The present chapter focusses on the socio-economic and scientific problems that Schumpeter wanted to confront in Entwicklung I. The theoretical problems can roughly be specified as concerning the economic functioning of capitalism (see Figure 5.1 on the next page). Although the specification of these theoretical problems of capitalism is crucial for the understanding of his evolutionary research programme, they have not normally been treated explicitly by economists. For instance, Schumpeter (History, 552n) later remarked that “while the term Capitalist gained citizenship in the economist's lingo, the term Capitalism was, throughout the nineteenth century, hardly used except by Marxists and writers directly influenced by Marxism.” The developments within the economics of the twentieth century have not really changed this situation. The major exception is Schumpeter's own contribution that depicted the major characteristic of capitalism as being its promotion of economic evolution.

The missing treatment of the problems of interest to Schumpeter was remarked by William Baumol's (2002, p. x) in his book on capitalism as an “innovation machine”. Baumol emphasised that, when developing the book, he was “unable to find anything that deals directly with my subject … with the exception of very brief discussions by Marx, Engels, and Schumpeter”. This comment demonstrates that even Baumol follows the all-dominant practice of focussing on a few of Schumpeter's statements in Development and Capitalism. In contrast, the present book tries to demonstrate that major parts of these books, and of most of his other works, are closely related to Baumol's topic.

Although Schumpeter made several attempts of elaborating and applying the basic model of the capitalist engine that he had presented in Entwicklung I and Development, the results of his major effort are found in Business Cycles. This book has roots back to his student years. At that time, members of the historical school (like Sombart and Spiethoff) had begun to focus on the problem of crises and cycles. Furthermore, this problem seems to have been a hot issue in Vienna among the participants in the seminars of the economic theoretician Böhm-Bawerk and the statistician and economic historian Inama-Sternegg. It is thus hardly surprising that Schumpeter put it at the top of his research agenda from the very beginning (see Section 5.4). However, he thereby not only set himself apart from the older generation of neoclassical economists who tended to ignore crises and cycles. It later became clear that his evolutionary theorising about business cycles was also radically different from the studies of business cycles that boomed in the 1920s and 1930s. The most obvious difference is that while nearly everybody else considered business cycles pathological, Schumpeter considered the phenomenon as part of the healthy process of economic evolution under capitalist conditions. Actually, his two-stroke model of the capitalist engine (see Figure 6.2 on page 149) suggested that waves are essential for capitalist economic evolution.

The coherence of the present book would have increased if Schumpeter's History of Economic Analysis could, in some way, have been presented as an extension of Development, Cycles, and Capitalism. However, he did not extend the evolutionary trilogy into a quatrology. Actually, the 1260 pages of History do not even contain the elements of a smaller book on the ‘History of Evolutionary Economic Analysis’. In order to exploit the potentials of History, we have to step back from Schumpeter's evolutionary trilogy and consider his double programme for the science of economics. This programme had in Wesen been described as the refinement of equilibrium economics and the creation of evolutionary economics. Since he could not describe the history of something that does not yet exist, the historical addendum to his research programme had to focus on equilibrium economics. The first version of Schumpeter's complement emerged before World War I in Doctrine. His early task, commissioned by Max Weber, had been to overcome the confusing battle of methods. The self-assigned task of History seems to have been to overcome the confusion of the period 1926–39, which, in Section 10.2, was called the years of high theory and high econometrics. After this period, “[t]he field looks like a big building plot all covered with ruins and half-completed new structures” (S1948b, 95).

