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==Career== ===Influences=== The source of Schumpeter's dynamic, change-oriented, and innovation-based economics was the [[historical school of economics]]. Although his writings could be critical of that perspective, Schumpeter's work on the role of innovation and [[entrepreneurship]] can be seen as a continuation of ideas originated by the historical school, especially the work of [[Gustav von Schmoller]] and [[Werner Sombart]].<ref>{{cite web|url= http://users.ntua.gr/jmilios/MichaelidesMiliosEAEPE2005.pdf |title=PG Michaelides, The Influence of the German Historical School on Schumpeter, 17th International Conference of the European Association for Evolutionary Political Economy |location=Bremen, Germany |date=November 2005}}</ref><ref name="GHS">{{cite journal|last=Michaelides |first=Panayotis G. |year=2009|title=Joseph Schumpeter and the German Historical School|journal=Cambridge Journal of Economics |volume=33 |issue=3 |pages=495–516 |doi=10.1093/cje/ben052 |citeseerx=10.1.1.903.6952}}</ref> Despite being born in Austria and having trained with many of the same economists, some argue he cannot be categorized with the [[Austrian School of economics]] without major qualifications<ref>{{cite book |first=D. | last=Simpson | title=Neoclassical Economic Theory, 1870 to 1930 | chapter=The Austrian Tradition: Schumpeter and Mises |date=1990 |publisher=Springer |isbn=978-9400921818 |pages=201–249 |doi=10.1007/978-94-009-2181-8_6 |chapter-url= https://link.springer.com/chapter/10.1007/978-94-009-2181-8_6 |access-date=January 23, 2022}}</ref> while others maintain the opposite.<ref>{{cite journal |first=S. |last=Boehm |title=Joseph Schumpeter and the Austrian School of Economics |date=1987 |journal=Journal of Economic Studies |issn= 0144-3585 |volume=2 |issue=2 |pages=18–28 |doi=10.1108/eb002567 |url= https://doi.org/10.1108/eb002567 |access-date=July 23, 2022}}</ref> Schumpeter was also influenced by [[Léon Walras]] and the [[Lausanne School]], calling Walras the "greatest of all economists".<ref>Schumpeter, J. A., 1994 [1954], ''History of Economic Analysis'', Oxford University Press, p. 795</ref> The Austrian sociologist [[Rudolf Goldscheid]]'s concept of fiscal sociology influenced Schumpeter's analysis of the tax state.<ref>{{cite book|last=Swedberg |first=Richard |author-link=Richard Swedberg |year=1991 |chapter=Introduction: The Man and His Work |title=The Economics and Sociology of Capitalism |publisher=Princeton University Press |isbn=978-0691042534|chapter-url= https://books.google.com/books?id=t61SJFv39XcC&pg=PA48|page=48}}</ref> A 2012 paper showed that Schumpeter's writings displayed the influence of [[Francis Galton]]'s work.<ref>{{cite journal|url= https://journals-openedition-org.translate.goog/interventionseconomiques/1753?_x_tr_sl=fr&_x_tr_tl=en&_x_tr_hl=en-US |title=L'influence de l'eugénisme galtonien dans la pensée de Joseph Alois Schumpeter |first=Fabrice |last=Dannequin|date=November 1, 2012 |journal=Revue Interventions économiques. Papers in Political Economy |issue=46 |doi=10.4000/interventionseconomiques.1753 |via=journals-openedition-org.translate.goog|doi-access=free }}</ref> ===Evolutionary economics=== {{main|Evolutionary economics}} According to [[Christopher Freeman]] (2009), "the central point of his whole life work [is]: that capitalism can only be understood as an evolutionary process of continuous innovation and '[[creative destruction]]'".<ref>{{cite book |title=Techno-economic paradigms: essays in honour of Carlota Perez |editor-first=Wolfgang |editor-last=Drechsler |editor-first2=Erik |editor-last2=Reinert |editor-first3=Rainer |editor-last3=Kattel |page=126 |date=2009 |publisher=Anthem Press |location=London |isbn=9781843317852}}</ref> ===''History of Economic Analysis''=== Schumpeter's scholarship is apparent in his posthumous ''History of Economic Analysis'',<ref>{{cite book|last1=Schumpeter |first1=Joseph |title=History of Economic Analysis |date=1954 |publisher=George Allen and Unwin |location=London}}</ref> Schumpeter thought that the greatest 18th-century economist was [[Anne Robert Jacques Turgot|Turgot]] rather than [[Adam Smith]], and he considered [[Léon Walras]] to be the "greatest of all economists", beside whom other economists' theories were "like inadequate attempts to catch some particular aspects of Walrasian truth".