Wednesday, May 16, 2007

Solow on Schumpeter

Via Brad DeLong, Robert Solow's review of a new biography of Joseph Schumpeter.

New Republic: ...In my view--and that of most contemporary economists, I believe--Schumpeter's most original and most lastingly significant book was Theory of Economic Development, ... [where] ...he worked out his conception of the entrepreneur, the maker of "new combinations," as the driving force and characteristic figure of the fits-and-starts evolution of the capitalist economy. He was explicit that, while technological innovation was in the long run the most important function of the entrepreneur, organizational innovation in governance, finance, and management was comparable in significance.

Innovation is not the same thing as invention. Anyone can invent a new product or a new technique of production. The entrepreneur is the one who first sees its economic viability, bucks the odds, fights or worms his way into the market, and eventually wins or loses. Each win means profit for the entrepreneur and his backers, and it also means a jog upward for the whole economy. In the course of this process, which cannot possibly run smoothly, many businesses, individuals, and institutions, themselves founded on earlier successful innovations, will be undermined and swept away. Schumpeter called this birth-and-death process "creative destruction," and realized before anyone else that it was the main source of economic growth. There is no feasible alternative for capitalism; this is capitalism. Here is a characteristically strong statement: "Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capitalist propulsion. The atmosphere of industrial revolutions--of 'progress'--is the only one in which capitalism can survive."

The picture generated by classical and neoclassical economics had none of this dynamism, turbulence, and intrinsic uncertainty. (Malthus was perhaps a partial exception.) Smooth trends and stationary states, equilibria of one kind or another, predominated. ...

Today, some sixty years after their deaths, Schumpeter's star probably outshines Keynes's. The business cycle has receded in importance, partly because the large industrial economies have sprouted a more stable structure, and partly because the lessons that Keynes taught have been learned by central banks and finance ministries. Instead, long-term economic growth has moved to the top of the political and intellectual agenda, and that was Schumpeter's topic. As Robert Lucas memorably put it, once you have begun to think about economic growth, it is hard to think about anything else. It is a pity that troubled old Schumpeter did not live to see the triumph of his obsession.

The TNR review is subscription-only. To get around this, search on Google for a string from the article, and click on the cached version of the search result. TNR needs some better technologists :-)

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