Introduction
Evolutionary economics is mainly concerned with the study of the processes involved in the transformation of global and local markets. The field focuses on economic changes in relation to industries, firms, and institutions. It also analyses the impacts of these developments on employment, trade, growth, and production (Dopfer, 2005). The transformation is perpetuated through actions of agents, which are characterised by interactions and experiences. The development is reviewed with the help of evolutionary methodologies (Andersen, 2009).
In the current paper, the author will analyse evolutionary economics from the perspective of Joseph Schumpeter. To this end, a review of Schumpeter’s model of economic development will be provided. The main features of this scholar’s evolutionary economics will be analysed. The features addressed include innovativeness and entrepreneurship, technological competition, as well as profits, credit, and capital.
Evolutionary Economics: Background Information
According to Witt (2002), evolutionary economics entails the analysis of the processes associated with technological and institutional innovation. The processes are analysed through generation and testing of different ideas. The aim is to ‘discover’ and accumulate value for incurred costs as opposed to their competing alternatives (Andersen, 2009).
Evolutionary economics is closely related to mainstream economics. It is also linked to the heterodox school of economic thought, which is anchored on evolutionary biology. According to Dopfer (2005), this branch of economics is similar to its conventional counterpart, given that it places emphasis on complex interdependencies. It also draws attention to growth, competition, resource constraints, and structural change. However, critics have raised concerns with the approaches utilised by conventional economics in analysing the various elements listed above.
In mainstream economics, the main argument is based on rational agents and scarcity. The two are treated as interdependent elements. Consequently, rational choice with regards to a given agent is defined as the straightforward practice involving mathematical optimisation (Witt, 2002). Complexity economics is growing at a high rate in contemporary society. To this end, economic systems tend to be treated as evolutionary elements (Witt, 2002).
According to Andersen (2009), Schumpeter proposed what can be regarded as very radical ideas during his time. His ideas focused on an evolutionary economic approach to growth and changes (Andersen, 2009). In his book The Theory of Economic Development, Schumpeter elaborates on this approach to economics.
In this work, Schumpeter bases his theory on a number of assumptions. The presumptions take into consideration the importance of macroeconomic equilibrium (Schumpeter, 1934). Macroeconomic symmetry is regarded as the ‘normal mode of economic affairs’ in actual life (Dopfer, Foster & Potts, 2004). Schumpeter views the equilibrium as an element that is continually destroyed by entrepreneurs in their efforts to introduce innovations in the market (Schumpeter, 1943).
According to the evolutionary approach to economics, innovations that are successfully made part of the society alter the normal operations of fiscal life (Andersen, 2009). The alteration occurs given that some of the already existing means and technologies of production lose their positions in the economy (Andersen, 2009).
The study of economics is basically concerned with the financial welfare of members of society. It is also interested in the alternative means of improving this welfare. Consequently, the various schools of economics focus on this aspect of human life. The schools of thought referred to include, among others, the neoclassical, Keynesian, classical, and neo-Schumpeterian approaches (Kurz, 2008). However, there are subtle differences between the strategies used by the various perspectives as far as analysing economics is concerned. The major difference is in relation to the emphasis put on the different stages of economic analysis. Other variations touch on detailed interrelatedness of elements (Dopfer, 2005).
According to Kurz (2008), neo-Schumpeterian approach to economic growth places emphasis on the essence of long-term changes. In addition, it assesses the ‘crucial’ purpose of innovation in economic development. In essence, Schumpeter’s approach regards capitalism as an evolutionary process. The process entails continuous innovation and creative destruction. The evolutionary perspective proposed by Schumpeter is characterised by a number of unique features. The elements determine the strengths and weaknesses of the approach.
An Analysis of Schumpeter’s Model of Economic Development
Schumpeter’s theory of economic change is based on the assumption that perfect and competitive economies exhibit stationary equilibrium. Profits, interest rates, involuntary unemployment, investments, and savings do not exist in such an ideal setting (Schumpeter, 1934). According to Dopfer (2005), the state of equilibrium is characterised by what is referred to as a ‘circular flow’. The reason is that the process repeats itself every year. The circular motion implies that the same products are developed in the same manner over time.
