Analysing Discontinuous Innovation: Some Implications of Schumpeter's The Theory Of Economic Development
Authors
Jerry Courvisanos, The Business School, University of Ballarat,
Stuart Mackenzie, The Business School, University of Ballarat,
Abstract
A century ago Schumpeter’s The Theory of Economic Development built on the concept of strong agency motivation from his Austrian School teachers to conceptualise the entrepreneur as a major economic force, driving innovation and economic development. Despite this prominent role, Baumol sees the entrepreneur hovering in the vast literature of economics as “a shadowy entity without clearly defined form and function”, like some ‘phantom of the economic growth opera’. Due to the nature of the neoclassical model itself, Baumol’s oft-cited quotation has not led to a formal endogenisation of the productive entrepreneurial function. Baumol’s three attempts in full-sized books to try and incorporate entrepreneurial behaviour into the economics mainstream speaks volumes for the difficulty of taking a dynamic role and fitting it into a static neoclassical apparatus. Despite the explosion of interest and literature on the role of the entrepreneur there remains no generally accepted definition of the phenomenon, yet regardless of this lack of ontology, researchers in economics and in entrepreneurship, persist with a positivist research paradigm in trying to analyse an improperly defined concept. Thus there is no generally accepted theory of the entrepreneur. This paper re-assesses the ontology of the entrepreneur in Schumpeter’s work, including recent English translations of some lesser-known German writings, in the context of economic development and innovation. In the process of this analysis, a clear picture emerges about the nature of discontinuous innovation which is the central role that the entrepreneur plays in capitalism. Some implications of the findings for competing theories of entrepreneurship are discussed.
Introduction
A century ago this year Joseph Schumpeter’s second book on economics Theorie der Wirtschaftlichen Entwicklung [The Theory of Economic Development] was published in German,1 but not available in English until 1934 in a translation of the shortened 1926 version. This book re-introduced the entrepreneur into economic analysis after it faded from the economist’s field of view as the static equilibrium neoclassical model became dominant in the second half of the 19th Century. The reason for this re-introduction was to examine the dynamics of capitalist economic development and the entrepreneur’s role in this process. To mark the centenary of the publication of Theory, this paper aims to re-assess Schumpeter’s “entrepreneur” in the context of the significant material by Schumpeter that has emerged in English in the recent past.
While it is not the purpose of this paper to trace how Schumpeter’s thinking about entrepreneurship changed over time, it is argued there is a break point in his writing that occurs with the unpublished paper Entwicklung [Development] which was apparently written in 1932 just before his permanent departure for the USA, but was only discovered in 1993 and published in English in 2005.2 Inspired by his paper, the analysis conducted in this paper draws primarily on material from: the first (1912) and second (1926) editions of Theorie der Wirtschaftlichen Entwicklung (including Chapter 7 which was omitted from the second and subsequent editions) and the first English edition of The Theory of Economic Development: An Inquiry Into Profits, Capital, Credit, Interest and the Business Cycle (1934); the paper Unternehmer (Entrepreneur) (2003[1927]); and, of course, the unpublished paper Entwicklung (2005[1932]).3
The paper accepts the argument by Swedberg (2007) that Schumpeter’s is the most promising theory of entrepreneurship that we have and it represents a point of departure for further development. However, this can only occur after a more comprehensive understanding of Schumpeter’s concept of what an entrepreneur actually is. The paper therefore re-assesses the ontology of the entrepreneur in Schumpeter’s work in the context of economic development and innovation. Some implications of the findings for competing theories of entrepreneurship are discussed.
Economic development, innovation and the entrepreneur
The entrepreneur for Schumpeter must be seen as the human agency, via innovation, to economic development. However, this activity needs to be placed within Schumpeter’s framework of the economic process. This is required so as to position these concepts clearly inside Schumpeter’s overall theory of the economy, particularly his concepts of statics and dynamics.