In a previous book called Evolutionary Economics: Post-Schumpeterian Contributions (Andersen, 1994, 1), I emphasised the need for “a ‘dialogue’ with older, verbal studies of economic evolution”. Although several of the great economists of the past can be seen as contributors to such verbal studies, the title of the book suggested that I was primarily thinking of Joseph A. Schumpeter. It seemed clear to me that Schumpeter, early in life, had chosen what can today be classified as evolutionary economics as the field in which he would make a great contribution to the progress of his chosen science. Actually, he seems to have wanted to do for economics what Darwin had done for biology: to develop a theory that supports the study of the historical process of the evolution of economic life. However, he rejected to work along Darwinian lines. Instead, he combined broad evolutionist perspectives with the tools of neoclassical economics and the German historical school. Furthermore, he recognised that the full explanation of economic evolution is dependent on the explanation of socio-political evolution, so he also worked to promote evolutionary sociology. Although his attempts to develop these areas and to include them into the body of economics and other social sciences cannot be described as unconditional successes, his unique efforts were not made in vain. His vision of the evolutionary process and the concepts that he used to implement this vision are still able to challenge and inspire.

According to the Schumpeter's theory of scientific creativity, the initial “period of sacred fertility” produces the fundamental vision and the fundamental results that are “subsequently worked out” (S1921, 87). He also suggested that “the roots of great scientific achievements, especially those of a theoretical nature, predominantly lie in the twenties of their author's life” (DBA, 16–17; omitted in S1914c). In Schumpeter's case, the especially fertile years covered the period 1903–13. During these years, he had not only produced Wesen and Entwicklung I but also developed many related ideas. The subsequent development of his early results primarily took place after he had resumed academic life in 1925. In the intermediate years, he had been involved in politics and private banking—including his short and rather unsuccessful service as the Austrian Minister of Finance (see Appendix A). Now he established himself as an internationally recognised professor of economics—first at the University of Bonn in Germany from 1925 to 1932; and then at Harvard University from 1932 until his death in 1950. At the University Bonn he radically revised Theorie der wirtschaftlichen Entwicklung and prepared to extend its analyses of the evolutionary functions of money and business cycles. Nevertheless, the three books from which his evolutionary economics and evolutionary sociology are today primarily known were published during his Harvard period. These books are The Theory of Economic Development from 1934; Business Cycles from 1939; and Capitalism, Socialism and Democracy from 1942.

Acharya Jagadish Chandra Bose – the scientist who brought the ancient Indian wisdom of spiritualism into the domain of science. This was the predominant image of the Acharya in colonial India.

In post-colonial India, J C Bose is remembered as the first of the Indian scientists who attempted to build up an Indian structure of science – as the propounder of ‘alternative sciences’ whose idiom sounds flat and out of date today – at best, a flawed genius. Bose is almost a ‘forgotten scientist’ who failed to create a tradition of his own. ‘Bose – the acharya’ is no more an idiom than his spiritual statements are believed to be.

Those who hail Bose and those who denounce him are equally fascinated by the quote cited above. These were the concluding lines of Bose's scientific lecture delivered at the Royal Society, London in 1900. Scriptural citation in the peroration of a scientific lecture is not a common practice. Hence, it is often held that Bose's science was not science alone.

The antagonistic relationship between modern science, understood as materialism, and religion, or spiritualism, existing in the West during the nineteenth and twentieth centuries, provided a challenging background to the contemporary Indian thinkers. Some of them passively accepted this dichotomy; some were ignorant of it; some either accepted materialism or spiritualism; and some thinkers tried to negotiate this antagonism between matter and spirit. A long braid of thinkers beginning from Bankimchandra Chattopadhyaya to Swami Vivekananda, Sri Aurobindo and S Radhakrishnan attempted to make some significant changes though working within the Oriental categories rightly explicated by Edward Said. Inserting into this dichotomy their political programme of making a case for Indian independence, they maintained that materialism (available in plenty in the West) is important but it alone cannot suffice. Spirit (the spiritualism that is available in the East, particular in India) needs to be added to it. Some aspects of this formulation fall outside the Saidian formulation. That is, though they worked within the parameters of Orientalism, the modifications they had implemented (some of them at least) fell outside it – particularly their attempt at converting what was dichotomous into continuous. My paper will discuss these various aspects involved in the modificatory nature of this relation. To dispel the impression that all Indian thinkers have embarked on this convergence, I will discuss a counterinstance available in the writings of Krishnachandra Bhattacharyya, who repudiated contemporary Indian philosophers' attempt at making the continuous relation between matter and spirit without necessarily endorsing the antagonistic relation as available in the West.