Schumpeter (1934) argues that economic development is a spontaneous process. In addition, there are irregular changes within the circular flow channels. Disturbances alter and displace the previously existing state of equilibrium forever (Schumpeter, 1934). As such, development entails the implementation of new combinations of different possibilities. The potentials exist within the stationary state (Andersen, 2009). New combinations result from innovations (Dopfer, 2005).
Features of Schumpeter’s Evolutionary Model
Introducing the features
The evolutionary economic development model exhibits a number of outstanding aspects that constitute its foundation. According to Dopfer et al. (2004), Schumpeter’s theory was not meant to substitute other perspectives of economic development at the time. On the contrary, it sought to complement these frameworks. The previous models included, among others, static equilibrium theory. The theory was formulated by Walras.
In his theoretical framework, Schumpeter emphasised on economic change resulting from innovation. It is a fact that innovation has a number of implications for modern society in impacts on, among others, the social and political aspect of human life. Schumpeter focused on the economic aspect of these implications. According to Schumpeter (1939), “the changes in the economic process brought about by innovation, together with all their effects and the responses to them by the economic system, (can be referred to as) economic evolution” (p. 86). What this means is that just like other structures in human society, the economy is not a static phenomenon. It undergoes a number of changes as a result of various factors in society.
The following are some of the key features of Schumpeter’s evolutionary model:
Innovation and entrepreneurship
One of the major elements associated with Schumpeter’s evolutionary approach to economic development is innovation. The scholar developed his theories on the basis of innovations, how they arise, and how they affect life. The central argument in the theoretical framework is that economic development entails the introduction of new combinations (Schumpeter, 1934). According to Schumpeter (1934), these groupings arise from, among others, innovations. The realisation creates a link to be these innovations and the evolutionary process.
Schumpeter (1934) defines innovation as “(the) ‘new combinations’ of, among others, resources and equipments that are already in existence” (Schumpeter, 1934, p. 65). The new mixtures are labelled as entrepreneurial functions. Innovations in Schumpeter’s model take various forms. For instance, they may include the introduction of new methods or products.
They may also entail the exploitation of new markets and other resources (Doper et al., 2004). In addition, innovations can also include exploitation of new sources of raw materials or exploration of other organisations, such as monopolies. Schumpeter postulated that the introduction of new products, as well as the continuous improvement of those in existence, leads to development.
Schumpeter defines entrepreneurial functions as those elements characterised by the process of carrying out ‘new things’. In addition, the functions may involve “doing things that are already being done, but in new ways” Schumpeter, 1939, p. 34). The whole process ends up in innovation. In addition, Schumpeter argues that it is important to distinguish between innovation and invention. According to Kurz (2008), if inventions are not executed and put into practice, then they become irrelevant to the process of economic development. Turning inventions into tasks requires aptitudes that are different from those involved in innovation.
Schumpeter (1943) continues to argue that entrepreneurs can also play the role of inventors. In addition, they can be capitalists. Finally, they can also be innovators, albeit by chance (Schumpeter, 1934, p. 89). According to Kurz (2008), Schumpeter emphasises on the various differences between inventions and innovations. The reason behind the emphasis is the fact that he (Schumpeter) regards innovation as a function or a form of social activity. The function is carried out within the economic sphere for a specific purpose (Reisman, 2004). On the other hand, inventions can be carried out anywhere. For example, they can be performed in universities without any intention to commercialise the undertaking (Witt, 2002).
In the evolutionary approach, the entrepreneurial function has to be analytically distinguished from the functions of the other players in a firm (Reisman, 2004). For instance, with regards to financiers and capitalists, the function of bearing risks is not part of the mandate carried out by the entrepreneur and the manager (Kurz, 2008). Managers are only responsible for the daily operations of the organisation.
Schumpeter establishes a close relationship between entrepreneurship and innovation. The role of the innovator is assigned to the entrepreneur as opposed to the capitalist (Schumpeter, 1943). The entrepreneur is regarded as an individual who possesses administrative skills that are beyond the ordinary.
