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firms are suddenly driven to the wall, etc., and no one innovates again until the
situation clears.
74 America s Great Depression
2. In reality, it may take a long time for a cluster of innovations
in a new industry to develop, and yet it may take a relatively short
time for the output of that industry to increase as a result of the
innovations. Yet the theory must assume that output increases after
the cluster has done its work; otherwise, there is no boom nor bust.
3. As we have seen above, time preferences and interest are
ignored, and also ignored is the fact that saving and not technol-
ogy is the factor limiting investment.23 Hence, investment
financed by bank credit need not be directed into innovations, but
can also finance greater investment in already known processes.
4. The theory postulates a periodic cluster of innovations in the
boom periods. But there is no reasoning advanced to account for
such an odd cluster. On the contrary, innovations, technological
advance, take place continually, and in most, not just a few, firms.
A cluster of innovations implies, furthermore, a periodic cluster of
entrepreneurial ability, and this assumption is clearly unwarranted.
And insofar as innovation is a regular business procedure of
research and development, rents from innovations will accrue to
the research and development departments of firms, rather than as
entrepreneurial profits.24
5. Schumpeter s view of entrepreneurship usually acclaimed
as his greatest contribution is extremely narrow and one-sided.
He sees entrepreneurship as solely the making of innovations, set-
ting up new firms to innovate, etc. Actually, entrepreneurs are con-
tinually at work, always adjusting to uncertain future demand and
supply conditions, including the effects of innovations.25
23
Schumpeter wisely saw that voluntary savings could only cause simple eco-
nomic growth and could not give rise to business cycles.
24
See Carolyn Shaw Solo, Innovation in the Capitalist Process: A Critique of
the Schumpeterian Theory, Quarterly Journal of Economics (August, 1951):
417 28.
25
This refutes Clemence and Doody s defense of Schumpeter against
Kuznets s criticism that the cluster of innovations assumes a cluster of entrepre-
neurial ability. Clemence and Doody identified such ability solely with the mak-
ing of innovations and the setting up of new firms. See Richard V. Clemence and
Francis S. Doody, The Schumpeterian System (Cambridge, Mass.: Addison Wesley
Some Alternative Explanations of Depression: A Critique 75
In his later version, Schumpeter recognized that different spe-
cific innovations generating cycles would have different periods
of gestation for exploiting their opportunities until new output
had increased to its fullest extent. Hence, he modified his theory
by postulating an economy of three separate, and interacting,
cycles: roughly one of about three years, one of nine years, and one
of 55 years. But the postulate of multi-cycles breaks down any the-
ory of a general business cycle. All economic processes interact on
the market, and all processes mesh together. A cycle takes place
over the entire economy, the boom and depression each being gen-
eral. The price system integrates and interrelates all activities, and
there is neither warrant nor relevance for assuming hermetically-
sealed cycles, each running concurrently and adding to each
other to form some resultant of business activity. The multi-cycle
scheme, then, is a complete retreat from the original Schumpeter-
ian model, and itself adds grievous fallacies to the original.26
QUALITATIVE CREDIT DOCTRINES
Of the theories discussed so far, only the Austrian or Misesian
sees anything wrong in the boom. The other theories hail the
boom, and see the depression as an unpleasant reversal of previous
prosperity. The Austrian and Schumpeterian doctrines see the
depression as the inevitable result of processes launched in the
boom. But while Schumpeter considers secondary wave defla-
tion unfortunate and unsettling, he sees the boom bust of his pure
model as the necessary price to be paid for capitalist economic
development. Only the Austrian theory, therefore, holds the infla-
tionary boom to be wholly unfortunate and sees the full depression
Press, 1950), pp. 52ff; Simon S. Kuznets, Schumpeter s Business Cycles,
American Economic Review (June, 1940): 262 63.
26
Schumpeter also discusses a secondary wave superimposed on his pure
model. This wave takes into account general inflation, price speculation, etc., but
there is nothing particularly Schumpeterian about this discussion, and if we dis-
card both the pure model and the multicycle approach, the Schumpeterian theo-
ry is finished.
76 America s Great Depression
as necessary to eliminate distortions introduced by the boom. Var-
ious qualitative credit schools, however, also see the depression
as inevitably generated by an inflationary boom. They agree with
the Austrians, therefore, that booms should be prevented before
they begin, and that the liquidation process of depression should
be allowed to proceed unhampered. They differ considerably,
however, on the causal analysis, and the specific ways that the
boom and depression can be prevented.
The most venerable wing of qualitative credit theory is the old
Banking School doctrine, prominent in the nineteenth century and
indeed until the 1930s. This is the old-fashioned sound banking
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