FReemany J. Cugrk., 6 sere 2” SCHUMPETER'S THEORY OF BUSINESS = * CYCLES AND INNOVATION “ [AS we have shown in Chapter in most of the industrialized c th slower rates of growth, slickening investment and more, “corp: determined efforts to contain the growth of government expendi ture. It is now increasingly recognised that the period of very rapid economic growth which succeeded World War Il has given way to 1a rather different phase of recession and ‘stagflation’ — slower growth associated these circumstances in theories of Ko ‘long cycles’ or ‘long waves’ in economic development, which seek to explain such long-term changes in the economic cl In this chapter we are concerned in particular ion of long cycles advanced by Joseph Schumpeter, any other twentieth-century economist, attempted to explain competition and economic growth largely in terms of technical innovation. An interesting personal comment on the con- temporary relevance of these ideas came from an outstanding Keynes. ian economist of the post-war period — Paul Samuelson (1981): No one ean predict the fuure with confidence. Stil i is my considered guest ‘hat the final quarter of the twentieth century wil fll far short of the tied snare in i achicred ute of economic progres © dark horoscope of my old teacher Joreph Schumpeter may have par ticular relevance here, When I wat 4 precoo Ft think ra of Joseph Schurpeter's fururology 1942 Capitalism, Socialiom and Democracy find new meanings i There do appear to have been in the past century or 0 several periods of rather deep crises and slower growth, associated with higher levels of unemployment, which at least in some countries were regarded at ians since as ‘Great De- pressions’. These is of boom and prosperity experienced in the 1850s and 1860s, in the Belle Epoque before snug Fe Sqpe <3 ae HF, World War I and in the 1950s and 1960s. The depress were roughly the 1880s and the 1930s, although varying a country to country (see Chapter 9). In the USA, for ex ‘ih the 1860s was followed by a period of rather rapid growth in the 1870s and 1880s when European countri generally experiencing slower growth rates and more conditions. Japan was less affected by the depressions of and (so far) the 1980s. fy 2.4 Schumpeter’ theory of longeyeles BF x is ‘major work om Business Cycles, Schumpeter (1939) both decqpted the realty of the phenomenon of "Kondratev™ long Bytes. lasting half a century of so, and olfered a novel explanation of them, differing for that of Kondratiey (1928) melt. Accord: fg to Schumpeter (1989, Chapter 2), each busines cycle was Unique because of the variety of technical innovations at well at the'varery of exogenous events suchas was, gold discoveries oF Havent Tales, But despite his inistence on the specific features fp ef ah factandon and prune, he bleed tht the tk of tconamie theory was to go beyond a mete catalogue of accident : snags thon ear " Dehaviour wich tuations inespecive of their specific and variable mane of ach festures im hp view was innova. rowth and the source of entrepreneurial promt, initiative oF entrepreneurs (who might or might for profits, which in turn attracted a ‘swarm’ of, improvers to exploit the new opening with a wave jent, generating boom conditions. The competitive processes set in motion by this ‘syarming’ then gradually eroded fe profits (at in Marx’s model), but bi te into an equilibrium con would start again through fe of innovations. This process w20 SCHUMPETER’S THEORY OF engender various types of eycial behaviour, although Schumpeter cetainly acknowledged that thee wae a procs of interaction wih Imany other features of the econom jet of more conven her or not such a mechani effets» plausible explanation ong" (Kondraucy)cycce in economic development depente fruciay ~ as Kuenets (1940) pointed out in hs review of Busines Gyeles 1 the time ~ on whether some innovations reso lage ad $0 dscontinsous in thelr impact ato cause prolonged perturbations cal changes which ae occurring evry year in many indusees whose effect is far more gradual and which might well adapt to some Sort of smooth equilibrium growth path If these smaller innovations were to be associated with economic fuctuations then ths could only be if they were linked to the growth cycles of new industries and technologies: ao “ A neoSchumpeterian inte son Sane? et st cence nd ie uy esto arte Tata dol sn percha (Gena Bon hl tte a et orm a he fe min nti edhe ached Boh Sinica’ umm oe 4 a fa of Berd entry many OECD coun (hues 7) pected that the quarter century after the war would be the fastest wey ais um my pated of erzamic om he wai to extrapolate the problema of the 1920s and 1930s into the pose te pra the pole of e128" ad 190 he ee inp he wold go rt cre in the Economie Journal on why Britain had the