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Extracts from Joseph Schumpeter's The Theory of Economic Development

First Published 1934

On Entrepreneurs and Innovation (pages 74-94)

Below are selected quotations from Schumpeter on the entrepreneur.

[Note: Quotations citing Roman numeral pages are from the Introduction to the 2010 edition by John Elliott]

 

8 January 2011

The Entrepreneur is key to economic development

"The strategic stimulus to economic development in Schumpeter's analysis is innovation, defined as the commercial or industrial application of something new---a new product, process or method of production, a new market or source of supply, a new form of commercial, business or financial organization." (xix)

"The innovation process Schumpeter subsequently observed 'incessantly revolutionizes the economic structure from within, incessantly destroying the ole one, incessantly creating a anew one. This process of Creative Destruction is the essential fact about Capitalism'" (xix)

"Schumpeter's great contribution lies in dynamising the system by putting the role of the entrepreneur in the forefront and clearly indicating the fundamental differences between this system and the system of equilibrium" (xxii)

"...entrepreneurial innovation is for Schumpeter, the central autonomous cause of economic development, and capital accumulation is a major result. For Marx, by contrast, capital accumulation is itself the primary force in the development process." (xxiv)

Identifying the entrepreneur

"...the entrepreneurs function is to combine the productive factors to bring them together..." (p76)

The act of being an entrepreneur becomes mixed up with all the other day to day running of a business. But the act of being innovative is specific. "Therefore the entrepreneurs essential function must always appear mixed up with other kinds of activity..." (p77)

"the entrepreneur of earlier times was not only as a rule the capitalist too, he was also often- as is still today in the case of small concerns- his own technical expert etc" (ie: does everything. (p77)

"But whatever the type, everyone is an entrepreneur only when he actually carries out new combinations, and loses that character as soon as he has built up his business, when he settles down to running it as other people run their business." (p78)

"Because being an entrepreneur is not a profession and as a rule not a lasting condition, entrepreneurs do not form a social class in the technical sense.." (p78)

There's "...the fundamental point of distinguishing between 'entrepreneurs' and 'capitalists'..." (p75)

Entrepreneurs and Firms

Of the firm Schumpeter says that entrepreneurs can exist "even if they are, as is becoming the rule 'dependent' employees of a company, like managers, members of boards..." (p75)

"As it is the carrying out of new combinations that constitutes the entrepreneur, it is not necessary that he should be permanently connected with and individual firm..." (p75)

Difficulties and the rarity of entrepreneurs

"While he swims with the stream in the circular flow which is familiar to him, he swims against the stream if he wishes to change the channel." (p79)

'Therefore, too the carrying out of new combinations is a special function, and the privilege of a type of people who are much less numerous than all those who have the objective possibility of doing it. Therefore, finally, the entrepreneurs are a special type and their behaviour a special problem, the motive power of a great number of significant phenomena." (p81)

Custom, history, tried and trusted practice all condition people to do things in certain and set ways. This aids efficiency but not innovation. "All people get to know and are able to do their daily tasks in the customary way... the 'director' has his routine as they have theirs; and his directive function serves to correct individual aberrations." (p83)

"And from this it follows also for economic life that every step outside the boundary of routine has difficulties and involves a new element. It is this element that constitutes the phenomenon of leadership.: (p84)

Societies resist doing things differently. "the manifestation of condemnation may at once bring noticeable consequences in its train. It may even come to social ostracism and finally to physical prevention..."

"Surmounting this opposition is always a special kind of task which does not exist in the customary course of life, a task which also requires a special kind of conduct."

'in matters economic this resistance manifests itself first of all in the groups threatened by the innovation, then in the difficulty in finding the necessary cooperation, then in the difficulty in winning over consumers." (p87)

"Add to this the precariousness of the economic position of the individual entrepreneur and of entrepreneurs as a group and the fact that when his economic success raises him socially he has no cultural tradition or attitude to fall back upon, but moves about in society as an upstart, whose ways are readily laughed at and we shall understand why this type has never been popular ..." (p89)

People are "fenced in by social habits or conventions and the like..."

But

"The latter is not true of our type (the entrepreneur). In one sense, he may indeed be called the most rational and the most egotistical of all... The typical entrepreneur is more self-centred than other types, because he relies less than they do on tradition and connection and because his characteristic task... consists precisely in breaking up old, and creating new, tradition." (P91)

"...the antagonism of non-innovators to the pioneer---in the form of legal arid political obstacles, social mores, customs and the like." (xxi)

"It takes a special person to overcome these difficulties...The entrepreneur is more of an heroic figure that an economic figure; he must have the drive and the will ... In any society, including capitalism, said Schumpeter, such people are in the minority" (xxi)

What motivates entrepreneurs

Schumpeter lists
  • The dream to found a kingdom
  • The will to conquer, fight and prove one's superiority
  • The joy of creating, getting things done and exercising energy
"Experience teaches, however, that typical entrepreneurs retire from the arena only when and because their strength is spent and they no longer feel equal to their task." (p92)

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