<ref>{{cite web|url= http://www.hetwebsite.org/het/essays/margrev/phases.htm#aftermath |title=Phases of the Marginalist Revolution |publisher=HET |access-date=May 9, 2015|archive-url= https://web.archive.org/web/20130526154627/http://www.hetwebsite.org/het/essays/margrev/phases.htm |archive-date=May 26, 2013}}</ref> Schumpeter criticized [[John Maynard Keynes]] and [[David Ricardo]] for the "Ricardian vice". According to Schumpeter, both Ricardo and Keynes reasoned in terms of abstract models, where they would freeze all but a few variables. Then they could argue that one caused the other in a simple [[monotonic]] fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model. In this book, Joseph Schumpeter recognized the implication of a [[gold standard|gold monetary standard]] compared to a [[fiat currency|fiat monetary standard]]. In ''History of Economic Analysis'', Schumpeter stated the following: "An 'automatic' gold currency is part and parcel of a [[laissez-faire]] and [[free-trade]] economy. It links every nation's money rates and price levels with the money rates and price levels of all the other nations that are 'on gold.' However, gold is extremely sensitive to government expenditure and even to attitudes or policies that do not involve expenditure directly, for example, in foreign policy, certain policies of taxation, and, in general, precisely all those policies that violate the principles of [classical] liberalism. ''This'' is the reason why gold is so unpopular now and also why it was so popular in a [[bourgeois]] era."<ref>{{cite web|first=Richard |last=Timberlake |title=Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy |publisher=Econ Journal Watch |url= http://www.econjournalwatch.org/pdf/TimberlakeIntellectualTyrannyAugust2005.pdf |archive-url = https://web.archive.org/web/20050910125855/http://www.econjournalwatch.org/pdf/TimberlakeIntellectualTyrannyAugust2005.pdf |url-status=live |archive-date=September 10, 2005 |date=August 2005 |access-date=July 23, 2022}}</ref> ===Business cycles=== Schumpeter's relationships with the ideas of other economists were quite complex in his most important contributions to economic analysis – the theory of [[business cycle]]s and development. Following neither Walras nor Keynes, Schumpeter starts in ''The Theory of Economic Development<ref>Schumpeter, J.A. ''The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle'' translated from the German by Redvers Opie (1961) New York: OUP</ref>'' with a treatise of [[circular flow]] which, excluding any innovations and innovative activities, leads to a stationary state.<ref>{{cite web |title=Schumpeter, Joseph-1883-1950 |url= https://www.libertarianism.org/topics/schumpeter-joseph-1883-1950}}</ref> The stationary state is, according to Schumpeter, described by [[Walrasian equilibrium]]. The hero of his story is the entrepreneur. The entrepreneur disturbs this equilibrium and is the prime cause of economic development, which proceeds cyclically along with several time scales. In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the Russian [[Nikolai Kondratiev]]'s ideas on 50-year cycles, [[Kondratiev wave]]s. Schumpeter suggested a model in which the four main cycles, [[Kondratiev wave|Kondratiev]] (54 years), [[Kuznets swing|Kuznets]] (18 years), [[Juglar cycle|Juglar]] (9 years), and [[Kitchin cycle|Kitchin]] (about 4 years) can be added together to form a composite [[waveform]]. A Kondratiev wave could consist of three lower-degree Kuznets waves.<ref>Recent research suggests that the Kuznets swing could be regarded as the third [[harmonic]] of the [[Kondratiev wave]] – see {{cite journal |last1=Korotayev |first1=Andrey V. |author-link=Andrey Korotayev |last2=Tsirel |first2=Sergey V. |title=A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 2008–2009 Economic Crisis |journal=Structure and Dynamics |date=7 January 2010 |volume=4 |issue=1 |doi=10.5070/SD941003306 |url= http://www.escholarship.org/uc/item/9jv108xp |access-date=25 June 2022|doi-access=free }}</ref> Each Kuznets wave could, itself, be made up of two Juglar waves. Similarly two (or three) Kitchin waves could form a higher degree Juglar wave. If each of these were in phase; more