war, pointed out th: oa “S.) BUSINESS CYCLES AND INNOVATION ‘= a trning point in the business cycle had already occurred ‘spontaneously’. PSchumpeter had suggested that after a strong ‘band-wagon’ effect land the entry of many new firms into the rapidly expanding sectors ted by the exceptionally high profits of innovation, there follow a period of ‘competing away’ of profits as the new industries matured, This could lead to stagnation and depression ‘new wave of innovations did not compensate. Such an explana- tion appears to fit the facts of the postwar boom. It had been remarked already in the 1960s that the general rate of profit was beginning to fall in several OECD countries and this tendency was aggravated by more severe international compe This became still more marked in the 1970s espé of the erstwhile rapid growth sectors such as synthetic materials and consumer durables. In spite of its continued high rate of growth, the electronics sector was also affected by this general trend (Chapter 6). ‘Schumpeter had relatively little to say about unemployment and wages, but economists of many different schools, including both neo-classical and Marxist, would agree that a sustained period of boom and full employment such a5 that experienced before World War I or after World War II would tend to strengthen the bargaining jon of labour and thereby also to erode the rate of profit and stimulate cost’push inflation, with or without the pressure of mnilitant trade unions. These changes would tend to induce rather different types of technical change, and associated investment. In the early period of a long boom the emphasis is on rapid ex- pansion of new capacity in order to get a good market share and this investment has a strong positive effect on the generation of new employment, As the new industries and technologies mature, economies of scale are exploited and the pressures shift to cc saving innovations in process technologies. Capital-intensity in- ‘creases and employment growth slows down or even stops altogether. ‘Again, this hypothesis appears to fit the post-war pattem quite well. Already before the OPEC crisis these trends were apparent in the Teading_indust ies, both in the newer industries such as synthetics an We shall attempt rate these points for synthetic materials in Chapters 5 and 6, and for the economy more gen- Chapters 7 and 8. But : why was Schumpet jecently? And how does his theory relate to more2 SCHUMPETER’S THEORY OF 2.2 The debate on Kondratiev and Schumpeter One reason for the negle was the general reluctance of the economics profession to tackle the thorny problems of in. vention and innovation, which has already been alluded to introduction. Another reason was that Schumpeter’s book on ness Cycles appeared in 1939 (ive., three years after publ Keynes’ (1936) General Theory, which by then and for a long time afterwards occupied the cenire of the stage in the professional debates on cycle theory and admirers would agree, Busine It is inordinately long an ics is poor. Fels (1964) performed a valuable service in producing a much more intelligible abridged edition, but this was quite a while later and even this ‘edition is not an easy read. Perhaps most important of all Schum- peter did not satisfactorily explain why major innovations or clusters of innovations should occur only every half century or so, Indeed the whole notion of long waves or cycles was rather discredited in the 1950s and 1960s, both in the West and in the East. Kondratiev himself was one of Stalin's victims in Siberia but before this he had come in for thorough criticism on the part of his orthodox Marxist opponents on the grounds of his supposedly faulty statistical techniques, problems in the dating of turing points of the various cycles, inaccuracies and discrepancies in his data, paying too much attention to prices and interest rates rather than producti id lack of a satisfactory theoretical explanation of consistent with Marxist theory (see Barr 1979). Some of isms were unjustified and prejudiced. The notion that ight enjoy a renewed upsurge of growth after the de- pression was particularly unwelcome in the 1930s. However once the ideas became known in the West, they were subjected to criti cism almost as severe as in the East, notably by Garvy (1943) and Weinstock (1964). Although the notion of long waves had its de- fenders, both among monetarists such at Dupriez (1947) and among Marxists such as Mandel (1972 and 1980), for the most part eco: nomists either rejected or ignored them. During the 1970s, however, much has changed, justifying Mandel’s (1981) ironic comment that it takes the prolonged down-turn of a long wave ists to reconsider their ideas ids and Belgium is also apparent Be ge mid JUSINESS CYCLES AND INNOVATION: > a