Article Type : Review Article
Authors : Pichler JH
Keywords : Entrepreneurial dynamics; Innovative change; New combinations; The entrepreneur as systemic antithesis; Market disequilibrator
In trying to paintbrush background and
scientific "environs" when Schumpeter`s visionary "Theory of
Economic Development" (1912) came out, classical and neoclassical thought
as well as Marx’ "Capital" had been exposed already for some time to
scholarly scrutiny by the learned community. In neither classical-neoclassical
nor Marxian visions, the entrepreneur explicitly figures. It is Schumpeter`s
truly seminal interpretation of the capitalist process, wherein the
entrepreneur as such takes centre stage as the "pioneering" and
driving force in a dialectic sense as, in fact, sort of a villain, as the
"antithesis" to the market system. As indeed an element constantly
striving to outmanoeuvre constraining competition, to "trick" given
market conditions and, thereby, forever challenging the “system" itself;
or more pointedly still: when and wherever possible to be, or to become, a
monopolist. When relating this to modern entrepreneurship, its pivotal role in
a regional and global or, more specifically so, in a structural as well as
developmental context, Schumpeter`s vision, nowadays, more than ever in times
of dynamic change may serve as a guide for any entrepreneurially oriented
policy formulation.
Underlying hypotheses and
observations, Schumpeter states in the early German edition of his seminal
“Theory of Economic Development” (1912)1, were not invented or merely
fictitious, but taken and gleaned from economic reality in contrast to – then -
prevailing equilibrium oriented and essentially “static” views of interpreting
the market based capitalist process as “conditioned by given circumstances” (as
he subtitled the very first chapter). Thus, the telling motto right on the
title page of the first edition: “Hypotheses non fingo”. (As such never
appearing again in any later issues, including the English translation of 1934;
ref. Annexes 1 and 2.) [1-15].
From hindsight one might
be left wondering as to what, in fact, makes Schumpeter’s early conceived
vision of the leadership role of the entrepreneur in “economic life” still so
very topical, if not to say outright indispensable for explaining the dynamics of
the “capitalist” system. In recognizing role and importance of
entrepreneurially driven innovation with related forces of “creative
destruction” as intrinsically market based phenomena, Schumpeterian notions
indeed seem to have gained new momentum in today’s economic debate for the very
understanding of entrepreneurial by driven systems, including competitive
entrepreneurial behaviour with emphasis also on related entrepreneurship
education . All that against a bibliographical background of his “Theory” which
- intermittently nearly forgotten, widely misread or misinterpreted - took
fully 14 years until its second, in parts radically revised and modified
edition in 1926. Schumpeter explicitly voices his irritation in the foreword to
the second edition that readers of the earlier version obviously “mistook” the
book as a kind of “history” of economic development in line with the –
methodologically more descriptive – German “Historical Schools” to which,
nonetheless, the very flow and partly rather verbose style of the original text
undoubtedly shows a certain affinity. In restating and emphasizing the
theoretical thrust of his argument, the somewhat lengthy subtitle was added
from the second edition onwards (and retained also in the English translation)
to bring home the very essence together with substantial revisions to the core
second chapter on “The Fundamental Phenomenon of Economic Development”. In the
context of such revisions Schumpeter, in our view, perpetrated two “sins”: Firstly, by trying to schematize,
thereby narrowing down and kind of “sterilizing”, in the second chapter the
very role of the entrepreneur to the meanwhile famous, again and again being
referred to, “five cases” in “the carrying out of new combinations”; as such conveying a rather bloodless, sort of
descriptive “listing” of implied entrepreneurial traits and “characteristics”
lending itself to a rather limited, yet tempting interpretation as a sort of
proxy for defining the “Schumpeterian entrepreneur”, quite in contrast to the full
blooded picture so vividly painted in the original version refraining from such
schematization. Secondly, by omitting the entire seventh chapter (from 1926
onward) , wherein Schumpeter tried to put his vision and overall
conceptualization in a systemic context by way of a “holistic” topping off in
form of a socio-economic synopsis to the expositions in the preceding chapters.
It seems a pity that, especially the English reader, remains deprived of a
possibly still more comprehensive and deeper understanding of the very thrust
of the Schumpeterian message even if, admittedly, this chapter (of nearly 90
pages in the German original) might appear less rigorously argued [16-25].