importantly, if the downward arc of each was simultaneous so that the [[nadir]] of each was coincident, it would explain disastrous slumps and consequent depressions. As far as the segmentation of the Kondratiev Wave, Schumpeter never proposed such a fixed model. He saw these cycles varying in time – although in a tight time frame by coincidence – and for each to serve a specific purpose. {{Economic Waves}} ===Keynesianism=== In Schumpeter's theory, [[Walrasian equilibrium]] is not adequate to capture the key mechanisms of economic development. Schumpeter also thought that the institution enabling the entrepreneur to buy the resources needed to realize his vision was a well-developed [[capitalism|capitalist]] financial system, including a whole range of institutions for granting [[credit]]. One could divide economists among (1) those who emphasized "real" analysis and regarded money as merely a "veil" and (2) those who thought monetary institutions were important and money could be a separate driving force. Both Schumpeter and Keynes were among the latter.<ref>{{cite web |title=Joseph Schumpeter |url= http://www.thelatinlibrary.com/imperialism/notes/schumpeter.html |access-date=2022-10-13 |website=thelatinlibrary.com}}</ref> ===Demise of capitalism=== {{more citations needed section|date=February 2019}} Schumpeter's most popular book in English is probably ''[[Capitalism, Socialism and Democracy]]''. While he agrees with [[Karl Marx]] that capitalism will collapse and be replaced by [[socialism]], Schumpeter predicts a different way this will come about. While Marx predicted that capitalism would be overthrown by a violent proletarian revolution, which occurred in the least capitalist countries, Schumpeter believed that capitalism would gradually weaken itself and eventually collapse. Specifically, the success of capitalism would lead to [[corporatism]] and to values hostile to capitalism, especially among intellectuals. "Intellectuals" are a social class in a position to critique societal matters for which they are not directly responsible and to stand up for the interests of other classes. Intellectuals tend to have a negative outlook on capitalism, even while relying on it for prestige because their professions rely on antagonism toward it. The growing number of people with higher education is a great advantage of capitalism, according to Schumpeter. Yet, [[unemployment]] and a lack of fulfilling work will lead to intellectual critique, discontent, and protests. Parliaments will increasingly elect [[social democratic]] parties, and democratic majorities will vote for restrictions on entrepreneurship. Increasing [[workers' self-management]], [[industrial democracy]] and regulatory institutions would evolve non-politically into "[[liberal capitalism]]". Thus, the intellectual and social climate needed for thriving [[entrepreneurship]] will be replaced by some form of "[[laborism]]". This will exacerbate "[[creative destruction]]" (a borrowed phrase to denote an [[Exogenous and endogenous variables|endogenous]] replacement of old ways of doing things by new ways), which will ultimately undermine and destroy the capitalist structure. Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political [[Normativity|advocacy]].<ref>{{cite journal |last1=Medearis |first1=John |title=Schumpeter, the New Deal, and Democracy |journal=American Political Science Review |date=December 1997 |volume=91 |issue=4 |pages=819–832 |doi=10.2307/2952166|jstor=2952166 |s2cid=144892143 }}</ref> William Fellner, in the book ''Schumpeter's Vision: Capitalism, Socialism and Democracy After 40 Years'', noted that Schumpeter saw any political system in which the power was fully monopolized as fascist.<ref>{{cite book |last1=Heertje |first1=Arnold |title=Schumpeter's Vision: Capitalism, Socialism and Democracy After 40 years |date=1981 |publisher=Praeger |location=New York City |pages=50–54}}</ref> ===Democratic theory=== In the same book, Schumpeter expounded on a theory of democracy that sought to challenge what he called the "classical doctrine".