in Germany and France and the USA and there have even been some Syne of a revival of interest in Eastern Europe. The research pro- pamme at Amsterdam Ted by van Reon is one indication Sf this revival and. another wat Bochum University in 1980 (Pet ‘At tis conference thee ma aot of dic aspects of long wave theory. Tit is not Sup eecther main reasons for the rejection of the Long cycle or long thether in ith Sehumppeteriin of any other form, were Scal problems posocated with any atempt the last 100 years. dc E over the interpretation of such series in relation to ‘of major events such as the two world wars or the US Ci ‘There are other problems of a purely statistical nature as well as the major difficulty of building any generalizations on only four cycles extending over a period which witnessed enormous social tical changes, and in which only a few countries were in- Finally many people are uncomfortable ‘mechanistic determinism of some long weave theories Maiciy For these reasons the work of the three Kiel economists, Gfamdan, Rodemer and Wlter (1980) i parGeulaly inter ‘hrm out cate the focus in ther analysis son longterm produ nd ineestment huctuations, rather than monetary and price f Saas coi fay good Satie evidence for F the past century on longterm cycles forvarious counties Te Figures 21(a) and 2.1(8) we have replied some of the statit- F eal evidence collected by Glismann, Rodemer and Wolter, not by ‘Shisdual country, but rather for the total of the various countries cluded in their analysis: Britain, France, Germany, Italy, Sweden and ihe USA for production, and Britain, Germany, Tely, Sweden andthe USA tor invetmentt tse belngasumed to approximate total wold4 FRcoucrion ener es saves in total production and inveament: deviation fom wend (hee fine yeat mowing ergs)% SCHUMPETER'S THEORY OF J will be argued in Chapter 9, the the first instance an overall wor counts patter of output and Ives primarily be Influenced by the general process g-up’, which seems to have char: o 5 production and investment, Phenomenon of long waves is ‘igure 2.1(a) presents the thre of the prodi sents the three- and nine-year moving averages of the deviations from the growth trend for the same sample of countries and for the same period. Whether Figures 2.1(a) and 2.1(b) provide for a 50-year long-term cycle is largely an academic qu emphasized before, the evidence available — 150 years Insuficiet, while extemal factors ~ in particular the = provide major disturbances. There is consequently little doubt that the statistical debate will continue for a long time. However, to appreciate the relevance and importance of Schum- 5 Van der Zwan (1979) periodic major structural crises of adjustment saks of a ‘metamorphosis! mé idea now prefer to speak of rather than ‘long cycles’. For the purposes of this book it sary only to accept van der Zwan’s concept that there have been petiodic major structural crises of adjustment varying a li their severity and timing between countries and followed by fairly prolonged periods of expansion and prosperity. These major crises Were generally perceived at the time as being more severe than the ordinary down-turns of the short- and cycles. The change in carly 1980s obviously raises the question of whether analogies or useful comparisons with the 1930s, and in particular + technical inno as any bearing on these issues. Among ent attempts to tackle these questions are those of Mensch (1975) and van Duijn (1979). 2.3. Capital accumuls However, before discussing thei in Chapter 3, it is essen to place Schumpeter's theory in the context of more nal tment and employment thinking secumulaion and fluctuations in thi overall level of investment. Fur the upswings of the Rondratey would be periods in which eaument was generally buoyant because of the new profitable 2 enh were perceved. The higher level of unempoy- td daring the Kondvatev dovmvings would be Of ths Hnpetus and fo general demand deficiency die eo of na a ee ee ony sete wih ow ee of a i ar se ot ec ace ay a ie Sata cine We Nagene ppl a ot isin, Coal lng te San a ore Se a Hh ay ch re ee ee fal rod (amu 199) AS ernment eaten ye tel [ Gver- and under-expansion of the capital producing sector. ‘There are a large number of imperfections, lags and discontinuities involved in any expansion of the capital stock. These imperfections relate both to the so-called short run ‘investment demand’, and to Tong run capital accumulation. ‘Short-run investment demand is generally assumed to be a func- fons’ and interest rates. If investment Cin responsive apy to gma changes in the rate of interest given a certain level of expectations), then depending on wage and price flexibilities, a full employment general equilibrium could easily be obtained. Rece: employment could be