Professor Schumpeter's Theory of Innovation

PROFESSOR Schumpeter is known primarily as a business-cycle theorist, but his fundamental interest is much broader than this reputation would suggest. A careful reading of his works clearly shows that the objective is nothing less than to lay bare the anatomy of economic change in a capitalist society. English and American economics, on the other hand, has traditionally been content to confine its attention to what may be called the normal functioning of the capitalist economy. Such an approach, of course, does not exclude treatment of the business cycle, but it does exclude the larger problems of change and development, which are customarily regarded as lying within the province of the economic historian. The most important part of Professor Schumpeter's theory of economic development which falls within the traditional scope of Anglo-American economics is that which is concerned with business cycles. Now I do not mean to suggest that there is any objection to regarding Professor Schumpeter as a business-cycle theorist, for he is certainly one of the most distinguished contributors to this branch of economics; but the circumstance should not be allowed, as it too frequently has, to obscure his no less distinguished and important achievements in clarifying the processes of economic change. In this paper I shall ignore business-cycle problems and attempt to bring into sharp relief Professor Schumpeter's views on the mechanism of economic change in the capitalist economy. Professor Schumpeter's starting point is an economy from which change (though not growth) is assumed to be absent. ' In other words, the specific factor that causes change is abstracted. The resulting economic system is called the "circular flow" because it is found to run on, year in and year out, in essentially the same channels. The circular flow is in no sense conceived as an unrealistic construction; rather, it is an abstract construction which is intended to portray the consequences of a limited number of very real economic forces. From this point, the procedure is comprised of three steps: first, the causative factor of change the entrepreneur or innovator is analyzed as a pure type in abstraction from its economic environment; second, the factor of change is inserted into the model of the circular flow; and third, the interaction of the innovator with the forces at work in the circular flow is subjected to exhaustive analysis. What emerges is a process of development which displays the specific wave-like form of the business cycle. This simplified version of Professor Schumpeter's method is intended to focus attention upon certain questions which are of crucial importance in any final evaluation of his theory. Has he really isolated and abstracted for analysis the primum mobile of change? Is the picture of the circular flow fully satisfactory? Is the result of joining the two elements a correct representation of the essentials of capitalist reality? The causative factor in change, according to Professor Schumpeter, is "innovation," which is defined as "doing things differently in the realm of economic life. " 2 If this were interpreted to mean no more than that "the cause of change is change," it would, of course, be a mere petitio principii; but such an interpretation would be a misreading of Professor Schumpeter's meaning. Innovation is the activity or function of a particular set of individuals called entrepreneurs. The entrepreneur is a sociological type that can be isolated and investigated independently of the consequences which follow from the actions of the entrepreneur. Hence any suspicion of circular reasoning is unfounded. What are the characteristics of the entrepreneur? First, of course, the ability to appreciate the possibilities of an innovation; whether or not he is also the discoverer or "inventor" of the innovation is a matter of minor consequence. But even more 1 For the distinction between change (or development) and growth, see J. A. Schumpeter, The Theory of Economic Development (Cambridge, Mass., I934), Ch. ii. 2J. A. Schumpeter, Business Cycles (New York, I939), Vol. i, p. 84.