Schumpeter on innovation

In an effort to try to go to the sources I am reading Schumpeter’s The Theory of Economic Development. It is, not surprisingly, both an amazing and annoying book. Amazing because he revisits all things in their absolute simplest form, and annoying for the same reason. To read his exposition of prices is to be bored and enlightened at the same time. When he turns to economic development (or what we would possible term innovation), however, I really find only brilliance. Here are is my reading (pp 65- 67):

To produce means to combine material and forces within our reach (footnote omitted). To produce other things, or the same things by a different method, means to combine these materials and forces differently. In so far as the “new combination” may in time grow out of the old by continuous adjustment in small steps, there is certainly change, possibly growth, but neither a new phenomenon nor development in our sense.

Three things in this strike me as noteworthy.

First, Schumpeter thinks of production as the combination of forces and materials. This is an example of the fundamentalism in his exposition, but it is useful. The fun thing about this is that it seems to entail the much-touted notion of service innovation as a subset quite evidently present in his analysis.

Second, Schumpeter does not believe that what we call incremental innovation qualifies as development in the way he wants to understand and study the concept at all. This is interesting, since disruptive innovation has sort of become an extreme example in much of today’s innovation narrative. For Schumpeter disruptive innovation, innovation that changes something fundamentally, is more interesting than the gradual change. The “small steps” do not interest him.

Third, note the difference between “change” and “growth” that he introduces. Certainly change, possibly growth. Not all change is growth. This signals a separate problem set about what innovation qualifies as growth and what is simply change. This is an interesting question in many ways, and one that I would like to know more about.

Back to the text (pp 65-67):

In so far as this is not the case, and the new combinations appear discontinuously, then the phenomenon characterising development emerges. For reasons of expository convenience, henceforth, we shall only mean the latter case when we speak of new combinations of productive means. Development in our sense is then defined by the carrying out of new combinations.

Here Schumpeter makes the point that development disrupts equilibrium. He is, himself, deeply sceptical of evolutionary metaphors, finding them wholly the product of the dilettant mind, but it is easy to see that if we by evolution do not presume the assumption of a known form through development but the evolutionary process with mutations, selection and punctuated equilibria, well, then it fits the glove. Down to the observation that it is about “new combinations”. This idea, that innovation is about combinations, carries strong implications for intellectual property analysis. The ease by which combinations can be made seems to be predictive of the speed with which new combinations can emerge and development occur.

Schumpeter then delineates the different cases, and he finds five of them.

This concept covers the following five cases: (1) The introduction of a new good – that is one with which consumers are not yet familiar – or a new quality of a good. (2) The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially. (3) The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before. (4) The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created. (5) The carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position.

What is very clear here is that when we cite Schumpeter as a thinker about innovation there is a mis-match between how political discourse today thinks about innovation (ideas! ideas!) and how Schumpeter thinks about what he calls “development”. Schumpeter allows for creativity and the creation of the new, but he is much more down to earth than that in his analysis. The idea that the creation of a monopolist position could be development is for example quite intriguing. It is also clear that the dimensions of the concept are different from many understandings of the concept innovation. Schumpeter then weights the entire analysis in a way that I find really interesting. He writes:

Now, two things are essential for the phenomena incident to the carrying out of such new combinations, and for the understanding of the problems involved. In the first place it is not essential to the matter – thought it may happen – that the new combinations should be carried out by the same people who control the productive or commercial process which is to be displaced by the new. On the contrary, new combinations, as a rule, embodied, as it were, in new firms which generally do not arise out of the old ones but start producing beside them; to keep to the example already chosen, in general it is not the owner of the stage coaches who builds railways. This fact puts the discontinuity which characterises the process we want to describe in a special light, and creates so to speak still another kind of discontinuity in addition to the one mentioned above, but it also explains important features of the course of events.  Especially in a competitive economy, in which new combinations mean the competitive elimination of the old, it explains on the one hand the process by which individuals and families rise and fall economically and socially and which is peculiar to this form of organization, as well as a whole series of other phenomena of the business cycle, of the mechanism of the formation of private fortunes, and so on. In a non-exchange economy, for example a socialist one, the new combinations would also frequently appear side by side with the old. But the economic consequences of this fact would be absent to some extent, and the social consequences would be wholly absent. And if the competitive economy is broken up by the growth of great combines, as is increasingly the case to-day in all countries, then this must become more and more true of real life, and the carrying out of new combinations must become in ever greater measure the internal concern of one and the same economic body. The difference so made is great enough to serve as a whater-shed between two epochs in the social history of capitalism.

So, this is complicated, but a couple of take-aways to me seem to be inescapable. The first is that development (or innovation) is intrinsically about people. It is about new companies, it is about the social and economic history of individuals and families. This to me is a real thought-provoking hypothesis. This is not something that is reflected in the EUs Innovation Union for example. It is nowhere to be found in the OECD Innovation Strategy. The notion that we can understand innovation only if we key it to the social end economic histories of individuals and their private fortunes seems to open up all kinds of new questions to be explored in-depth. Then Schumpeter goes on to argue that innovation in the “great combines” will be more important than innovation in new firms (this is contradictory to me, is this really what he means?) and that part I am not sure about. What exactly does that mean? One reading would be that the Bells’ labs of the world become the engines of growth and that this is what he was arguing, but I am not sure at all about that interpretation. Any ideas?

The second modifier Schumpeter then goes on to explore is the notion that development happens not through taking what is unused, but through finding new combinations of what already exists. He writes:

The carrying out of new combinations means, therefore, simply the different employment of the economic system’s existing supplies of productive means […]

And then, by a might detour, he connects development with credit in a way that seals the deal. He essentially says that we “ride to success on our debts” and so makes the point that without capitalists no capitalism.

What to make of all of this in analyzing innovation generally, though? Aye, there is the rub. More later.