In order to fully
appreciate the very boldness of Schumpeter’s message, his “Theory” needs to be
viewed in light of the prevailing mainstream of economic thought at time of its
first publication. Classics and Neoclassic, notably of the Viennese marginal
(“Grenznutzen”) tradition with Eugen v. Boehm-Bawerk and Friedrich v. Wieser as
principal advisers to Schumpeter’s habitation at the Vienna University ,
clearly were dominating the discipline’s common body of knowledge; and so was
Marx’ quite different, non-market based (“socialist”) interpretation of the
economic process, all of which Schumpeter was well familiar with, while more
specifically having been exposed, of course, to neoclassical thinking in the
Viennese academic “style”. His habitation thesis as mentioned, submitted in
1908, indeed was devoted to a theoretical treatment and discussion of the “state
of the art” at the time, including a rather shrewd reception and
re-interpretation of Walrasian equilibrium as an exposition of “pure economics”
on essentially static grounds. These scientific environs and ingredients are
important to note as points of departure in Schumpeter’s own “Theory”, wherein
his critical stand against the prevailing “mainstream” finds ample expression
right in the first chapter by pointing at the intrinsically static, “circular
flow”-type view of “economic life” and voicing his discontent over the obvious
deficiency of such theorizing to adequately capture and explain the underlying
dynamics of the market based “capitalist” process. By contrast, he explicitly
commends Marx as - with his (dialectic) methodology - being able to indeed
grasp the intrinsically dynamic nature of “economic development.” To mention as
of specific relevance in this very context is Eugen v. Boehm Bawerk’s
profoundly neoclassical - and pointedly anti-Marxist – “The Positive Theory of Capital”
as for Schumpeter yet another bone of contention and point of critical
departure since, despite its erudite theoretical reasoning, again resting on
essentially “static” grounds and, therefore, bound to miss the intrinsic nature
of “capitalist” dynamics. (For an ingenious early re-interpretation of “The
Positive Theory” with Boehm-Bawerk’s subtle theorizing on the “round aboutness”
of capitalist accumulation by his contemporary Swedish economist Knut Wicksell
see graphical illustration, Annex 4.). It is against such background and
dissatisfaction with mainstream “circular flow” concepts as prevailing then,
that Schumpeter’s own “Theory” evolved and took shape: as a theoretical - and
in its endeavour similar to Boehm Bawerk’s preceding, albeit “static” - attempt
to, for his part, provide a non-Marxian dynamic interpretation of capitalist
“development” driven by its inherent systemic forces “from within”. We shall try in the following to pinpoint –
against such background - what seems to emerge as a kind of “hidden agenda”
behind Schumpeter’s vision rendering it such lasting a legacy for interpreting
capitalist development and its dynamics.
In taking a profoundly
critical stand against mainstream “statics”, Schumpeter in his “Theory”
endeavours to depict market based (long term) “economic development” as an ever
changing - and as such never toward equilibrium tending - process of “economic
life” generally. This, in fact, constitutes the all-pervading thrust of his
argument; and indeed no one – apart from Marx in his systemic theorizing – has
done so before in a similarly rigorous fashion which, no doubt, lends such
seminal and lasting fascination to his “Theory”. The essence of capitalist
dynamics, in Schumpeter’s view, thus boils down to a continuous pursuit of “carrying
out … new combinations” as an entrepreneurially driven process which proves
“that economic life never is static; it lies in the very nature of
development.” The question then arises:
who is “carrying out”, what stands for the “new” and how are “new combinations”
being carried through? Schumpeter’s straightforward answer to that is: the
entrepreneur, being depicted and singled out in the very “Schumpeterian”
meaning (or “in our sense” as he repeatedly emphasizes). In any given economic
moment or situation, so his argument, there exist “numerous possibilities for
new combinations”, yet only a small group has the drive and takes “leadership”
to, in fact, carrying them through, while “most do not see them”. Thus,”… the carrying out of new
combinations is a special function … of people who are much less numerous than
all those who have the ‘objective’ possibility of doing it. Therefore,
entrepreneurs are a special type, and their behaviour … the motive power of a
great number of significant phenomena.”
Hence it is, with Schumpeter, the entrepreneur - and only he - who”
‘leads’ the means of production into new channels … drawing other producers …
after him“, thereby rendering” a service, the full appreciation of which … is
not so easily understood by the public at large”. From there it follows, “the most typical
incorporation of future value creating potentials is a new enterprise …”, and
the “specific type” as characteristic for “a special class of economically
active individuals has taken on a name of its own, namely entrepreneur.” The entrepreneur as the driving or “leading”
force in economic life, be it as “business founder” or as “creative innovator”
who through “anti-hedonist” activity and initiatives creates future values.
