Complexity , Innovation , and Development
innovation-driven economic progress , and the equilibrium analysis of how markets determined prices and the allocation of resources .” 14 But as Nelson rightly says , this “ coexistence was incoherent .” 15 Schumpeter ’ s theory of innovation-driven economic development “ not only put forth a different view of what was most important about capitalist economies . It diverged from theory that stressed equilibrium conditions .… It was virtually impossible to buy conceptually into both at the same time .” 16
Schumpeter was aware that a departure from equilibrium thinking would put him at odds with the economics establishment . His first book , The Nature and Content of Theoretical Economics , published in 1908 when he was 25 , was a failure . His own mentor , Eugen von Böhm-Bawerk , advised him that knowledge did not advance through bright new insights but “ through the old professors ’ dying off .” 17
Schumpeter did not wait . He proceeded to push the frontiers of economic thought with the publication of The Theory of Economic Development . The book challenged then current economic wisdom and was not well received from the outset . 18
The central idea of Schumpeter ’ s new book is that when “ new combinations appear discontinuously , then the phenomenon characterising development emerges … Development in our sense is then defined by the carrying out of new combinations .” 19 Schumpeter contends that “ new combinations are , as a rule , embodied , as it were , in new firms which generally do not arise out of the old ones but start producing beside them … in general it is not the owner of stage-coaches who builds railways .” 20 He did not consider the revival of new industries following downturns as necessarily representing innovation although such acts may create opportunities for innovation or the creation of new combinations . Indeed , Schumpeter notes that “[ a ] s a rule the new combinations must draw the necessary means of production from some old combinations .” 21 What is critical , however , is the generation of novelty and not simply the return to previous levels of production .
Schumpeter ’ s theory of development covers at least four key elements . First , he considers the process of economic development to be endogenous and driven by the creation of new combinations including new products , new production methods or processes , new organizational forms , new markets , and new sources of raw materials and inputs . Second , these combinations are carried out by entrepreneurs who are motivated to undertake certain actions . Third , the entrepreneur is the change agent whose actions disturb the equilibrium of the
14
Ibid ., 902 .
15
Ibid ., 902 .
16
Ibid ., 903 .
17
J . A . Schumpeter , History of Economic Analysis ( New York : Oxford University Press , 1964 ), 850 , quoted in McCraw , Prophet of Innovation , 63 .
18
As Schumpeter later recollected , “ When this book first appeared in 1911 , both the general view of the economic process embodied in and about half a dozen of the results it tried to establish seemed to many people so strikingly uncongenial and so far removed from traditional teaching that it met almost universal hostility .” Letter from Schumpeter to David T . Pottinger , June 3 , 1934 , quoted in Becker , Knudsen , and Swedberg ,
“ Schumpeter ’ s Theory of Economic Development ,” 919 .
19
J . A . Schumpeter , The Theory of Economic Development ( Cambridge , MA : Harvard University Press , 1934 ), 66 .
20
Schumpeter , The Theory of Economic Development , 66 .
21
Ibid ., 68 . 7