overcome by simple monetary pol fence exists to support this view of the interes optimism that demand will come ‘ money supply, to great pessimism about the unpredictability and rent demand, which leads to a strong prefe for fiscal policy (Cooper and Clark 1982). In terms of these volatile28 SCHUMPETER'S THEORY OF contrast not just with the "deep (i occasionally ironical) awareness of the subtleties behaviour was based on a life-time of dire ne Exchange and the commodity markets porary monetarist prescriptions, but also with that of some of his ‘own followers (which is exactly what he would have expected). Summing up his discussion on long-term expectations he says (Keynes 1936, p. 164): by any practicable changer in Saeco eds BUSINESS CYCLES AND INNOVA’ South Pole does not invalidate this point. While pure animal spi tain the jioneers of anew technology (a8 ually promoted by the example \¢ or more exceptionally profitable ventures. Like those who Rush’ of the nineteenth century many of them ‘are doomed to disappointment, but their ‘swarming’ behaviour is al, even though fashionable trends jes and expectations (for the exaggeration of both Keynes slumps and booms and to big variations over time in the rate of ‘capital accumulation. However, he was more interested in the short run than the Iong run and did not really examine some of the longer term consequences of these fluctuations. The process of capital accumulation is affected not only by the vagaries of investment ya variety of inflex- , such ast @) inte in terms of delays in perceiving the need for new fixed capital and in the necessary time lag before.the new fixed labour. ‘These inflexi will not only lead to disequilibria, but might well result in cyclical crises. Long-run capital accumulation is therefore {at the core of many long-wave theories. The first of these inflex- ‘pansion of the Group. The second type of Taises the possibility that large ing obsolete at the same time, vy which may important in that in one period, by be <¢ a flurry of replacement investm anspo! that, in some countries, much wwy post-war investment hort period in the fu30 The third 4 in the assump! for exampl models confined the possibility of su labour working with the exi productive, meri pet sl bance re eat ponies fot tng) nel in tera of mee Once he che mead sien ig hanger tor pres (wage mcrae) wl no ee production factor Content of the invesinene The eae iti premature he Bly oui na neccee ad fer very clea the crucial role of technial change and factor price "expectations (eas fature” wage setdementsy "Not surprinly mest of thee Vintage models arve atthe conclusion that the ineesing laboce share of output has ed to reduction inthe fetime of capa Stock (e.g, see Vandoome and Meeusen, 1978) andthe ens de ‘The possiblity that ecen ow levels of nest ital shortage unemployments once expansion ced in ape 8 ind trom this ast discussion, technical change plays a crucial vole in creating some of these infccbiicn, Ings or sincontnatis. In temas of thortrun imestnent ders new technology should normally incemeexpecatons normally have a net employment genernueg elec tare of of output gets underwi As will have beco ms. Long-run capital accu (as emphasized by Neiset, 19 factor prices and thei As in the case of the c from a number of rigidi terms of rapid technical change, changes in the demand for certain also create bottle ining has increased technical change has again th are in short or inelastic supply) by wage differes by a more general “stickiness” in wage rates, engendered in part by tutional factors in the wage bargaining process and by lags in the adaptation of bargaining attitudes to changed circumstances. 4 Equilibrium and structural change “The more of less ‘traditional’ explanations of economic development tend to assume that there exists some sort of general equilibrium growth path. We have listed a number of factors: time lags in the Sdaptation of the capital stock; undetermined expectations; interest clastcty of investment demand; limited factor substitution, ete Which, combined with wage and price inflexbiliies, might lead to fustained departure from that equilibrium. We also insisted on the fole of technical change in creating possible further departures rom that equilibrium. Rost of that debate (in particular the tech- nical change bias) forms now a central part of economic growth textbooks However, the way most of these questions are put terms of general equilibrium), make them of very lite use in ex- aining major fluctuations ats implicitly assumed that departures from the equilibrium path are shortlved frictional imperfections. ‘A steady state growth, path, 2 dynamic full employment general Gquilibntum, a constant rate of ‘Harrodmneutral” technical change re all concepts, which — though useful from a theoretical point f view — at a certain sage seem more to obscute than to clarify actual interactions between grove, technical change and em loyment. “This is where in our view Schumpeter’s main contribution lis. Schumpeters framework it is disequilibrium, dynamic com ion (inthe sense of “imperfect’ competition) among entre in terms of industrial innovation, which forms ‘the emphasis is on the than on demand processes [demand (Giersch 1979, be viewed push] as driving forces in economic develops p. 630). In such a framework economic develo Primarily as a process of reallocat32 That process leads automatically to structural changes and die if only because of the uneven rate of technical change it flso primary depends on tha nesta schon babe ai ae is ofall emphasised by Russe (1990 an (2954), and by much of the ealy makering Meera oaeame the product life cycle trade is nothing steady abet the poder Ife ele wade teary, thee Sot aad a the pansion of products or dates, Rater scons wo __ Pluie ops some ‘sort of ete ipa wis fst grning tution and desiring pases te mow obtpes ingredients. Second, as pointed out by van der Zwan (1979, p. 23): hese hind wen ean sero iprnment by hindi a ISe ace AetlSrwtyttrreey e dr o EA acd ses otter tani ae an aes fronte ith rising costs for its inputs, which leaves it with additional demands. rele tact ree aa ree Rea eb et ee ces Power in the economy at lage this hampers Soro hese of demands Nt MET We expen of te advancing oda Sh sty ge get teat aeeay ce Soa i tinately bea tendency too in the modem sectors of the inte ‘conomy. In Chapter 7 we take he dacaion of thee prod iferenials between industries and 0 the question of of consuimer demand Tor Laid al change as one ofthe main factors structural vise . ie id economy over the level of employment, We do es: Sho" "USINESS CYCLES AND INNOVATION 3 of single-factor causation, nor to a conception of regular repetition ith fixed periodicity of an unchanging cyclical mode of develop- ‘On the contrary, whilst we would go along with Schumpeter his insistence on the central role of technical change in the dynamics of capitalist development, we also share his view, ex- pressed so clearly at the beginning of his analysis of Business Cycles (sce Fels 1964, pp. 11-12): «the question of causation isthe Fundamental Question... . Now if we do Lx hs Question quite generally about all the fluctuations, crises, booms. ‘cpressions that have ever been observed the only answer is that there is m0 [Engle cause or prime mover which accounts for them. Nor is there ever any Set of causes which account for all of them equally well. For each one is 2 Historic individual and never Uke any other, either in the way it comes about picture it presents. To get at the causation of each we must analyse the fact of each and its indvidaal Background. Any answer in terms of a single fause is sure to be wrong. In his insitence on the importance ofthe specifi features ofeach arbation tothe system, Senumpetr differed from most Keynes: ‘hearing and om much other macroeconomic tse theory hath Dit disregard of actual technical developments and rel hanger in the structure of industry and series, Like Marx and um his approach was evolutommy and historia and he was varanly wee ofthe limitations and dangers of abstract general atone dnd modes, He sw research on "business eyes ws having iertiy on. company histories; technical joumals, dies of par tSealar products and ranches of industry and repeatedly emphasted seeniBiceding aggregate satis could bey since they Hequenty Oncaled rather than reveled the underlying process of change THe jostled his view that technical hmnovaion was "more like 2 series bf explosions than a gentle thoogh incessant transformation” on thee grounds, First, he sgued that innovation ae mot at any me dstlbuted over the whole economic system at random, Dut nd to concentrate in certain : ine at consequently they are ops viasuse! Secondly, he asjucd that the diffsion proces was 2 ey even ont because “innovations do" nt remain Sad ae not evenly atte contay, they. tend tls Eom aMiaet dime and then most rms follow in the wake o PoFluoeston’ Thirdly, he maintained that these tw tthe disturbance“ SCHUMPETER’S THEORY OF 2 Hardly anyone would deny the truth of Schumpeter’s first confirmed by a great deal of empirical research on the mn of R and D, patents, inventions and innovations between the various branches of the economy. The differences between rates of growth of various branches of production are well-known and obvious, as is the fact that some industries decline fal changes are the of the canals and horse transport and the an obvious case, followed by the rite of the smal combustion engine and the de: i innovation were sufficient to entail substantial