Schumpeter's Theory of Interest
SCHUMPETER'S theory of interest, which was fully expounded in the first edition of his Theory of Economic Development (I9I2) but had been clearly foreshadowed in his first book, Das Wesen und Hauptinhalt der theoretischen Nationalikonomie (I908), is fairly well known, although it has not been widely discussed in English. Nor has it been widely accepted, but most critics recognize, explicitly or implicitly, that the extreme version of the theory of interest is not an essential part of Schumpeter's dynamic system.' A thorough understanding of Schumpeter's views on the problem of the interest rate requires, I believe, that we distinguish between an extreme and a less extreme version of his theory. The extreme version culminates in the proposition that in a stationary or quasi-stationary economy, in the Kreislaufwirtschaft, the rate of interest would be zero, and that the positive rate which we observe in reality is entirely the result of the well-known dynamic mechanism that Schumpeter has described and analyzed so brilliantly. The less extreme version admits that there would exist a positive rate of interest in the stationary economy, but insists that dynamic forces not only are likely to raise the interest rate above its stationary level but add, qualitatively, entirely new features to the static picture.2 The extreme version of his theory is hardly acceptable. Although Schumpeter spent much time and effort in defending it (e.g., in his famous controversy with Bohm-Bawerk),3 he frequently made remarks which indicate clearly that he was aware of the fact that this version was by no means essential for his dynamic mechanism. On the other hand, adherents of what might be called the ruling theory of interest B6hmBawerkians, Fisherians, Knightians, etc. (the differences between them are minor, at any rate much less important than the fierce controversies in which they were or still are embroiled would suggest) might well admit that there are few branches of static, equilibrium theory that require such drastic alterations, in order to preserve a semblance to reality under realistic dynamic conditions, as does the static, equilibrium theory of interest. Schumpeter was always keenly conscious of, and felt most uncomfortable with, the unreality of many assumptions underlying most static theorizing on the interest rate: existence of a uniform rate, absence of uncertainty, free capital market in the sense that everybody can borrow as much as he wants to at the ruling rate. These are, indeed, most unrealistic assumptions which have far-reaching implications.