It is presently 100 years since Schumpeter published his first book. This book is largely about the foundations of analytical economics and it was published when he was 25. Therefore, the following formulations by Stanley Fischer (1987, 235–6) may read as if they describe his book:

Schumpeter's praise, however, was not for himself but for his friend Paul Samuelson. Like Schumpeter, Samuelson finished his PhD thesis at the age of 25. At that age, both of them had ploughed through an enormous literature with an emphasis on the underlying formal structures and analytical tools. They had found widespread confusion and a lack of recognition of the basic unity under the multiform surface of topics and modes of formulation, and they both wanted to overcome confusion and lay the foundations for future research.

After having considered Capitalism and Cycles in the two previous chapters, we now come to the oldest and most fundamental part of Schumpeter's evolutionary trilogy: The Theory of Economic Development. This book is the translation of Entwicklung II, that is, the second edition of Theorie der wirtschaftlichen Entwicklung. Since we have already studied Entwicklung I, the first German edition of the book, in Chapters 4 and 5, it might not be obvious why an extra chapter is needed for treating Development. However, the previous chapters did not include a systematic discussion of the basic evolutionary mechanisms that in all editions of the book are at the centre of Schumpeter's attention. The major reasons for this omittance were that Development is much more focussed on mechanisms than Entwicklung I and that the mechanisms can best be discussed by including the additional treatments of them in Cycles and Capitalism. These additional treatments are very different. Cycles is like Development based on the model of economic evolution that has been called Schumpeter's Mark I model. This model of the capitalist engine depicts the mechanism of innovation as based on the creation of new firms, tion because of the conservatism of established firms. In contrast, some of the core arguments of Capitalism are based on Schumpeter's Mark II model (see Section 7.2). According to this model, established firms innovate and adapt in oligopolistic competition. Thereby, they become core elements of the mechanism of innovation as well as the mechanism of adaptation.

Trances, visions, speaking in many tongues, irrational social behaviour including the discarding of clothes have been widely interpreted by psychoanalysts as a psychopathological condition. However, parapsychologists are increasingly looking at the grey zone that blurs the rigidly held distinctions between psychoses and spirituality. Stanislav Grof, in his remarkable book Beyond the Brain: Birth, Death and Transcendence in Psychotherapy, published in 1985, goes beyond these neat divides between psychiatry and spirituality to take a fresh look at the phenomenon of ‘spiritual emergence’. To quote Grof:

Schumpeterian unfinishedness

It is tempting to end the present book on Schumpeter's evolutionary economics by solving two related tasks. The first task is to provide a systematic summary of Part II's rather complex presentation of his evolutionary trilogy. The second task is to summarise and evaluate the “standard criticisms” (Lange, 1941, 192) that have been raised against the different elements of his work. The combined solution of the two tasks would serve to continue a literature that was initiated immediately after Schumpeter's death. At that time, Richard Clemence and Francis Doody published a small book called the The Schumpeterian System. This book, which is largely based on Cycles, gives a condensed and relatively systematic presentation of Schumpeter's core contributions. His two former students also had the ambition of confronting a situation where

There are a number of reasons for Japan's underwhelming global presence, but the mercantilist economic model—which encourages the Japanese to think about and experience global culture in a one-sided manner—is clearly a central factor. As YUKAWA Masao (at the time, an Associate Director of Mitsubishi) pointed out in his 1999 article “Japan's Enemy is Japan,” when the Japanese talk about kokusaika, or internationalization, they almost always mean internationalization from Japan—outward investments and acquisitions, and tourists going abroad (sotonaru kokusaika), —as opposed to vice-versa (uchinaru kokusaika).

Even internationalization in the “safe” direction, from Japan to the world, has often proven to be a disappointment. Many Japanese managers working outside Japan fall quickly outside their comfort zone, with the result that many Japanese acquisitions and partnerships abroad have proven to be expensive failures. Similarly, there are relatively few Japanese exercising leadership in prominent global organizations and forums. In striking contrast to Germany's highly constructive, conciliatory role in Europe over the last several decades, Japan has done little that could be described as effective— beyond the rhetoric— to build a community in Asia.