problems of struc: tural adaptation, especially for those countries which already had stock and pool of skilled labour devoted to the ex- tion of the older systems of technology. re comprehensive evidence is now available which shows that differences in growth rates of production and of productivity have been systematically related to R and D intensity and to pattems of technical change (Terleckyj 1974). The most R and D intensive industries are those with extraordinarily high rates of growth in the twentieth century and most of them did not exist at all before tury — electronics, aircraft, drugs, scientific instru- synthetic materials (Freeman 1974). For long periods growth rates of 15 per cent per annum in many industrialized countries were commonplace for these branches of industry. Again, it is fairly obvious that these high growth rates were related to a’ much greater flow of technical innovation in new products and processes and the high rate of diffusion of these innovations through the world economy. There has been a very high concentration of total R and D i sand chemicals in almost all the OECD countries in showing rather low rates of growth. These are frequently char acterized by low R and D inte If. The existence of a statis: -chnical change and the growth ipdoes not, of course, necessarily mean # us BUSINESS CYCLES AND INNOVATION > 3s is technical innovation which has caused the growth. The reverse could be true, or both could be ascribed to some other sector, such as the quality of entreprencurship of market demani the importance of autonomous invention and entrepreneurship, but Schmookler (1966) put the main emphasis fon market demand, ie 2.5 Schumpeter or Schmookler? However if make demand were the only problem, then technical weStktcn could’ be regarded. a6 a. secondary phenomenon and {Shen tor granted, sce would spy respond te demand manage. TEESE fe Sou be pare of the adjustment to changing patterns of Sonam engine of prow. Seinokler’ Ser, somtimes been mterpicted in this way. Fluctuations Wwestment are followed by Ahutuations in inventions in Cotes PSG we shal prevent some evidence which sugents ha apt Scmandicd then of tention and innovation dors ot corespond demi hisorel Facts in the ease of the two technologies which we focus Schumpeter theory of an autonomous impetus on the Stpply side deting from advances in science and invention an felt though imagine enreprencurhip appear Ct the eee eds beter Onee, however, major innovation has been ge "then ‘a pattem ef demandled secondary inventions and ins snag set mover many decades giving apparent cfed ‘schmooller-type of analysis Dnt (1982) hs suggcted an interesting parallel beoween tech olegheal paradigns and Kuhn's theory of scientific paradigms. A weer tcchtology is comparable toa new paradigm in scence, aie Rechnology takes vif 1 further articulation the outcome Br ateal taieciony” possbilties (comparable to normal science Testy infeed by the mart adection er ann Teche change is both an engine and a thermostat, sonst Tanetion tends to predominate at technology (1966) work as important independent influence and unl argue that basic science is also demat he uses the metaphor of the two blades36 ‘SCHUMPETER'S THEORY OF BUSINESS CYCLES AND INNOVATION discovery and the other one the changes in the state of market demand. However in practice he concentrates almost ent devote some ‘and secondary pate | tnd leah a oe : li the mest powerful mestage appearing to emerge from Schmool H evident from his own conclusions: ' a : 2 : i Hit i i iu i } t By Pot u po . i Figure 2.2 gives a schematic representation of Schmookler’s al lis theory. Initially, a small increase in demand might be met by in. BW BY creased production from existing plant (Route 1) ot with a time H i : lag through ‘expansion of “capacity ‘using ‘exiting technology 5 (Route 2); More commonly howevel, given strong demand, new j would generate an increase both / . il b the number of patents, On a ver ao HE century, but much more generally as te of ven mmonopolistically led to the growth of company-financed (‘a ! Rand D laboratories and other technical services (Route 4). The , ——— new inventions and improvements would be embodied in existing ‘and in new and improved pro- Cyclical falls in demand would it 122 Schematic representation of Schmooklers model of deman/-ed inventionie 3 SCHUMPETER'S THEORY OF ceases of fore not on a general co series, but on the argumer usually led the upswings from the troughs, and on the movements of the investment series could be better explained by external events other than the course of invention. In Chapter 5 we conclude that the evidence from the plastics industry, whether descriptive or statistical, does not support either ied invention or of technology. a theory of