Monday, April 27, 2009

Lessons of Joseph Schumpeter

Schumpeter has been the subject of a number of posts on this blog. I find his career and his ideas compelling. Some of you who have heard me speak have heard me call him the second greatest economist of the first half of the 20th century. (I think he would have been number one, but the Great Depression took place and everyone suddenly started reading John Maynard Keynes.)

I find two of his ideas stand out. The first is his idea of "creative destruction." Schumpeter said that a growing economy was an economy of constant change. And that change resulted new firms and products being created, and old products and firms being destroyed - creative destruction.

The second idea of interest to me was his view of the role of the entrepreneur in the economy. He identified five elements of entrepreneurship:

1) Introducing a new good or service,
2) Adoption of new inputs to produce a new or previously produced good or service,
3) Introduction of new technology,
4) Opening a new market,
5) Creating a new economic organization by combining and/or spinning off parts of existing firms.

Last week there was an intriguing series on National Public Radio (NPR) that examined the current economic situation in my home state, Michigan. It is an excellent piece, well-done in ways that regular NPR listeners are familiar with. (I must admit, I did not hear it in the original - I've been listening to other podcasts on my commute. So I thank Don Boudreaux at Cafe Hayek for the link that took me to one of the stories.)

I think if you go to the NPR series site, you will find a number of short pieces to share with your classes that will illustrate either the entrepreneurial opportunity that lies hidden in the current crisis, or the underlying change that is the result of the same event. Either way, you and your students will walk away with a sense of optimism that has been too often lacking in reporting from the Great Lake State.

I look forward to your comments.

This post relates to the following Keystone Economic Principles:
2. There ain’t no such thing as a free lunch.
5. Incentives produce “predictable” responses.
6. Do what you do best; trade for the rest.
7. Economic thinking is marginal thinking.
8. Quantity and quality of available resources impact living standards.


PrestoPundit said...

So what do you think of Amar Bhide's comparison of Schumpeter and Hayek on the entrepreneur -- or Edmund Phelps' comparison of Schumpeter and Hayek?:

Well into the 20th century, scholars viewed economic advances as resulting from commercial innovations enabled by the discoveries of scientists – discoveries that come from outside the economy and out of the blue. Why then did capitalist economies benefit more than others? Joseph Schumpeter’s early theory proposed that a capitalist economy is quicker to seize sudden opportunities and thus has higher productivity, thanks to capitalist culture: the zeal of capable entrepreneurs and diligence of expert bankers. But the idea of all-knowing bankers and unerring entrepreneurs is laughable. Scholars now find that most growth in knowledge is not science-driven. Schumpeterian ­economics – Adam Smith plus sociology – captures very little.

Friedrich Hayek offered another view in the 1930s. Any modern economy, capitalist or state-run, is a great soup of private “know-how” dispersed among the specialised participants. No one, he said, not even a state agency, could amass all the knowledge that each participant “on the spot” inevitably acquires. The state would have no idea where to invest. Only capitalism solves this “knowledge problem”.

Later, Hayek fleshed out a theory of how capitalism makes “discoveries” on its own. He had no problem with the concept of an innovative idea, for he understood that, even among experts, knowledge is incomplete about most things not yet tried. So he felt free to suppose that, thanks to the specialised insights each acquires, a manager or employee may one day “imagine” (as Hayek’s hero, David Hume, would have put it) a commercial departure – one that could not be inferred or envisioned by people outside the individual’s line of work. Then he portrays a well-functioning capitalist system as a broad-based, bottom-up organism that gives diverse new ideas opportunities to compete for development and, with luck, adoption in the marketplace. That “discovery procedure” makes it far more innovative than the top-down systems of socialism or corporatism. The latter are too bureaucratic to learn about ideas from below and unlikely to obtain approval from all the social partners of the ideas that do get through ..

John Booke said...

For me Joseph Schumpeter's key lesson was that capitalism would probably destroy itself and that a more socialistic society would emerge. He also pointed out that as more and more people in an economy strive for higher and higher levels of education eventually competition for white-collar jobs would force wages to fall. Do we see that yet?

Tim Schilling said...


I'm not familiar with either of the comparisons you mention. I will have to pick them up.

I am attracted to much of what the Austrian school stands for. What I find most interesting about Schumpeter is his stressing of the dynamic nature of economies.

Not only is that clear in his "creative destruction" idea, but the role of the entrepreneur, as well. Many people have a tendency to put the label of entrepreneur on managers. I think the role is much more innovative.

Additionally, inventors are not necessarily entrepreneurs. They often lack the ability to bring their innovations to the wider society. That takes the vision and the risk-taking of the entrepreneur.