Schumpeter on Innovation

Reblogged from Thirawiyan’s Blog

Schumpeter, perhaps more than any other writer, is very explicit about the economic function of the entrepreneur. The entrepreneur is the prime mover in economic development and his function is to innovate or to carry out new combinations. Five types of innovation are distinguished the introduction of new good (or an improvement in the quality of an existing good); the introduction of a new method of production; the opening of an new market, in particular, a export a market in a new territory the ‘conquest of a new source of supply of raw materials or half- manufactured goods’ and the creation of a new type of industrial organization, in particular, the formation of a trust or some other type of monopoly.

Anyone who performs this function is an entrepreneur whether he is at independent businessman or a “dependent” employee of a company such as a manager or a director. Not all businessmen are entrepreneurs; the typical entrepreneur is the founder of a new firm rather than the manager of an established one.

Schumpeter is adamant that the entrepreneur is not a risk- bearer. Risk bearing is the function of the capitalist who lends his funds to the entrepreneur. The entrepreneur bears risk only in so far as he acts as his own capitalist. Unlike Knight, Schumpeter does not perceive much problem of moral hazard for a capitalist lending to an entrepreneur.

Entrepreneurs spend a lot of heir time doing non-entrepreneurial things: The entrepreneur of earlier times was not only as a rule a capitalist too; also he was also often- as he is still today in the case of small concerns- his own technical expert, in so far as a professional specialist was not called in for special cases. Likewise he was (and is) often his own buying and selling agent, the head of his office, his own personal manager, and sometimes, even though as a rule he, of course employed solicitors, his own legal advisor in current affairs. And it was performing some or all of these functions that regularly filled his days.

The carrying out of new combinations can no more be a vocation than the making and execution of strategically decisions, although it is this function and not his routine work that characterizes the military leader. Therefore, the entrepreneur’s essential function must always appear mixed with other kindsof activity which as a rule must be much more conspicuous than the essential one. Hence, the Marshallian definition of the entrepreneur, which simply treats the entrepreneurial function as ‘management’ in the widest meaning, will naturally appeal to most of us. We do not accept it, simply because it does not bring out what we consider to be the salient point and the only one which specifically distinguishes entrepreneurial from other activities.

The climate most favorable to innovation is when the economy is approaching in equilibrium for then the future seems relatively easy to foresee. The first innovations made by the most talented entrepreneurs prove successful and this encourages less talented entrepreneurs to follow suit in a swarm. Because they are adapting ideas which are pioneers have already tried out the risks that the capitalists perceive in backing the less talented entrepreneurs are relatively low.

A wave of innovation follows which then, for a variety of reasons quickly recedes.

Schumpeter believed that talented entrepreneurs were very scarce breed. Their scarcity lays not so much in their alertness or their professionalism as in their psychology. While entrepreneurs are rational economic men, their objective is not to the pursuit of consumption in the usual sense of that word.

The motivating factors are three fold:

First of all there is the dream and the will to found a private kingdom usually though not necessarily also a dynasty. The modern world really does not know any such positions but what may be maintained by industrial or commercial success is still the nearest approach to medieval lordship possible to modern man. Its fascination is especially strong for people we have no other chance of achieving social distinction.

Then there is the will to conquer- the impulse to fight, to prove one superior to others, to succeed for the sake, not of the fruits of success itself. From this aspect economic action becomes akin to sport- there are financial races, or other boxing- matches.

Finally, there is the joy of creating of getting things done or simply of exercising one’s energy and ingenuity. Our type seeks out difficulties, changes in order, delight in ventures. This group of motives is the distinctly anti-hedonist among the three.

The precursor to innovation is invention, which is a field of imaginative activity outside the province of the entrepreneur. The process of invention forms no part of Schumpeter’s theory, but one of the attractive features of the theory is how easily the dynamics of invention can be grafted on it. Schumpeter recognized that invention could be an endogenous process stimulated by the desire to alleviate pressing scarcities, but his attitude is basically to regard it as autonomous.

The possibility of grafting on a theory of invention may be illustrated as follows. It is often suggested that modern economic growth related to the innovation of the mass market. Multipurpose goods, such was the typical consumer durable. The innovation of these goods often depends critically upon the invention of components from which they can be made up. Innovation of a new multi-purpose good is possible when the design of each of the constituent components has involved sufficiently providing the requisite standards of compactness, reliability and performance.

If an autonomous random process of invention generates improvements in component design then there will come a critical point at which mass production of themulti- purpose good becomes viable. This is the point at which each of the components has jus evolved to the requisite standard. This may trigger of a major innovation, such as the railway or the motorcar, whose repercussions are sufficiently widespread to stimulate a wave of subsidiary innovations. This wave of innovations uses up the outstanding stock of inventions, which were pending adoption and lead to a subsequent fall in invention until the stock of inventions builds up again to a threshold level.

Schumpeter himself was very cautious about relying upon major innovation and their consequent economies and spins off as an explanation for the clustering of innovation observed during the business cycle. Basically, he regarded wave of innovation and their creative destruction as a basic phenomenon of capitalist economic development so much that he dated the origin of capitalist from the first appearance of these waves. He recognized that the waves could take different forms in different times and places. He was concerned to offer analytical frame work for the interpretation of varied historical experience rather than to formulate a narrow theory to which all historical experience was alleged to conform.

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