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.
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