Statics and dynamics
In trying to understand the totality of the economy, Schumpeter divides economic processes into three categories or classes: “…into those processes of the circular flow; into those of development; and into those which impede the latter’s undisturbed course.” (1934 [1912] p.218).Throughout his body of work he refers to the processes of the circular flows as “statics” and those of development as “dynamics”. These concepts, and the idea of dynamic processes causing a disturbance in the static equilibrium, are drawn from the work of John Bates Clark (1934 [1912] p.60n). This distinction between statics and dynamics is fundamental to Schumpeter’s entire economic theory. It is mentioned in his first published book, Das Wesen und Hauptinhalt der theoretischen Nationalökonomie (The Nature and Essence of Theoretical Economics) and this foreshadows his thinking on economic development:
This distinction is crucial. Statics and dynamics are two totally different areas. Not only do they deal with different problems, but they use different methods and they work with different materials. They are not two chapters in the same theoretical construction – they are two totally different buildings. Only statics has been worked on sufficiently, and this book mainly addresses this kind of problem. The analysis of dynamics is still in its beginnings; it is a ‘land of the future’. (1908 p.626, translation cited in Swedberg 2007 [1991] p.30).
Schumpeter’s thinking on that “land of the future” would emerge four years later in The Theory of Economic Development.
By “circular flow” or statics, Schumpeter means that part of the overall economy that can be conceptualised as operating as a general equilibrium system under stationary conditions as proposed by the neoclassical economists. Within this system, commodity and product prices settle at levels that cause supply and demand in each market to be matched and homo economicus is rational and narrowly self-interested by seeking to maximise one’s own economic gain. In aggregate, incremental quantitative growth is achieved through stimuli such as changing consumer tastes in conditions of gradually increasing population, saving and capital accumulation. Importantly, there is no endogenous development that results in qualitatively new phenomena.
In Chapter 1 of Theory, Schumpeter traces the origins of statics and dynamics to members of the Austrian school, including his own teacher, Eugen von Ritter Böhm-Bawerk, to John Bates Clark and to the analysis techniques of his great idol, Léon Walras. Although an admirer of Walras, Schumpeter developed doubts about his approach to economic analysis in Walras (1874), which he relates to in the preface of the Japanese edition of Theory, which he wrote in 1937. He describes how he began to suspect that Walras’s theoretical apparatus was not only “rigorously static in character…but also…applicable only to a stationary process.” Schumpeter claims Walras was aware of this and confirmed to him personally his view that the theory of a stationary process constituted the entire domain of mainstream theoretical economics, that any forces causing economic change were exogenous and to be merely recognised by economists, not analysed. He continues:
I felt very strongly that this was wrong, and that there was a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained. This is so, then there must be a purely economic theory of economic change which does not merely rely on external factors propelling the economic system from one equilibrium to another. It is such a theory I have tried to build… (1989[1937] pp.165-6)
The date of these comments on Walras’s analysis by Schumpeter is important to this paper’s argument: they were written after, and are consistent with, the major reassessment of Schumpeter’s own thinking on economic development in the unpublished 1932 paper Development. Also of importance is that these comments are indicative of a realist philosophical position that differentiates between the phenomena of the real world and human produced knowledge about them.
Development
Chapter 2 of Theory constitutes the first comprehensive account of Schumpeter’s concept of economic development and in several places its language indicates that he is not totally confident in what he is proposing. He is feeling his way. He is, after all, dealing with an entirely new conception of economic development and one that, perhaps, he already realises is going to challenge much of the accepted wisdom of the neoclassical orthodoxy of his time and that established concepts and methods of analysis for systems in static equilibrium are inappropriate for understanding dynamics. Indeed the chapter begins with a warning that the increasing use of empirical methods has “…led us away from the metaphysical treatment of social development…but it has done its work so imperfectly that we must be careful in dealing with the phenomenon itself, still more with the concept in which we comprehend it.” (1934[1912] p.57) Here, already, are the same concerns with ontology and epistemology of development to which he refers later in the preface to the Japanese edition.
