The Creative response in economic history

Edvard Mnsson Frida Fogstrm KajsaHedqvist Madalina Kmen Nikos Bitsakakis

The article The Creative Response in Economic History, written by Joseph A. Schumpeter presents and compares the differences between the views of economic changes, introducing concepts such as entrepreneurship, inventor, innovation, enterprise and responses to the industry changes.

Adaptive and Creative Response

The author begins his article with an emphasis on the different kinds of reactions to changes in market conditions, by comparing the adaptive response with the creative response. While the adaptive response belongs to a more traditional way of looking at an economy adaptation to change, that is responding to an increase in population with an increase in the labor force, the creative response deals with the out of the existing practices response. According to Schumpeter a creative response has at least three essential characteristics: (1) the observer can always understand a creative response ex-post and never ex-ante; (2) a creative response shapes the course of the subsequent events; (3) the frequency, intensity and success of a creative response have to do with the quality of the personnel in a society, with the quality of the personnel in a specific field and with individual decisions, patterns of behavior and actions. An example which can ensure the better understanding of the differences between adaptive responses and creative responses can be the chess play.

If we take the theoretical aspects mentioned above and apply them on the capitalist market, it will be clear that in a capitalist market a creative response to business, becomes almost synonym with entrepreneurship. Thus, the defining characteristics of an entrepreneur, according to Schumpeter, can be said to be simply the doing of new things or the doing of things that are already being done in a new way (innovation).

Defining Entrepreneurship
The concern of the author regarding the confusion around the concept of entrepreneurship can be seen as he is trying to draw some lines between management and enterprise, entrepreneur and capitalist, entrepreneur and inventor. Therefore, according to Schumpeter, the term enterprise encompasses the set up of a concern embodying a new idea, meaning the organization settled around a new idea, and management refers more to head the administration of a going concern, such as long-term coordination and administration of the already set-up organization. The other essential distinction made by the author

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The creative response in economic history

is that the entrepreneurial function, though facilitated by the ownership of means, it is not identical with of the capitalist. The third and most important difference is made between and entrepreneur and an inventor. Whilst the inventor produces ideas, the entrepreneur gets things done, which may but not need to embody anything that is scientifically new. Multiple classifications of the phenomena of enterprise have been taking place during the history. Some of them classify enterprises according to institutional forms, such as the medieval trading companies, the later chartered companies and the modern corporations. Another type of classification is made according to the fields of activities, leading to the existence of enterprises that introduce new commodities, enterprises that introduce technological novelties, new commercial combinations or enterprises that reorganize an industry. A sociological classification would split entrepreneurs into feudal lords, aristocratic landowners, civil servants, farmers, artisans and workmen. Moving into the contemporary markets, who should, therefore, be considered an entrepreneur? More than that, the author states that the gains of the entrepreneur and the capitalists that finance him should be related not to his effort and their loan but to the efforts and the loans of all the entrepreneurs and capitalists who made attempts and lost. In this case, the return to the entrepreneurs and capitalists as a group is negative, from a society point of view. Another important point is that the entrepreneurial gain is not a net growth of the returns of the industrial sector in which it occurs. A new product being introduced and sold will generate losses to the older firms on the market. Therefore, the industry sector as a whole will, many times, break even. The third very important point brought to attention by Schumpeter is that the net returns towards the capitalist interests that finance entrepreneurial activity and to the capitalist class as a whole are disappearing when innovation happens. For example, the capital invested in railroads does not migrate into trucking and air transportation but will perish in and with the railroads.

The role of the Entrepreneurs

The final part of the article deals with the importance of the entrepreneurial function as time goes on. The author suggests that the importance of entrepreneurial activity is decreasing while entrepreneurs are shifting their way of performing the activity. While in the past they used to perceive new opportunities that couldnt be seen at the moment, to act upon flashes and hunches, nowadays their action is based on figuring out, thus improvement comes from specialists teamwork, becoming somehow automatic. The author also believes that entrepreneurs are influenced by the social class civilization, politics, values, attitudes to church and war and that they will form in the future their own entrepreneurial social class, comparable with the knightly service in the feudal society.

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Entrepreneurial Gain
A rather controverted theme in Schumpeters article is that of the gains of the entrepreneurs. The author claims that the term profit viewed by the English classics was constituted by management wages, premium for risk and interest on owned capital, which is different from our current view of the concept. The surplus that an entrepreneur gains from his activity constitutes his wage, called entrepreneurial gain. However if the innovations of the entrepreneur are neither small nor isolated events, the entrepreneurial activity affects wage and interest rates from the outset and becomes a factor in booms and depressions. Thus, the entire market and companies present in the market are affected by the activities performed by the entrepreneur.

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