Triumph of the new.

Prophet of Innovation: Joseph Schumpeter and Creative Destruction, by Thomas K. McCraw (Belknap, 736 pp., $35)

EVERY few years, public interest in innovation and entrepreneurship undergoes something of a revival. We're in one of those periods.

Business pages brim with news of entrepreneurial returns to private equity firms and innovative financial engineering at hedge funds. A new wave of Internet start-ups, such as YouTube and MySpace, reminds the public that entrepreneurs keep creating the "new new thing" that can augment or transform existing business models. A bull market for stocks is renewing interest in financial news and information. George Gilder is once again--we can be thankful--writing big-think pieces about innovation.

Several new books are targeted at readers hungry for a deeper understanding of entrepreneurship. Carl Schramm's The Entrepreneurial Imperative makes a persuasive case for the importance of entrepreneurial dynamism to the long-run health of economies. (The Kauffman Foundation, of which Schramm is president, has done a great job in bolstering awareness of entrepreneurship.) Capital Ideas Evolving, by financial historian Peter L. Bernstein, explains how a new generation of financial entrepreneurs is harnessing academic theory to transform 21st-century Wall Street. There is even a movie: The stunning new film The Call of the Entrepreneur breathes cinematic life into a highly abstract concept.

All of these works find some of their inspiration in the writings of Joseph Schumpeter, the famous Austrian economist who is the subject of an extraordinary new biography. Prophet of Innovation by Thomas K. McCraw chronicles the life of one of the 20th century's most original and insightful scholars.

Like his contemporary and frequent rival John Maynard Keynes, Schumpeter makes for a rich biographical subject. Keynes received the treatment he deserved from Lord Robert Skidelsky's magisterial multi-volume biography. McCraw's effort, similarly, is worthy of Schumpeter.

Schumpeter's story was a rich pageant of both triumph and calamity. His life mirrored the capitalist process of incessant change and reinvention he sought to explicate. He was born in 1883 and lived through the implosion of imperial Europe, the Great Depression, two world wars, and the advent of the Cold War. He lived through a time when, as one historian put it, "the medieval and modern orders collided head-on."

His own life was marked by similar tumult. Schumpeter moved many times throughout his life, ultimately settling in the United States for a distinguished career at Harvard. He experienced alternating periods of soaring financial success and humiliating indebtedness. And his scholarly output was immense: He publishing several major papers and books, including Capitalism, Socialism, and Democracy, which remains a popular classic to this day.

He was an unabashed, even shameless, Lothario who bedded scores of women before he settled down. "Settling down" for Schumpeter, however, comprised three marriages that included a period of bigamy.

Schumpeter was unusually close to his mother, Johanna, an independent-minded and restless woman who pushed her son to develop intellectually. Her death in 1926 would have been devastating enough for Schumpeter; but it coincided with the death of his beloved second wife Annie, who perished during the birth of their first child. The baby also died, four hours after Schumpeter rushed him to a hospital after leaving his wife's deathbed.

Schumpeter's personal experiences molded his views about capitalism and politics and set him apart from some of his contemporaries. According to McCraw:

   Compared to Keynes, Schumpeter had no
   reason to think that life was something a
   person could expect to enjoy
   automatically. It was one
   thing to grow up in Britain--stable,
   prosperous, and
   ever-victorious in its many
   wars--and quite another to
   be a child of the vanquished,
   and now vanished, Austria of
   Schumpeter's youth. His own
   vision of life resembled his
   vision of capitalism as a
   perennial gale of creative
   destruction.... By the time
   he married [his third wife]
   Elizabeth Boody, he had
   lived in nine cities and five
   countries (seven countries by today's
   boundaries). He had relocated his household
   23 times. No wonder his vision differed
   so thoroughly from that of the
   sedentary Keynes.

It was perhaps in part because of these circumstances that Schumpeter placed heavy emphasis on the importance of political stability. McCraw writes: "Because the maturing Schumpeter sensed that creative destruction in the economic sphere could be violently disruptive, he began to place a high premium on political order. He became convinced that the supplanting of one set of entrepreneurial elites by another could bring social unrest that might stall the capitalist engine."

This concern for the destabilizing aspects of modern commercial capitalism is part of what marked him as a conservative, something he called himself even as it was unfashionable to do so. In 1986 John Kenneth Galbraith dubbed Schumpeter "the most sophisticated conservative of this century." (Schumpeter famously and comically remarked on the intellectual flimsiness of some of his fellow conservatives that "when I see those who espouse my cause, I begin to wonder about the validity of my position.")

Indeed, his life and his work speak to the disjunctions at the heart of conservatism, particularly modern American conservatism with its embrace of libertarianism. More than most economic systems, McCraw writes, capitalism is "distinctly oriented toward the future." The combination of Schumpeter's championing of such a forward-oriented system with his concern for established political order built an inherent tension into his scholarship and vision.

Schumpeter deepened our understanding of the entrepreneur in capitalist society and the nature of capitalism itself. He shared with Marx an intense interest in the dynamics of capitalism and, as McCraw puts it, "its ever-changing nature, whose only music was uproar." His most lasting achievement was to demonstrate that capitalism is incomprehensible without an understanding of the role of entrepreneurs--the innovators who generate new products, forms, organizations, or brands. These "new combinations" challenge and ultimately undermine the established order; and, in capitalist societies, the process is repeated again and again. This economic swirl creates social and political stresses, but material progress is impossible without it.

Until Schumpeter, economists paid little attention to entrepreneurship. His famous student, Nobel Prize-winner Paul Samuelson, said that Schumpeter "left behind the only kind of school appropriate to a scientific discipline--a generation of economic theorists who caught fire from his teaching."

We can gauge the magnitude and scope of Schumpeter's genius as we would that of any theorist: His vision seems better to reflect reality than that of many of his predecessors or contemporaries. This includes Keynes, whose brilliance is too often underappreciated by conservatives even as it is overstated by liberals.

Schumpeter's achievement was difficult and two-fold: to describe the world both as it was and as it was becoming. Only great intellects are capable of such tasks. Given how much we have come to expect economic and technological change as a matter of course today, some of what Schumpeter prophesied in hindsight seems almost obvious. But that just shows how thoroughly the Schumpeterian vision has been absorbed. Indeed, Richard Nixon's famous aphorism about Keynesianism would benefit from an innovative update: We're all Schumpeterians now.

Mr. Schulz is a research fellow at the American Enterprise Institute and editor of the website TCS Daily.