Download The Schumpeterian Entrepreneur

The Creative Destruction of
Economic Development: The
Schumpeterian Entrepreneur
Müslüm Basılgan∗
Abstract: The subject of the entrepreneur in economic theory has
mostly been examined in terms of development. Schumpeter, who
argued that the neoclassical economic theory could not explain the
powers of the economic change due to its static base, took a different position by arguing the necessity of a dynamic theory. Schumpeter identified the entrepreneur as essential element of the dynamic theory of economic change. To Schumpeter, the major role of the
entrepreneur is to realize new combinations or innovations that ensure economic change. The primary objective of this study is to explore the individual (psychological) and leadership (sociological)
characteristics of the Schumpeterian entrepreneur, who leads to
creative destruction via the new combinations in the capitalist system; to put forth his difference from other economic actors and to
demonstrate his role in the future (the collapse) of capitalism.
Key Words: Schumpeter, entrepreneur, creative destruction, innovation, leadership.
INTRODUCTION
In the economic literature, the study of the subject of entrepreneur and entrepreneurship covers a large slice of time that
dates back to Cantillon. Many schools and philosophers have
been interested and contributed to this subject. Nevertheless, it
is observed that the subject of entrepreneurship was not given
much place especially in the post-World War II economic theory. Its main reason is that neo-classical economics had read
the entrepreneur out of the economic model, leaving no room
for enterprise and initiative but only for passive calculation.
∗
Assist. Prof., Gümüşhane University, FEAS, Department of Economics / Research Fellow, Durham University, UK. I would like to thank Prof Dr. Mehmet Asutay (Polical
Economy, Durham University, UK) significant contributions to this article.
TODAĐE’s Review of Public Administration, Volume 5 No 3 September 2011, p.35-76.
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Therefore, the studies generally focused on the contribution of
entrepreneurship to the economic development.
Though neo-classical economics, as to Schumpeter, gives
an important theoretical framework for equilibrium economics,
he believes it is not adequate enough to understand the complexity of the economic development process. He, therefore,
claims that this static framework must be supplemented by entrepreneur, a dynamic factor that will explain especially the
economic development, which characterizes capitalism, and
the basic reason for the change in the capitalist economy. The
main motive of this study is to present Schumpeter’s views on
entrepreneur, which he sees as the driving engine of the economic development, and the role of entrepreneur within the
capitalist system.
To this end, first, Schumpeter’s views on the individual
characteristics of entrepreneurs will be discussed. Although the
subject of entrepreneurs and in what way they behave differently from other economic actors was the main topic of first theoreticians, Schumpeter saw entrepreneurs as actors having
somewhat different individual characteristics than other people.
The study will attempt to present the basic individual characteristics of entrepreneurs, whom, according to Schumpeter, have
a distinctive psychological profile.
To Schumpeter, entrepreneurs with such distinctive individual characteristics create a different social leadership function,
unlike the other individuals in the society. In this context, the
study will focus on how Schumpeter sees the entrepreneur as a
social leader, and how he treats the phenomenon of this type
of leadership in the context of social class.
Schumpeter’s theory of entrepreneurship is undoubtedly
founded on the concepts of “innovative entrepreneur” and the
“creative destruction caused by him. From the Schumpeterian
point of view, entrepreneurs cause creative destruction via new
combinations or innovations. Hence, this study, for the third
purpose, will present how this entrepreneur, having a functional
role, leads to creative destruction and the differences of entrepreneurs from other economic agents in this process.
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
37
Another significant characteristic of Schumpeter’s analysis
of entrepreneur is that he approaches to entrepreneur both as
individual (psychological) and leader (sociological) and thus,
assigns an important role to the entrepreneur in the capitalist
system. Schumpeter, like Marx, maintained that capitalism
would collapse to be replaced by socialism. However, unlike
Marx, he argued that capitalism would collapse not because of
its economic failure, but on the contrary, because of its economic success. Lastly, Schumpeter’s views on capitalism and
the entrepreneur’s role in the future of capitalism will be discussed.
INDIVIDUAL CHARACTERISTICS OF THE
SCHUMPETERIAN ENTREPRENEURS
The mainstream economics takes the assumption that individuals are motivated by personal interest, and looks at the behavior of individuals from this perspective. There have been
many criticisms levelled against this assumption, underlining
the need for a more realistic viewpoint (see: Granovetter,
2000). Schumpeter, who is recognized as one of the major
economists of all times by many philosophers (e.g. Michaelides
and Milios, 2009: 495; Becker and Knudsen, 2003: 200; Hodgson, 2007: 1) and, who in this sense has significant contributions to the development of the discipline, investigated the
economic behavior of individuals as a social phenomenon in
his important work titled Theorie der Wirtschaftcilhen
Entwicklung of19111 (It was translated into English as The
Theory of Economic Development (TED) in 1934), and made
his perspective as an important part of the entrepreneurship
model. In this respect, Schumpeter’s view of the motives of individuals, highly unlike that of mainstream economics, is based
1
The literature contains two different first publication years for the book: 1911 (e.g.
