Joseph Schumpeter’s Concept of Entrepreneurship and Combinations

Joseph Schumpeter was an outstanding economist that immigrated to the U.S. Many of his works were not mathematical like other economists but he did delve into the economy as a complete economic system. His work has led to new ways of thinking about the economy as a system and offered a greater understanding of creative destruction and entrepreneurship as part of the economic model. 

He believed that entrepreneurship is an important part of the economic system. These difficult to account for innovations result from companies that have the ability to research important product improvements.  Innovative improvements are a force that changes the market and allows some companies to earn higher levels of revenue for a time until their products are copied by others. The innovative process is needed to maintain new products and a market leading position. 

He outlined his theory in the book Theory of Economic Development (1911) and maintained the fundamentals throughout his life. He believed development is not possible without new products and services. He outlined his concept of innovation through a idea called combination that includes (pg. 66):

1) The introduction of a new good, not yet familiar or of a new quality of good.

2) The introduction of a new method of production.

3) The opening of a new market.

4) The conquest of a new source of supply of raw materials.

5) The carrying out of a new organization of any industry, like the creation of a monopoly position or the breaking up of a monopoly position.

Those creating the combinations are called entrepreneurs. They can be within a company or have their own business. They take information, connect it to new uses, and develop products. Economic development comes from this process of finding new sources of knowledge and putting them to productive use. 

As markets change and adjust there are cycles of destruction and creation. War, famine, political forces, scarcity and much more cause the constant need for change to seek a system in equilibrium. Large adjustments can cause pain but can also put a system on a higher plane of existence. Without pressure to change, few things will develop and the economy will become stagnant.

Schumpeter, J.A. (1934). The theory of economic development. Oxford University Press, New

York.

Evolutionary Economics-Is your organization innovating?

Is your organization changing to the times? It is important for organizations to consider the market conditions when loosing revenue or attempting to create sustainable growth. Market factors can cause some organizations to be successful while others are forced out of business. This is a process that fits within the evolutionary economic model that sees innovation, change, and development as a result of adjusting developmental patterns.

Evolutionary economics counters neoclassical models by focusing on the fluid development of economic systems throughout history. Where evolutionary economics sees adjustment in a more unpredictable adaptive context, the neoclassical model sees the economy at rest with well anticipated changes. The evolutionary model is fluid by nature and tries to explain how innovation and adaptation emerges from chaotic economic trials.

In evolutionary economics the rationality of the system is bounded (Simon, 1955). This means that people make decisions as institutions, organizations, government, and other entities to adjust to the market. Typically, these elements follow patterns of change and adaptation that worked well in the past. They have the power to innovate and develop from the challenges they face. This change becomes even more possible when the factors see an opportunity for resources or become aware that their existing patterns are not working.

This is different from other theories that assume that the actors have enough knowledge, time, and energy to make logical adjustments to the environment. However, such actors don't work within a vacuum and have imperfect information with imperfect conditions. This forces them to use patterns based upon previous behavioral styles and then adjust these patterns due to market pressures.

Evolutionary economics fosters the belief that adjustments within the systems are a learning process (Lall, 2000). In essence, unlike the neoclassical model where an optimum level of performance is desired the evolutionary style sees no optimal level of performance. It only sees the amount of adjustment and change in relation to economic factors presented. Growth is seen by how much change actually has occurred over a given time period.

Innovation within the economic system can cause levels of uncertainty (Schumpeter, 1950). As uncertainty increases so does the opportunities for innovation. Innovation coming from multiple sources within the economy and can also cause "creative destruction" which leads to winners and losers in economic development. It is this uncertainty that forces the factors to continually adapt to find market advantages.

Innovation in the market can come from the natural cooperation of entities within the system as well as through the institutionalized developers such as universities and governmental agencies (Nelson, 2008). Organizations and corporations often seek to develop products and services for specific market capitalization. Universities and public research focus on larger social platforms of market development that may take longer if relying on private interests alone. Thus, private and public research has an important change producing function in society.

The question business owners should ask themselves are 1.) "Is my organization changing to market needs?"; and 2.) "Are the patterns my management team developed through its policies & procedures adequate for this market change?".  If the answer is no then the organization needs to make a stronger environmental analysis and adjust its patterns in order to be one of the winners in this "creative destruction" process.

Lall, S. (2000) Technological change and industrialization in the Asian newly industrializing economies,in: L. Kim & R. Nelson (Eds) Technology, Learning, and Innovation (Cambridge: Cambridge University Press).

Nelson, R. (2008). Economic development from the perspective of evolutionary economic theory. Oxford Development Studies, 36 (1). 

Simon, H. (1955) A behavioral model of rational choice, Quarterly Journal of Economics, 69, pp. 99–118.

Schumpeter, J. (1950) Capitalism, Socialism, and Democracy (New York: Harper).