05Schumpeter-Entrepreneurship-and-Innovation

EC4901–TheMarketEconomySchumpeter’sviewoftheentrepreneurasinnovatorBeforeconsideringSchumpeter’snotionofentrepreneurshipandeconomicdevelopment,itisimportanttoclarifyhisviewofthemarketandhisunderstandingofthecapitalistsystem–hischaracterizationofcapitalismisdirectlytiedtotheroletheentrepreneuroccupieswithinit.Schumpeterunderstoodandarticulatedthedynamicsofthecapitalisteconomicprocess.Capitalisteconomiesevolve,andtheirevolutionisendogenous,arisingspontaneouslyfromtheingredientsofthecapitalisteconomicsystem.Whilerejectingthewidelyacceptedviewofthemarketasaperfectlycompetitiveconstruct,SchumpeterfocusedhisanalysisinaninitialstateofgeneralequilibriumHeviewedthemarketprocessasadynamicprocessdrivenbycreativedestruction:“It[referringtothemarketprocess]mustbeseeninitsroleintheperennialgaleofcreativedestruction;itcannotbeunderstoodirrespectiveofit…”(1950:83).WhatDoesCreativeDestructionMean?AtermcoinedbyJosephSchumpeterinhisworkentitledCapitalism,SocialismandDemocracy(1942)todenoteaprocessofindustrialmutationthatincessantlyrevolutionizestheeconomicstructurefromwithin,incessantlydestroyingtheoldone,incessantlycreatinganewone.“Schumpeterlinkedthemarketprocessofcreativedestruction–whichheassociatedwith“newcombinations”–andthereforeeconomicdevelopmentandprogress,toinnovationanddistinguishedtheentrepreneurastheprimeinnovator.Theunderstandingofcompetitionisactingdifferentlyfromone’scompetition.Schumpeterinsiststhattheimportantkindofcompetitioninthemarketsystemiscompetitionfromthenewcommodity,technology,sourceofsupplyandtypeoforganisation.SchumpeterhasaslightlydifferentviewofentrepreneurshipthanKirzner.Describestheconstantdynamismofcapitalism,theprocessofbirthanddeathofnewbusinessesandtechnologies(Schumpeter,1942)DisagreedwiththefocusonequilibriumfromNeoclassicalEconomics.“Therewasasourceofenergywithintheeconomicsystemwhichwouldofitselfdisruptanyequilibriumthatmightbeattained.......strugglesandvicissitudesofthecapitalistworld”PeriodaroundWW2–lackofinterestinatheoryofdestruction,evencreativedestructionAlthoughperhapsbestknownforhistheoryofcreativedestruction,Schumpeteralsoofferedmanyvaluableinsightsintootherareasofeconomics:◦innovation,◦economicgrowth,◦businesscycles,◦unemployment,◦saving,◦incomedistribution,◦monopoly,◦politicaleconomyandmoreOnlyinthepasttwodecadesorsohasSchumpeter’sgeniusreceivedduerecognition.Hisdefinitionofcompetitioniscloselylinkedtothewayhedefinestheroleoftheentrepreneur.Thefunctionoftheentrepreneuristoreformorrevolutionisethepatternofproductionbyexploitinganinventionoranuntriedtechnologicalpossibilityforproducinganewcommodityorproducinganoldoneinanewway,byopeningupanewsourceofsupplyofmaterialsoranewoutletforproducts,byrecognisinganindustry.Inadditiontobeinganinnovator,theentrepreneurisaleader.Hisactionschannelthemeansofproductionintopreviouslyunexploitedmarketsandotherproducersfollowhimintothesenewmarkets(1960:89).PerhapsKirznerbestdescribedthemarketimpactofSchumpeter’sentrepreneurwhenhewrote:“…forSchumpetertheessenceofentrepreneurshipistheabilitytobreakawayfromroutine,todestroyexistingstructures,tomovethesystemawayfromtheeven,circularflowofequilibrium”(1973:127).Schumpeter’sandKirzner’snotionsofentrepreneurshiparegroundedintheexploitationofprofitopportunities,thegreatestdifferenceisthattheformershiftsthemarketawayfromequilibriumwhilethelatterservestocontinuallymovethemarkettowardequilibrium.WhileSchumpeter’sentrepreneurisaninnovatorwhodestroysthecurrentstructure,Kirzner’sentrepreneurisalerttoarbitrageopportunitiesbasedonpasterrorsandservestoexploitandcorrectthoseerrors,andindoingso,directsthemarkettowardsequilibriumForSchumpetertheentrepreneuristhedisruptive,disequilibratingforcethatdislodgesthemarketfromequilibrium,forKirznertheentrepreneuristheequilibratingforcewhoseactivityrespondstotheexistingtensionsandprovidesthosecorrectionsforwhichtheunexploitedopportunitieshavebeencryingout.Schumpeterdistinguishedinventionsfromtheentrepreneur’sinnovations.Hepointedoutthatentrepreneursinnovatenotjustbyfiguringouthowtouseinventions,butalsobyintroducingnewmeansofproduction,newproducts,andnewformsoforganization.Theseinnovations,heargued,takejustasmuchskillanddaringasdoestheprocessofinvention.Innovationbytheentrepreneur,arguedSchumpeter,leadstogalesofCreativeDestructionasinnovationscauseoldinventories,ideas,technologies,skills,andequipmenttobecomeobsolete.Thequestionisnot“howcapitalismadministersexistingstructures,...[but]howitcreatesanddestroysthem.”Thiscreativedestruction,hebelieves,causescontinuousprogressandimprovesthestandardsoflivingforeveryone.Schumpeterarguesthatinnovationcomesaboutthroughnewcombinationsmadebyanentrepreneur,resultingin◦anewproduct◦anewprocess◦openingofnewmarket◦newwayoforganizingthebusiness◦newsourcesofsupply