<ref>{{cite web |title=An Unacknowledged Adversary: Carl Schmitt, Joseph Schumpeter, and the Classical Doctrine of Democracy |first=JanaLee |last=Cherneski |date=July 2013 |url= https://ora.ox.ac.uk/objects/uuid:30d29ff5-4fdc-4859-b351-6a0cfa80c8d3/files/mfc87b72a1f12aa31c0264dfdd395265f |access-date=December 15, 2024}}</ref> He disputed the idea that democracy was a process by which the electorate identified the common good, and politicians carried this out for them. He argued this was unrealistic, and that people's ignorance and superficiality meant that they were largely manipulated by politicians, who set the agenda. Furthermore, he claimed that even if the common good was possible to find, it would still not make clear the means needed to reach its end, since citizens do not have the requisite knowledge to design government policy.<ref>{{cite book|last1=Schumpeter|first1=Joseph |title=Capitalism, Socialism, and Democracy |url= https://archive.org/details/in.ernet.dli.2015.190072 |date=1942 |publisher=Harper and Brothers |page=[https://archive.org/details/in.ernet.dli.2015.190072/page/n259 252] |edition=1st}}</ref> This made a 'rule by the people' concept both unlikely and undesirable. Instead, he advocated a minimalist model, much influenced by [[Max Weber]], whereby democracy is the mechanism for competition between leaders, much like a market structure. Although periodic votes by the general public legitimize governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role of individuals is usually severely limited. Schumpeter defined democracy as the method by which people elect representatives in competitive elections to carry out their will.<ref name="Przeworski">{{cite book |editor-first=Ian |editor-last=Shapiro |editor-first2=Casiano |editor-last2=Hacker-Cordón |title=Democracy's value |date=1999 |publisher=Cambridge University Press |isbn=9780521643887 |last1=Przeworski |first1=Adam |chapter=Minimalist Conception of Democracy: A Defense}}</ref> This definition has been described as simple, elegant and parsimonious, making it clearer to distinguish political systems that either fulfill or fail these characteristics.<ref name="RussianPolitics">{{cite book|url= https://books.google.com/books?id=f482bYQM9xgC&q=schumpeter+enfranchisement&pg=PA219 |title=Russian Politics: Challenges of Democratization |last1=Barany |first1=Zoltan |last2=Moser |first2=Robert G. |date=August 27, 2001 |publisher=Cambridge University Press |isbn=9780521805124 |via=Google Books |access-date=June 14, 2022}}</ref> This minimalist definition stands in contrast to broader definitions of democracy, which may emphasize aspects such as "representation, accountability, equality, participation, justice, dignity, rationality, security, freedom".<ref name="Przeworski" /> Within such a minimalist definition, states which other scholars say have experienced [[democratic backsliding]] and which lack civil liberties, a free press, the rule of law and a constrained executive, would still be considered democracies.<ref name="RussianPolitics" /><ref>{{Cite journal|last1=Bidner |first1=Chris |last2=Francois |first2=Patrick |last3=Trebbi |first3=Francesco |date=2014 |title=A Theory of Minimalist Democracy |journal=NBER Working Papers |url= https://ideas.repec.org/p/nbr/nberwo/20552.html|language=en}}</ref><ref>{{cite journal|url= https://www.journalofdemocracy.org/articles/elections-without-democracy-thinking-about-hybrid-regimes/ |title=Elections Without Democracy: Thinking About Hybrid Regimes |journal=Journal of Democracy |first=Larry |last=Diamond |volume=13 |issue=2 |date=April 2002 |pages=21–35 |doi=10.1353/jod.2002.0025 |s2cid=154815836 |access-date=July 23, 2022}}</ref> For Schumpeter, the formation of a government is the endpoint of the democratic process, which means that for the purposes of his democratic theory, he has no comment on what kinds of decisions that the government can take to be a democracy.<ref name="MeasuringDemocracy">{{cite book|url= https://muse.jhu.edu/book/3406 |title=Measuring Democracy: A Bridge between Scholarship and Politics |last=Munck |first=Gerardo L. |date=2009 |publisher=Johns Hopkins University Press |isbn=9780801896507}}</ref> Schumpeter faced pushback on his theory from other democratic theorists, such as [[Robert Dahl]], who argued that there is more to democracy than simply the formation of government through competitive elections.<ref name="MeasuringDemocracy" /> Schumpeter's view of democracy has been described as "[[Elite theory|elitist]]", as he criticizes the rationality and knowledge of voters, and expresses a preference for politicians making decisions.