Joseph Schumpeter and Entrepreneurialism

1. Joseph Schumpeterand Entrepreneurialism

2. Background and Personal Characteristics of Joseph Schumpeter • Joseph Schumpeter’s books • Entrerprenuer • Innovation • Scumpeter versus capitalism and socialism

3. Background and Personal Characteristics of Joseph Schumpeter (1883-1950) • Tangled patterns wove throughout Schumpeter’s early life. • He was bornin Moravia in 1883. • He worked in government and finance during the 1920s. • He settled at Harvard University.

4. Schumpeter’s characteristics were evident in his actions and writings. • He both dressed and wrote flamboyantly. • He was extremely well read. • He had a streak of contrariness.

5. Joseph Schumpeter’s books • 1908, The Nature and Essence of Theoretical Economics • 1911, The Theory of Economic Development • 1914, Economic Doctrine and Method • 1939, Business Cycles • 1942, Capitalism, Socialism, and Democracy • 1954, History of Economic Analysis (published posthumously)

6. Schumpeter • Starts with neoclassical model. • Introduces entrepreneurship and innovation—change. The balanced, circular flow is disrupted. • Innovations drive business cycles and development. Innovations occur in clusters. • Innovation is followed by recession and depression, then recovery.

7. Schumpeter • Argues that capitalism will not survive. • Rejects Ricardian and Socialist arguments for the decline of capitalism. • Obsolescence of entrepreneurial function • Collapse of Political Strata • Institutions crumble • The cold, rational mindset of capitalism is destructive of moral authority • Economic issues move to political sphere • Welfare state expands and takes over—guided capitalism to state capitalism, etc.

8. Schumpeter believed that entrepreneurs were central to the business cycle. • Schumpeter believed that the” creative destruction” of entrepreneurs drove economic growth. • He believed that innovation was central to capitalism. He thought that new production functions served to shake up the system. • Schumpeter believed that new business and new firms were central the economy.

9. Schumpeter thought entrepreneurs should think up new things and devise new ways of doing things. • Schumpeter thought people aced as entrepreneurs only occasionally, not continually. • Schumpeter believed that entrepreneurs were buried onside institutions. • He thought that entrepreneurs were driven by the will to create the dynasty.

10. Schumpeter onThe Entrepreneur I “When he swims with the stream in the circular flow which is familiar to him, he swims against the stream if he wishes to change the channel. What was formerly a help becomes a hindrance. What was a familiar datum becomes an unknown. Where the boundaries of routine stop, many people can go nofurther, and the rest can only do so in a highly variable manner.” “...every man would have to be a giant of wisdom and will, if he had in every case to create anew all the rules by which he guides his everyday conduct.”

11. Schumpeter onThe Entrepreneur II “In the breast of one who wishes to do something new, the forces of habit rise up and bear witness against the embryonic project.” “It is no part of his function to “find” or “create” new possibilities. They are always present, abundantly accumulated by all sorts of people. Often they are also generally known and being discussed by scientific or literary writers.” “For its success, keenness and vigor are not more essential than a certain narrowness which seizes the immediate chance and nothing else.”

12. The Schumpeterian story of the business cycle included an upside and a downside. • On the upside, innovation led to new investment opportunities, which had a ripple effect. • Yet its welcoming investment climate led people to overbuild and borrow, thinking that the good times would continue indefinitely. • The result was a decline in the business cycle. • Schumpeter saw these shifts as cycles of innovation. • He found that the availabilityof profits signaled where money should be invested.

13. Schumpeter categorized these waves into three types. • Large entrerpreneurialinnovations caused „Kondratieff waves” that lasted for decades. • Smaller investors caused „Juglar waves” that lasted for approximately ten years. • „Kitchin waves” were shorter still. • These waves did not appear with the regularity that Schumpeter had predicted.

14. 5 Types of Innovation 1. new goods (product innovation) 2. new methods of production (process innovation) 3. new markets 4. new sources of inputs 5. new organization

15. Schumpeter offered the following explanation for the Great Depression. • The Depression occurred when all three cycles hit a downturn at the same time. • In Schumpeter’s view, the Depression was a part of a necessary process.

16. Schumpeter mused on capitalism and socialism. • Schumpeter did not think capitalism would survive. • He argued that with pure productive power, capitalism would continue. • He believed that over time, large firms would make entrepreneurs obsolete. • He thought that the political weakness of entrepreneurs would undermine that roots of capitalism. • He believed that intellectual complainers would become disgruntled and more powerful, and they would undermine the moral sustainability of capitalism.

17. Schumpeter claimed that socialism could work. • He concluded that it was possible to plan the economy. • He regarded central planning as unfortunate but also as inevitable

18. Although Schumperet and Marx agreed on certain issues, they disagreed on the process. • Marx and Schumpeter believed that capitalism was domed and that socialism would prevail. • Marx thought that the poor would lead the revolt against capitalism. • Schumpeter thought that the intellectuals would leds the assault on capitalism. • Schumpeter admired Marx’s intellect but recognized his limitations.

19. Schumpeter’s legacy is evident in economics today. • Schumpeter had a truly free mind that transcended ideology. • He was difficult to characterize and a tremendously deep thinker. • He was bold enough to predict a future which did not appeal to him. • He sought to open doors rather than to close them.

20. Schumpeter discussed the boundaries of socialism and capitalism. • He thought that socialism would collapse for political rather than economic reasons. • Schumpeter anticipated the large government structure that we have today.

21. Schumpeter also developed the field of growth economics. • New technology was the primary source of economic growth. • Growth accounting focused in the source of growth. • Real business cycle economists argued that technology and changes in production moved the economy. • New growth economists dicussed modeling the process od developing technology.

22. These ideas of economic growth are extraordinarily importent. • Schumpeter underestimated people’s desire for economic growth. • In actuality, people are greedy concerning economic growth and entrepreneurialism.