Internationalization in the other direction, meanwhile, slows to a trickle. Immigration policy, conducted under the bureaucratic Immigration Bureau motto, “Internationalization in compliance with the rules,” keeps the number of foreign workers low, despite widespread recognition that Japan would benefit from a major expansion on this front.

Japan is a country that has given the world much to admire. In a few decades, Japan rebounded from wartime devastation to the world's second-largest economy, now valued at almost 4 trillion dollars. It did so without much in the way of natural resources or land, with neither the oil of Saudi Arabia nor the vast natural resources of the United States. This achievement is without parallel and stands as an inspiration to developing and developed countries alike. Japan has the longest life expectancy in the world, universal access to healthcare, very high levels of literacy and basic education, and an impressively equitable wealth and income distribution (though there has been a deterioration and growing inequality in Japan recently). Japanese social life functions smoothly, with great masses of people in the most densely populated large nation on earth showing patience and mutual regard, even when in near-asphyxiating proximity to one another. One can walk freely almost anywhere without fear of being mugged, and a lost wallet is very likely to find its way back to its owner. The streets are clean, the city air quality is good and the transportation system is a model of precision and efficiency. Visitors to Japan can be shown extraordinary kindness.

Japan also boasts many world-leading industries; parts of its manufacturing sector are hugely successful, specifically those in the export sector exposed to international competition.

Japan finds itself caught between a rock and a hard place. Its environment is predominantly composed of countries aspiring to be modern nation-states and imbued with quite strong nationalist ideologies. The Japanese concept of national security leads the country to adopt reactive nationalist policies and ideologies. This is also reflected in the very strong, indeed paramount, element of mercantilism on the economic and business fronts. In the areas of trade and investment especially, Japan stands out as a supreme outlier. Consequently, Japan has not made the transition from modern to post-modern state. And also as a consequence, Japan remains not only closed, but almost in a siege mentality, notably, to cite the most egregious example, in respect to immigrants. That's the hard place.

The rock, however, is that Japan's nationalism, modernism and mercantilism contribute powerfully to the nationalist, modernist and mercantilist ethos that prevails in the region. Japan's nationalism, especially in provocations such as the visits to the Yasukuni Shrine or the revision of history textbooks, greatly exacerbates an already highly tense nationalist regional environment. The number of fault lines are numerous, as we have seen, and some of them very deep. There is North Korea; there is a heavy concentration of nuclear armory; there is the situation with Taiwan; there are many tensions and territorial disputes in areas such as the East and South China Seas; there is competition for resources, especially for crude oil.

Japan's policy-makers stubbornly hold to the untenable dogma of mercantilism—the idea that a nation's prosperity depends on the foreign trade surpluses it generates, where exports and outward investments are good, imports impoverish and inward foreign investments are bad. Especially in the context of efforts to resolve the financial crisis and to rebuild the global economic system, there are several problems when the world's second-largest economy adheres to mercantilism. First, it flies in the face of the most basic economic principles like specialization, flexible prices determined by unhindered supply and demand or the primacy of productivity. Mercantilism is a zero-sum approach, long ago discredited, to the wealth and welfare of nations; a pre-Enlightenment, pre-modern mental frame that denies the most basic value generation premises of trade, investment, specialization and comparative advantage. Even as Japan's trade surplus has been dropping rapidly with the global slowdown, many economists would agree with the verdict of Nikolas Müller-Plantenberg from the Universidad Autónoma de Madrid: “Japan's large and sustained current account surpluses are at the root of its current economic problems.”

Second, it is philosophically indefensible, relying as it does on exceptionalism. As Princeton University's Peter Singer points out, most major secular and religious ethical traditions adhere to some version of the Golden Rule principle: act towards others as you would have them act towards you. The Japanese government appeals to this principle in its call for universal intellectual property protection, or in its discourse on poverty in Africa.