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The Prophet of Innovation: Joseph Schumpeter

Working Paper March 2016

DOI: 10.13140/RG.2.2.11512.65285

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THE PROPHET OF INNOVATION*:

JOSEPH SCHUMPETER

Mcahid AKICI

Istanbul Commerce University

History of Economic Thought

Prof. Dr. Murat Ali YLEK

March, 2016

* Originated by Thomas K. McCraw (2009)

ABSTRACT

This paper consists of thoughts, life and great contributions of the famous Austrian-

American economist and political scientist Joseph Alois Schumpeter. Entrepreneurship,

economic growth, and innovation are few of the economy-related fields that

Schumpeter endeavored in his career.

Schumpeterian approach to economics has thoughtfully omitted since last century. After

revealing the Evolutionary Theory of Economic Change by Nelson and Winter in 1982,

thankfully Schumpeters ideas became more popular and known. Creative Destruction

and Theory of Economic Development have the large impact on forming the future

studies. Also, there are striking similarities between Marxs and Schumpeters prospects

of capitalism.

While Schumpeter is influenced by many well-known scientists such as Pareto, Marx,

Spencer or Menger, he also inspired many economists with his intellectual theories on

innovation and development economics. Even today, Schumpeterian vision can serve as

a primary guide for entrepreneurs or even innovation-oriented policymakers.

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OUTLINE

1. HIS LIFE, HIS WORKS AND CONTRIBUTIONS....4

2. SCHUMPETERS ECONOMIC THOUGHT......5

2.1 METHODOLOGY..6

2.2 ENTREPRENEURSHIP AND CAPITALISM THEORY.6

2.3 CREATIVE DESTRUCTION7

3. CONCLUSION....8

4. REFERENCES...10

3
1. HIS LIFE, HIS WORKS, AND CONTRIBUTIONS

Joseph A. Schumpeter grew up in a town near Vienna. His life was quite tough since he

experienced WW1, Great Depression, and WW2. He moved to the US when WW2 was

happening. Schumpeters career has begun studying at law faculty. Three years after

taking Ph.D., he became a professor of economics and government. According to

McCraw (2007), because Schumpeter is raised under the oppression of great German

power and growing impact of Marxist labor propaganda, he interested in the idea of

capitalism. Schumpeter has left behind various theories such as Entrepreneurship

Theory, Capitalist Theory and Creative Destruction (Schpferische Zerstrung).

One of the best books of him is written about the capitalist idea, so-called Capitalism,

Socialism, and Democracy. Schumpeter derives in this book the term, creative

destruction.' He treats the monopoly market as keeping itself apart from discipline and

creativeness. Furthermore, Schumpeter strictly advocates that the innovative quality that

created capitalism is the best economic systems due to those capitalists make

investments from their profits to develop new and better products, and ideas. With the

opening words of the above-mentioned book, he asks and answers: "Can capitalism

survive? No. I do not think it can. Even if his statements are mostly parallel with Marx,

however, at some point, Schumpeter argues against Marx. For instance, while Karl

Marx defines the profit as the exploitation of redistribution of labor, profit, according to

Joseph Schumpeter, is all about the implementation of the new.'

The Theory of Economic Development (TED) is the magnum opus of Schumpeter. In

this theory, Schumpeter concerns about entrepreneurship and economic innovation.

Even though TED is changed by him in different editions, the definition of the

innovation remains same: new combinations.' According to Schumpeter (1911),

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inventions do arise when the entrepreneur needs them, and if the personality of the

entrepreneur is not in place to make use of every new invention, the inventions will

never turn into practice.

In evolutionary economics, which relatively a newer emerging branch of the science of

economy, Schumpeters thoughts have a large impact on the other scientists, such as

Nelson and Winter (1982) (Becker et. al., 2012). Schumpeterian approach to

understanding the economic change and competition inspired those two American

economists, Richard Nelson and Sidney Winter very deeply. In other words, they almost

devoted their masterwork to Schumpeterian designation and more specifically they call

themselves as neo-Schumpeterian evolutionary theorists (Nelson and Winter, 1982).

2. SCHUMPETERS ECONOMIC THOUGHT

Aristocrat side of Schumpeters personality brought him to advocate socialism in his

life. He has very different approach to commenting the fall of the capitalist system

rather than Karl Marx. Additionally, he followed the Austrian Liberal manner that could

be observed very clearly in his studies (Pichler, 2010).

Even he commonly supports some capitalism related ideas with Karl Marx; Schumpeter

has never influenced by the Keynesian approach to the economy. To Schumpeter,

French mathematician, Lon Walras is one of the greatest economists who combined

mathematics and economics together in his major works. It could be literally said that

Schumpeters view of the economy and his thoughts are based mostly on algebraic

methods (Kucukkalay, 2011).

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 2.1. METHODOLOGY

Usage of multidisciplinary scientific methods in economics is one idea that Schumpeter

strictly believes. According to him, all scientific methods especially, theoretical,

statistical and historical research are suitable to explain economic events. Even if those

specified methods are supposed to be used primarily, the researcher should be eager to

use relevant disciplines depending on the necessities of his/her study (Kucukkalay,

2011).

Schumpeter believes that the science of economy is a large branch of social sciences.

However, according to Schumpeter, every economist needs to have an adequate

scientific insight to obtain useful information.

