brain drain.” The issue isn’t that talented economists leave the country, but that many return from US PhD programs armed with orthodox models that have repeatedly failed our economies. They bring back the intellectual framework that justifies the very policies that keep generating crises.

This brings me to another bit of recent news: the so-called Nobel Prize in Economics (technically, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel). This year’s award went to Philippe Aghion Peter Howitt, and Joel Mokyr for their contributions to what’s broadly called “Schumpeterian growth theory” — work that connects innovation and technological change to economic growth. Surprising and soul crushing news to Milei, who wanted the prize for stabilizing the economy (a miracle according to Niall Ferguson).

Aghion and Howitt's models attempt to explain long-term growth by endogenizing productivity — the famous Solow residual. They borrow Schumpeter’s language of innovation and creative destruction, though often in a far more formal framework. In that sense, the connection to Schumpeter is more symbolic than substantive. Still, compared to some recent laureates, this year’s selection is a relatively defensible choice. Their models are certainly more in line with Schumpeter that some of the heterodox neo-Schumpeterian models.

Joel Mokyr, a historian, has written extensively on the cultural roots of the Industrial Revolution. His work offers a deeply Eurocentric — also, and more importantly, culturalist and supply-side — interpretation of why growth took off in Europe. While I disagree with much of that perspective, it’s undeniable that the Industrial Revolution did begin in Europe, and any serious account must explain that historical specificity. The problem is less Eurocentrism per se than the exclusive focus on supply factors, ignoring the demand and institutional dimensions that Keynesian and structuralist economists once emphasized. In that sense, I welcome the recognition of a historian among the laureates. But I also lament the profession’s retreat from the richer, more historically grounded analyses of scholars like David Landes, whose The Unbound Prometheus offered a more balanced view of the Industrial Revolution — one attentive to the demand aspects of economic growth.

Perhaps the real lesson — both from Argentina’s crises and from this year’s “Nobel” — is that economics still struggles to learn from its own history.

More on the "Consumer Revolution"

I have noted before (and here and here) the neglect of the role of demand in more recent historical accounts of the Industrial Revolution. The typical view used to emphasize demand, like in Landes' Unbound Prometheus, but more recent accounts like Allen or Mokyr emphasize technological change and supply side forces.

Thankfully, there is a whole new literature that puts an emphasis on the so-called Consumer Revolution, in particular the work of Maxine Berg. T. H. Breen in The Marketplace of Revolution goes further and suggests that the economic reasons behind the American Revolution were also associated to the transformation in consumer culture. In his words:

"What gave the American Revolution distinctive shape was an earlier transformation of the Anglo-American consumer marketplace. This event, which some historians have called a 'consumer revolution,' commenced sometime during the middle of the eighteenth century, and as modestly wealthy families acquired ever larger quantities of British manufactures— for the most part everyday goods that made life warmer, more comfortable, more sanitary, or perhaps simply more enjoyable—the face of material culture changed dramatically. Suddenly, buyers voiced concerns about color and texture, about fashion and etiquette, and about making the right choices from among an expanding number of possibilities."

In this view, the demand for new goods (and not so new too), tea, coffee, tobacco, chocolate, china, calicos, silks, etc. was central for the technological revolution of the 18th century. What Breen seems to suggest is that the same Consumer Revolution that was taking place in England was taking place in America, and that the subordinated role in the colonial pact, and the trade restrictions imposed by the many Parliamentary Acts, are at the heart of the movement for independence. In other words, not only demand might be relevant to explain economic growth, but economic growth might be central for political developments.