<ref name="Piano">{{cite journal|last=Piano |first=Natasha |date=January 16, 2019 |title=Revisiting Democratic Elitism: The Italian School of Elitism, American Political Science, and the Problem of Plutocracy |journal=The Journal of Politics |volume=81 |issue=2 |pages=524–538 |doi=10.1086/701636 |s2cid=159423921 |issn=0022-3816}}</ref><ref name="Munck">{{cite book|url= https://books.google.com/books?id=8UITDAAAQBAJ&q=schumpeter+dahl+democracy&pg=PA27 |title=Regimes and Democracy in Latin America: Theories and Methods |last1=Munck |first1=Gerardo Luis |date=2007 |publisher=Oxford University Press |isbn=9780199219902 |via=Google Books |access-date=14 June 2022}}</ref><ref>{{cite book|title=Law, Pragmatism, and Democracy |last=Posner |first=Richard |publisher=Harvard University Press |pages=183–184}}</ref> Democracy is therefore in a sense a means to ensure circulation among elites.<ref name="Munck" /> However, studies by Natasha Piano of the University of Chicago emphasize that Schumpeter had substantial disdain for elites as well.<ref name="Piano"/><ref>{{cite journal|last=Piano |first=Natasha |date=October 2, 2017 |title="Schumpeterianism" Revised: The Critique of Elites in Capitalism, Socialism and Democracy |journal=Critical Review |volume=29 |issue=4 |pages=505–529 |doi=10.1080/08913811.2017.1458501|s2cid=150201729| issn=0891-3811}}</ref> ===Entrepreneurship=== The field of entrepreneurship theory owed much to Schumpeter's contributions. His fundamental theories are often referred to<ref name="Fontana">{{cite journal |last1=Fontana |first1=Roberto |first2=Alessandro |last2=Nuvolari |first3=Hiroshi |last3=Shimitzu |first4=Andrea |last4=Vezzulli |year=2012 |title=Schumpeterian patterns of innovation and the sources of breakthrough inventions: Evidence from a Data-Set of R&D Awards |url= https://pascal.iseg.utl.pt/~depeco/wp/wp242012.pdf |journal=School of Economics and Management, Technical University of Lisbon, Department of Economics |volume=WP 24/2012/DE/UECE Working Papers |issn=0874-4548 |pages=2–37 |access-date=July 24, 2018 |archive-date=October 8, 2018 |archive-url= https://web.archive.org/web/20181008101726/http://pascal.iseg.utl.pt/~depeco/wp/wp242012.pdf |url-status=dead }}</ref> as Mark I and Mark II. In Mark I, Schumpeter argued that the innovation and technological change of a nation come from entrepreneurs or wild spirits. He coined the word ''Unternehmergeist'', German for "entrepreneur-spirit", and asserted that "... the doing of new things or the doing of things that are already being done in a new way"<ref>{{cite journal |last1=Schumpeter |first1=J.A. |year=1947 |title=The Creative Response in Economic History |journal=Journal of Economic History |volume=7 |issue=2 | pages=149–159 |doi=10.1017/s0022050700054279|s2cid=155049567 }}</ref> stemmed directly from the efforts of entrepreneurs. Schumpeter developed Mark II while a professor at [[Harvard]]. Many social economists and popular authors of the day argued that large businesses had a negative effect on the standard of living of ordinary people. Contrary to this prevailing opinion, Schumpeter argued that the agents that drive innovation and the economy are large companies that have the capital to invest in [[research and development]] of new products and services and to deliver them to customers more cheaply, thus raising their standard of living. In one of his seminal works, ''Capitalism, Socialism and Democracy'', Schumpeter wrote: {{blockquote|As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the door of the large concerns – which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector – and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down.<ref>{{cite book|last=Schumpeter |first=Joseph |title=Capitalism, Socialism and Democracy |year=1942 |publisher=Harper and Roe Publishers |location=New York |page=82}} </ref>}} {{As of | 2017}} Mark I and Mark II arguments are considered complementary.