Mostly, Schumpeter describes market and competitive equilibriums not different than

his Austrian colleagues, but he also considers time factor within these equilibriums.

Furthermore, taking the time factor into consideration while calculating economic

indicators shows that the variation in economic examination methods (Elliot, 1980).

2.2. ENTREPRENEURSHIP AND CAPITALISM THEORY

While describing the capitalist system, Schumpeter attributes great importance on

innovation, entrepreneurship, and its role. In economic development, Schumpeter

apparently promotes the place of the entrepreneurship that adapts innovation into the

production function rather than new inventions (Baumol, 2015). Thus, Schumpeter

gives great importance on innovations, know-hows and the role of the entrepreneurship

while explaining development processes of the capitalist system.

Classic and Keynesian economics consider supply and demand as core components of

economic wealth and development. However, the entrepreneur, to Schumpeterian

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economic thought, identified as the sole source of economic growth and the economic

dynamism of the developing economy.

Schumpeter, with his entrepreneur theory, argues against Karl Marxs theory of the law

of tendency for the rate of profit to fall and states that the fall in profit in the economy

could be absorbed by courtesy of entrepreneurs (Marx, 1976). According to

Schumpeter, the reason lies behind the stagnation in the capitalist economy depends on

the discouraged entrepreneurs whose innovative spirit is faded away.

Unlike the assumptions of other philosophers and economists on the fall of capitalism,

Schumpeter suggests that the collapse of capitalism is not relevant with becoming

poorer gradually, but because of wealth and richness. According to Kucukkalay (2011),

the steps of the theory of collapse of capitalism are following:

Capitalist economic system to grow mature.

Humans needs to be satisfied.

Interest rates and profits to approach zero.

Entrepreneurs and innovators to be unnecessary.

Entrepreneurs to become managers.

v Result: Innovation, entrepreneurship, and capitalism to be vanished or outdated.

2.3. CREATIVE DESTRUCTION

Classic view in economy denotes that the equilibrium point exists where supply and

demand meet at specified rate of price in perfect competition market. Schumpeter

refuses to believe in the existence of perfect competition market neither the real world

nor the future-oriented economies (Pichler, 2010). Instead of focusing on equilibrium in

the economy, Schumpeter advocates examining the reasons and results of structural

changes in the economy, such as business cycles. Furthermore, in Creative Destruction

7
Theory, while Schumpeter defines the arithmetic of capitalist development, on the other

hand, he tries to explain how the other market types -except for perfect competitive

market- support capitalist growth.

Obviously, monopoly markets and monopolist firms are the best supporters of the

creative destruction process. As a monopolist firm contributes the creation stage of new

products by investing in R&D, on the other hand, the very same company removes old

goods and businesses from the market, namely, creative destruction.'

Schumpeter develops Theory of Innovation that contains remarkable, supportive ideas

from his creative destruction theory. The meaning of economic innovation for

Schumpeter corresponds to the modifications in the way of the manufacturing method

in a production process. Therefore, without altering the manner in output, innovation or

an invention itself does not hold true to be count as innovation according to

Schumpeters Theory of Innovation.

3. CONCLUSION

Schumpeter performed a lot of contribution into the improvement process of

evolutionary and behavioral branches of economics through his modernist approaches

to the science of economy.

The capitalist system was the destiny of the era that Schumpeter lived. However,

considering intangible variables within the scope of the theories makes Schumpeter

different rather than his colleagues. In this sense, his prediction about the collapse of the

capitalism was because of moral decay and dissatisfaction of the society that occurs

because of increased economic wealth.

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The aspect Schumpeter perceives innovation and entrepreneurship are quite

deterministic to be a tractable model of entrepreneurship and innovation. According to

Baumol (2015), Schumpeter is the first economist that came close to modeling a figure

of an entrepreneur in the growth process. Todays scientists are now able to achieve

what was inherited by Schumpeterian thoughts.

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 4. REFERENCES

Baumol, W. (2015) Joseph Schumpeter: the long run, and the short, J Evol Econ (2015)
25:37-43 Doi: 10.1007/s00191-013-0327-3.

Becker, M., Knudsen, T., Swedberg, R. (2012) Schumpeters Theory of Economic

Development: 100 years of development J Evol Econ (2012) 22:917-933 Doi:
10.1007/s00191-012-0297-x.

Elliot, J. (1980) Marx and Schumpeter on Capitalisms Creative Destruction: A

Comparative Restatement, The Quarterly Journal of Economics, August 1990,
46-68.

Kucukkalay, A., (2011) ktisadi Dnce Tarihi ISBN: 978 605 377 543 0, 3, 475-479

Marx, K. (1976) Capital, Volume III, Penguin ed. 317-375.

McCraw, K. (2007) Prophet of Innovation. Joseph Schumpeter and Creative

Destruction. Cambridge, MA-London.

Nelson, R., Winter, S., (1982) An Evolutionary Theory of Economic Change. Belknap
Press of Harvard University Press, Cambridge.

Pichler, J. (2010) Innovation and Creative Destruction: At the Centennial of

Schumpeters Theory and Its Dialectics, Review Papers, 5-6.

Schumpeter, J. (1947) The Creative Response in Economic History, Journal of

Economic History, Vol. 7/2 1947.

Schumpeter, J. (1911) Theorie der wirtschaftlichen Entwicklung, 1

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