“They (these values, J.H.P.) correlate with new combinations, new combinations
translated in value terms … the shadows of things to come …” In carrying out
new combinations, the entrepreneur, firstly, singles out from a “multitude of
various moments … the related right decision … which is given to few people
only with specific capabilities, and secondly, carries them through. These are
the characteristics of our entrepreneur, of our man of action. They are
inseparable and of equal importance. And the result is economic development,
progress”; development or progress being triggered by “our type” of
(Schumpeterian) entrepreneur.
The role of the Schumpeterian
entrepreneur, as inseparably being geared to the very essence of “economic development”, thus resembles a kind
of “hidden” form of what might be called Schumpeterian “dialectics” for
interpreting the dynamics of capitalist development from a (non-Marxist)
systemic perspective. The market system itself, under “given circumstances”,
thereby constituting the thesis; the entrepreneur in the Schumpeterian sense as
the driving (also the “creatively destructive”) force being the antithesis to
the system, ever striving to “out
compete” given circumstances by way of new combinations and thus - temporarily
at least - trying to be or to become a kind of “monopolist”; finally,
the synthesis of such a scenario to be seen in prevailing market forces
tending forever to catch up with, to “compete down” temporarily dominating
entrepreneurial initiatives provoking, by force of such process,
entrepreneurial creativity yet anew in trying to tackle or outmanoeuvre the
system “from within” and, as such, quite distinct from Marxist “dialectics”.
The entrepreneur in such
a scenario takes on the role of unsettling “disequilibrator”, as an ever
disturbing element to static or “circular flow” tendencies toward equilibrium
in the very sense of “creative destruction”; as a mavens of forever challenging
the system “conditioned by given circumstances”, of constantly trying to trick
competitive market constraints and forces through innovative “new combinations”
providing thus the intrinsic drive for (Schumpeterian) “economic development”. Different
from Marx, different also from the classical-neoclassical and as such
essentially “static” concepts, Schumpeter in his “Theory” boldly presents an
alternative (non-Marxist) interpretation of the “capitalist” process with the
entrepreneur taking center stage. It is this very boldness too, which in good
measure seems to account for the lasting relevance, if not to say fascination
of his “Theory” up till now (celebrating the well over 100 years anniversary
since its first printing).
By provocatively casting the entrepreneur – traditionally being considered the “epitome” of capitalism itself – as sort of villain or “antithesis” to the market system with its “mainstream” proclaimed tendencies toward (static) equilibrium, amply testifies to the originality of Schumpeter’s own theorizing. Thereby depicting the specific role of the entrepreneur under systems-related aspects further implies that the very same (“capitalist”) system essentially derives its inherent strength and dynamics from ever self-renewing entrepreneurial drive and initiatives; dynamics and strength, in the end, for sustained reproduction of the system as such out of its own forces, or “from within”. Notwithstanding Schumpeter’s later scepticism under changed economic conditions in the face of World War II whether entrepreneurially led capitalism indeed may “survive”, we today can witness a sheer global revival of Schumpeter’s early vision: be it in form of a new and growing awareness of the need for entrepreneurial initiatives, values and attitudes as crucial for sustainable development and more broadly based welfare; be it in recognizing the specific relevance of “entrepreneurship education”, or the importance of diversified entrepreneurially based small and medium sized business structures; be it in the context of fostering business start-ups combined with venture capital financing and concomitant tendencies toward privatization worldwide (including related emphasis on economies “of scope” rather than just one-sidedly “of scale”) – this all relates to the very notion of Schumpeterian “entrepreneurship” as being reflected in entrepreneurially driven initiatives, creativity and “leadership”. Leadership that in any market based system stands for structural diversification, for sustained viability and capabilities of success and sheer systemic “survival” under competitive conditions. From a contemporary perspective, relevance and importance of Schumpeter’s vision nowadays seems to be demonstrated vividly in the ongoing - and partly still painful - restructuring from formerly centrally planned to market oriented systems in Central and Eastern Europe. A transformation whereby the final verdict over success or failure in large measure hinges on how effectively these economies are capable to build and rebuild their over decades ruthlessly weakened, if not outright ruined entrepreneurially based business structures as a prerequisite for economic dynamics and sustained development in an increasingly competitive environment with more and more diversified markets. More than ever, as it seems, can under today’s regional as indeed worldwide challenges Schumpeter’s erstwhile vision serve as a valuable guide, as a kind of compass with a view to policy formulation for entrepreneurially conducive framework conditions, or more bluntly still: for creating conditions wherein entrepreneurial initiatives, creativity and leadership in the very Schumpeterian meaning can thrive and adequately are being rewarded. To conclude on that note in Schumpeter’s own words: “Look around - and you will see, things really are like that.” Or in conformity with his early motto again: “Hypotheses non fingo.”