<ref name="Fontana"/> ===Cycles and long wave theory=== Schumpeter was the most influential thinker to argue that long cycles are caused by innovation and are an incident of it. His treatise on how business cycles developed was based on Kondratiev's ideas which attributed the causes very differently. Schumpeter's treatise brought Kondratiev's ideas to the attention of English-speaking economists. Kondratiev fused important elements that Schumpeter missed. Yet, the Schumpeterian variant of the long-cycles hypothesis, stressing the initiating role of innovations, commands the widest attention today.<ref name="ReferenceB">Freeman, Christopher, ed. Long Wave Theory, International Library of Critical Writings in Economics: Edward Elgar, 1996</ref> In Schumpeter's view, technological innovation is the cause of both cyclical instability and economic growth. Fluctuations in innovation cause fluctuations in investment and those cause cycles in economic growth. Schumpeter sees innovations as clustering around certain points in time that he refers to as "neighborhoods of equilibrium" when entrepreneurs perceive that risk and returns warrant innovative commitments. These clusters lead to long cycles by generating periods of acceleration in aggregate growth.<ref>Rosenberg, Nathan. "Technological Innovation and Long Waves." In Exploring the Black Box: Technology, Economics, and History, 62–84. Cambridge, UK: Cambridge University Press, 1994.</ref> The technological view of change needs to demonstrate that changes in the rate of innovation govern changes in the rate of new investments and that the combined impact of innovation clusters takes the form of fluctuation in aggregate output or employment. The process of technological innovation involves extremely complex relations among a set of key variables: inventions, innovations, diffusion paths, and investment activities. The impact of technological innovation on aggregate output is mediated through a succession of relationships that have yet to be explored systematically in the context of the long wave. New inventions are typically primitive, their performance is usually poorer than existing technologies and the cost of their production is high. A production technology may not yet exist, as is often the case in major chemical and pharmaceutical inventions. The speed with which inventions are transformed into innovations and diffused depends on the actual and expected trajectory of performance improvement and cost reduction.<ref name="jstor.org">{{cite journal |last=Mansfield |first=Edwin |date=May 1983 |title=Long Waves and Technological Innovation |journal=The American Economic Review |volume=73 |issue=2 |pages=141–145 |jstor=1816829}}</ref> ===Innovation=== Schumpeter identified innovation as the critical dimension of economic change.<ref name="Pol">{{cite book |last1=Pol |first1=Eduardo |last2=Carroll |first2=Peter |title=An introduction to economics with emphasis on innovation |date=2006 |publisher=Thomson Custom Publishing for University of Wollongong |isbn=978-0170133005}}</ref> He argued that economic change revolves around innovation, entrepreneurial activities, and market power.<ref>{{cite book |last=Ziemnowicz |first=Christopher |editor-last=Carayannis |editor-first=Elias G. |title=Encyclopedia of creativity, invention, innovation and entrepreneurship. |date=2020 |publisher=Springer |isbn=978-3319153469 |edition=Second |chapter=Joseph A. Schumpeter and Innovation}}</ref> He sought to prove that innovation-originated market power can provide better results than the invisible hand and price competition.<ref>{{cite journal |last=Nakamura |first=Leonard I. |title=Economics and the New Economy: The Invisible Hand Meets Creative Destruction |journal=Business Review – Federal Reserve Bank of Philadelphia |date=July 2000 |pages=15–30 |url= https://www.philadelphiafed.org/-/media/research-and-data/publications/business-review/2000/july-august/brja00ln.pdf |access-date=December 19, 2019}}</ref> He argued that technological innovation often creates temporary monopolies, allowing abnormal profits that would soon be competed away by rivals and imitators. These temporary monopolies were necessary to provide the incentive for firms to develop new products and processes.<ref name="Pol"/> ===Doing Business=== The [[World Bank]]'s "Doing Business" report was influenced by Schumpeter's focus on removing impediments to [[creative destruction]]. The creation of the report is credited in part to his work.
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