In addition, they are capable of introducing entirely new things into the firm’s system. Consequently, the entrepreneur must be motivated to enhance their productivity. Some of the motivating factors include the desire to develop private commercial legacies. Others include the will to prove their superiority. The industrialist may also be driven by the desire to develop new things, exercise their ingenuity, and display their energy.
According to Reisman (2004), entrepreneurs and innovators play a significant role in economic development. To realise their goals, investors require a number of items. For instance, they require technical knowledge in order to come up with new developments (Cooke, 2002). In addition, they need the power to dispose of other factors through credit (Dopfer, 2005).
It is apparent that a number of factors inspired Schumpeter to come up with the various distinctions. According to Andersen (2009), Schumpeter wanted to develop a mental lexicon, which would enable him to focus on innovation in isolation of other related activities. His contemporary, Max Weber, shared similar viewpoints as far as economic development is concerned (Witt, 2002). Marx also argued for the importance of developing ‘ideal types’ in relation to social phenomena (Reisman, 2004).
According to Dopfer et al. (2004), a number of Schumpeter’s postulations are vague. For instance, he did not clarify about the new combinations. The relationship between the new aggregations and others (those in the past and in the future) remains unclear. In later studies, Schumpeter utilised such terms as creative destruction and industrial mutation to refer to the same phenomenon (Schumpeter, 1943, p. 83).
According to Kwasnicki (2000), a number of conclusions can be logically drawn from Schumpeter’s postulations. For instance, new innovations can be viewed as the creative aspect of his theory. Consequently, the combinations build on (and substitute) the old innovations in a synchronised fashion (Andersen, 2009). The existing ‘developments’ constitute the destructive element.
Technological competition
The other major element of Schumpeter’s evolutionary economic development model is technological competition. According to Andersen (2009), Schumpeter built on the existing idea that capitalist development is based on technological competition between business organisations. According to Andersen (2009), Marx had theorised how capitalist firms could remain competitive. One way to achieve this involves increasing productivity through the introduction of additional machinery to enhance efficiency.
As a result of new technologies, firms stand a chance of improving their competitive edge in the market (Schumpeter, 1943). Another benefit of technological innovation involves an increase in profits. The firms that fail to implement these changes are characterised by reduced returns on investment and decreased profit margins. They are likely to be driven out of business by competitors (Ziman, 2000).
The implication of innovations on the aggregate economy touches on capital accumulation. The accumulation goes together with rising productivity (Kwasnicki, 2000). According to Ziman (2000), Schumpeter adapted Marx’s argument in his model. He turned the borrowed idea into the main exposition factor in his analysis of evolutionary dynamics. For Schumpeter, competition based on technology reflects the true nature of rivalry in a capitalist setting. The viewpoint contradicts price-competition, a popular concept expounded by other economists.
Schumpeter expounded further on Marx’s arguments. He achieved this by introducing the broad concept of innovation. According to Dopfer (2005), Marx had limited his argument to the analysis of mechanisation, which entails process innovation. However, additional elements are made apparent in Schumpeter’s evolutionary model. For instance, such issues as the development of new products and the introduction of new types of raw materials are addressed. Other elements, such as the creation and exploitation of new markets, intermediary products, and newer methods of organising businesses are also made evident (Kwasnicki, 2000).
According to Schumpeter (1939), economic rewards linked to successful innovation are naturally transitory. Once sufficient imitators successfully enter into the market, the rewards tend to vanish (Cooke, 2002). However, Schumpeter is of the view that the interaction between innovation and imitation has an effect on economic growth. In essence, invasion by imitators and the introduction of successful innovations has major implications on the market.
The growth of the industry or sector associated with the innovation will remain high for a given duration of time (Dopfer, 2005). Derived effects may be experienced in related fields since one innovation has the tendency to induce and facilitate similar developments in other areas (Cooke, 2002). A number of systemic interdependencies are made evident as a result of the innovations. The development takes place in particular sectors and their surroundings (Cooke, 2002). For a given period of time, the surrounding economic sectors will exhibit higher growth compared to the rest of the economy.