pure ‘discovery push" or invention push, ignored the reciprocal influence of the growth of demand, of fluctuations in economi and of competitive pressures. But it would be consi grew to maturity. Exogenous science and ne the early stages, whilst demand tends to take over as becomes established. A ‘matching’ process of new ichnology and new markets, guided by imaginative entrepreneurs, roughout, ‘The second is that advanced in his 943). Figures presentation of these two models which we shall designate as Schumpeter 1 and Schumpeter II. They are based essentially on e diagrams used by Pi ted by the Schumpeter I model and ummarized as follows: in science. These are largely t structures, and hence to any although they may certainly BUSINESS CYCLES AND INNOVATION 2.3. Schematic representation of Schumpete's model of entrepreneurial innovation (mark 1. Fig a”40 " > SCHUMPETER'S THEORY OF BUSINESS CYCLES AND INNOVATION a be influenced by the belief in a potential demand or concept of unmet need, or shortages of existing products. sponsible for the main dynamic thrust in c: realize the future potential of these inventions and are prepared to take the risk of developing and innovating. Thi would not be undertaken by the average ca exceptional entrepreneurs. ) Once a radical innovation had been made it would disequili ig market structures and reward the successful innovator wi exceptional, growth and temporary monopoly profits. However, this monopoly will be later whittled away by the entry of swarming secondary innovators rise to the cyclical phenomena already described. ‘The main differences between Schumpeter Il and Schumpeter I 1¢ incorporation of endogenous scientific and technical conducted by large firms, Schum, R and D statistice at his disposal as these have only been ee managed innovation (mark I). é = dust ss z systematically collected since World War II. However, he was un- fe & doubtedly aware of the rapid growth of these activities between Hl 5 i Z ‘ntreprencur as ultimately being completely superseded by a "bureau. 3 : tie had actly foretolowed is — 3 ‘change in the emphasis of his theory in an article as early as 1928. 4 in Cipttom, Socom and Democracy (1943) he went even further _ 3 tendency othe main fnce which would limaely iil 5 lead to the disappearance of capitalism itself. i a In Schumpeter I (Figure 2.4) therefore there is a strong positive d f Toop tom niceufl innovation to increased Rand D q i2 sci IMPETER'S THEORY OF fon nineteenth-century in the early years of the ‘what had been happening istory as. sect was based me, less ionovane, thus proving continuous ‘new small innovative firm to undermine the large monopolistic fame despite the scale of their R and D and other jin the was often argued that the concentration had slowed down or ceased, ims tended to be rel 963) and parila argued from the statisial ev that here wat no sora beter fm Se ed relative seal of research and to dimin industrial concentration in the’ 1960s and 1970s is now seldom disputed, but the Schumpeterian sien a) cone Otten ignored. oF contadited, wally o work. This view atte ugly om Ge wih wee mci and viedo recent per on the subject Sorte (1979) made use of sates of the National Science Foundation forthe 1970s and other US soutee to show that Schumpeter ar Tn most branches the largest firms which mother study in the UR for the a ~ BUSINESS CYCLES AND INNOVATION 3 this, In Chapter 7 we present further evidence both on the long- term tendeney towards concentration of production and sales, and fon the resurgence of fastgrowing small innovation firms in such new technologies in processing and small computers. ‘Obviously these Schumpeterian models represent a rather dif- ferent view of the determinants of technical change and economic development than that propounded by Schmookler. Howev Important to note that in terms of Schmookler's statistical analysis the results might sometimes look the same. Since li Gistinction is made between the original radical inventions and innovations and all subsequent inventions in Schmookler’s method, in terms of simple patent counts, there would always be far more inventions and patents by the ‘swarming’ secondary innovators oreover, than by. the original radical inventors and innovators. these might often tend to follow rather than precede the upsurge or decline of investment and production. Thus the Schumpeterian ‘not necessarily inconsistent with the Schmookler Tis validity can be tested only by the descriptive narrative typ approach which we have attempted in our discussion and detailed case studies in Chapters 5 and 6, as well as by a st Which attempts to separate basic inventions and Tn Chapter 3 we develop this argument yhovations generally. Engines must be distinguished ventions and from thermost