Schumpeter is most concerned about the use of Entwicklung (development) as “…the word by which we designate the concept and whose associations might lead us astray in all manner of undesirable directions.” (1934[1912] p.57) Here he makes clear that his theory of economic development has been derived from a concrete problem in economics and not arrived at by analogy from other domains of science, such as Darwinian evolution. He stresses this point again in Chapter 7 of the first edition of Theory:“…development, as far as I can see, has neither formal nor material connections with the biological development of any organic body.” (2003[1912] p.63) and while in the same chapter he himself draws analogies between processes of development in other fields, he is clear that his theory was not derived from these sources.
Schumpeter is also concerned about the possible confusion of development with progress. This is expressed clearly in Development: “Faith in progress,” he says, “…implies a positive valuation of changes. Precisely because it implies valuation, it has no place in science.” (2005[1932] p.119) This view had not changed since he wrote in 1912:
Whether development leads to social welfare or to social misery, to the prospering or to the decline of national life, depends on its concrete content, on what concretely occurs in those forms which we describe. But what is most important is that our principle does not already contain a value judgment. (2003[1912] pp.78-79)
Reflecting in Development (in 1932) he admits:
…that I produced a mess when I first termed this notion "development" because the exact form of definition had not yet been found. A similar mess was produced with the term "dynamics," which I originally used as a synonym. This was a completely misplaced term that has inspired misleading associations.(2005[1932] p.115)
At this point, then, an ontological question exists – what is the type of change to the economy that Schumpeter is trying to understand and which he, perhaps injudiciously, termed development? He provides a succinct answer in a footnote to the second edition of Theory:
In the first edition of this book, I called it "dynamics." But it is preferable to avoid this expression here, since it so easily leads us astray because of the associations which attach themselves to its various meanings. Better, then, to say simply what we mean: economic life changes, it changes partly because of changes in the data, to which it tends to adapt itself. But this is not the only kind of economic change; there is another which is not accounted for by influence on the data from without, but which arises from within the system, and this kind of change is the cause of so many important economic phenomena that it seems worth while to build a theory for it, and, in order to do so, to isolate it from all the other factors of change. The author begs to add another more exact definition, which he is in the habit of using: what we are about to consider is that kind of change arising from within the system which so displaces its equilibrium point that the new one cannot be reached from the old one by infinitesimal steps. Add successively as many mail coaches as you please, you will never get a railway thereby. (1934[1912] p.64n, emphasis in original)
The change in which he is interested is a revolutionary, not evolutionary, shift in “one of the channels of the circular flow” and it represents a sharp discontinuity from its previous form. It is a change in structure of part of the economy.
Innovation
Schumpeter’s example of railways and mail coaches, whilst superficially simple, with deeper analysis provides great insight to his concept and the role of innovation. His concern is not with the nature of any underlying technology per se, but with changes in its economic use. Mail coaches and railways in the 19th Century were the temporal stages of development in two distinct means of transporting goods and people. The former were wheeled and freely steerable on any surface hard enough for the wheels to turn without a resistance greater than the power of their locomotive force, typically a team of two, four or six horses. Mail coaches were an incremental technological development of a transport tradition that can be traced back through Roman chariots to the earliest and simplest of flatbed wagons that must have quickly followed the invention of the wheel.
The steam driven locomotives with which the Liverpool to Manchester passenger and freight services began in 1830, were also an incremental technological development, this time of wheeled vehicles running on a prepared track that bears their weight and guides the vehicles and acts as a limit to their range and direction. The origins of this form of railed transportation can be traced back to at least the Greeks and Romans (Lewis 2001).
Even the steam engine was not new technology in 1830. The earliest engines were novelties invented by Hero of Alexandria in the 1stCentury AD and practical stationary engines had been undergoing incremental development since Thomas Savery’s invention for pumping water in 1698. But none of these incrementally developing technologies had resulted in the type of discontinuous economic change with which Schumpeter is concerned until the performance of George Stephenson’s Rocket at the Rainhill Trials in 1829 demonstrated that a mobile version of a steam engine on rails could be used to transport large numbers of people safely over long distances at speed. (Encyclopedia Britannica. 15th ed. 1984)