The positive growth in the affected cluster is bound to slow down with time. Ultimately, recurrent tendencies of such development clusters and the repetitive pattern result in business cycles. The cycles may vary in length (Schumpeter, 1939). According to Schumpeter (1939), business cycles have their origins in technological competition. The rivalry impacts on the said ‘long waves’ of economic activity.
The analysis of long term economic activities is credited to Kondratieff, a Russian statistician (Schumpeter, 1943). According to Cooke (2002), Schumpeter provided warnings touching on the long waves. In essence, the waves should not be linked to any particular form of innovation carried out in the same era. On the contrary, they should be attributed to the commercial processes carried out during that particular period.
According to Cooke (2002), the argument by Schumpeter in relation to long waves and business cycles is complicated. It is characterised by a detailed diachronic analysis. Schumpeter does not propose a ‘mono-explanation’ with regards to the phenomenon of long waves. Cooke (2002) argues that the hypothesis by Schumpeter in relation to technological competition and business cycles was criticised fiercely by other scholars. The critics argued that Schumpeter fails to provide adequate proof to support his explanations of the alleged waves.
Profits, credit, and capital
According to Kurz (2008), Schumpeter’s model of economic development highlights a number of issues related to credit. To this end, the concept cannot be separated from entrepreneurial action (Schumpeter, 1943). It is noted that credit mechanisms play a significant role in the economic development process. The importance is amplified when one takes into consideration new combinations and the moving of production into new channels (Cooke, 2002).
Schumpeter (1939) regards the entrepreneur as a typical debtor. The agent is likely to exist within a capitalist society. To provide a clear picture of the importance of credit in growth, the approach is linked to the economic domain of society. The sector has both capital and economic aspects (Kurz, 2008). According to Dopfer (2005), Schumpeter postulates that capital is the lever through which the entrepreneurs control the concrete goods that they need. Consequently, the capital provides a means through which factors of production can be diverted to new uses.
Entrepreneurial profits are regarded as temporary productive factors if they result directly from innovation (Reisman, 2004). The entrepreneur is regarded as an individual with the capability of initiating action. Consequently, their role in the economy is regarded as indispensable. In light of this, Schumpeter (1939) advances that although the means of production can be replaced, an entrepreneurial leader cannot. When this perspective is adopted, entrepreneurship is separated from profits and other aspects of production. Such elements include remunerations for employees, rental expenses, and return on capital.
According to Reisman (2004), Schumpeter’s model of interest on capital relies heavily on entrepreneurship and the accruing returns. Consequently, from Schumpeter’s perspective, it is apparent that interest constitutes a significant part of the economic development process. According to Schumpeter (1939), interest should be regarded as a value phenomenon. In addition, it should also be viewed as an element of price.
In the opinion of Kurz (2008), profits are surpluses arising from costs. Schumpeter postulates that there are no profits under competitive equilibrium. The reason for this is that the price of each product is equal to the cost of production. Entrepreneurs innovate for profits. As such, dynamic changes in innovations are also bound to generate these benefits. Consequently, profits facilitate economic growth. They persist until the innovations become generalised (Kurz, 2008). Interests originate from a number of technical elements. The elements are closely related to the entrepreneur’s profits. Consequently, Schumpeter portrays the entrepreneur as a crucial agent in economic development. However, their significance is not pegged on their value as interest receiver. On the contrary, their importance is related to their role as payers (Reisman, 2004).
Conclusion
Schumpeter is regarded as one of the most prominent pioneers of evolutionary economics. It is important to note that the subject persisted even after his death. Some of the terminologies used in this field vary depending on the time of their creation and utilisation. However, most of the scholars agree with Schumpeter that innovation is the driving force behind economic development.
As innovation increases, the degree of variations in society also rises. The development enhances the dynamic element of the economy. Lack of innovation is associated with economic stagnation and undefined growth. A critical review of Schumpeter’s evolutionary approach to economic development indicates that the process is characterised by irregularities. For instance, under the evolutionary approach, the economy exhibits sequences of innovation and imitations. The review also makes it apparent that the other features of Schumpeter’s evolutionary perspective are closely linked to innovation. The features include innovation and entrepreneurship, technological competition, profits, credits, and capital.
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