Henrekson and Jakobsson (2001), Becker and Knudsen (2003)) and 1912 (e.g..
Michaelides and John Milios (2005), Bertocco (2008)). Schumpeter used 1911 while
writing its foreword (Allen, 1991: 102). More important is that Schumpeter himself also cited this year as the original publication year of his book. In one the footnotes of
his article, “The Instability of Capitalism” published in The Economic Journal, he cited “The Theory of Economic Development” as reference as follows, “Theorie der
wirtschaftlichen Entwicklung, 1911, 2nd ed. 1926.” (see: Schumpeter, 1928: 382).
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on different non-hedonistic psychological motives that enjoy
dealing with uncertain situations, rather than maximizing utility
(Endres and Woods, 2010: 590; Busenitz, 2007:183).
According to Schumpeter, first of all, the individual does
business in a world of routine activities and stimuli. He acts
similarly in similar situations. Thus, “the vast majority of economic activities are conducted based on motives, traditions
and customs” (Schumpeter and Takata, 1998: 8). Therefore,
Schumpeter thinks that the individual behavior is not rational
as maintained by the orthodox economics. To Schumpeter, individuals behave according to their value judgments when they
face new situations:
“In this system of values a person’s whole economy is expressed,
all the relations of his life, his outlook, his method of production,
his wants, all his economic combinations. The individual is never
equally conscious of all parts of this value system; rather at any
moment the greater part of it lies beneath the threshold of consciousness. Also, when he makes decisions concerning his economic conduct he does not pay attention to all the facts given expression to in this value system, but only to certain indices ready
at hand. He acts in the ordinary daily round according to general
custom and experience, and in every use of a given good he starts
from its value, which is given to him by experience. But the nature
and structure of this experience are given in the value system”
(Schumpeter, 1934: 39).
In Schumpeter’s view, the average individual typically displays customary behavior, and his decisions, in the face of new
situations, are based on a value structure shaped by his surroundings. This value system emerges usually as an outcome
of the individual’s cultural interaction, and the individual assesses the utility of a specific action according to the said value
system (Whelan and O'Gorman, 2007: 82).
Here, Schumpeter argues that mostly under new conditions,
the individual was obliged to assess options that appear in any
place and at any time. When frequently faced with the same
situation, this becomes a customary action. In general, these
habits constitute the basis for the individual’s ordinary economic actions. His own ability and experience suffice for the normal
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
39
individual, when confronted with innovations he needs guidance. The individual’s routine actions are the consequences of
extraordinary and unusual events, where decisions are defined
by the individual‘s value structure: “The assumption that conduct is prompt and rational is in all cases a fiction. But it proves
to be sufficiently near to reality, if things have time to hammer
logic into men” (Schumpeter, 1934: 80). For Schumpeter,
such ordinary economic decisions and actions are simple extensions of individuals’ ordinary behaviors. Schumpeter thinks
that habitual economic behaviors rarely change. These habits,
while establishing social institutions on the one hand, make
daily life more comfortable. For Schumpeter (1942: 258-259),
it is with most of the decisions of daily life lie within the little
field, which the individual citizen's mind encompasses with a
full sense of its reality. Roughly it consists of the things that directly himself, his family, and his business dealings - the things
under his personal observation, the things which are familiar to
him.
So, Schumpeter’s individual is not homo economicus. To
weigh marginal costs and benefits, and to stop working at the
moment when the costs of the extra effort exceed the extra satisfaction, according to Schumpeter, is characteristic of the circular flow (Brouwer, 2002: 90). While in the accustomed circular flow every individual can act promptly and rationally, he
cannot simply do this when he is confronted by a new task
(Schumpeter, 1934: 79). When confronted by a new situation,
all individuals make their decision based on a system of values
that constitutes a foundation for their motives. The individuals,
while making their decision according to this system of values,
especially lack of knowledge or an irrational system of values
might lead them to irrational conclusions (Ebner, 2003: 130).
At this point, the factors affecting decision-making assume
importance. The reason is that according to Schumpeter, while
making decisions, individuals have other motives than the personal interest-oriented ones. Schumpeter took into account the
causes of economic activities while developing his theoretical
system. Schumpeter (1934: 24) says the whole production
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process aims at satisfying the wants and argues that even machinery and landownership is related with satisfying the wants.
Therefore, what the individual wishes to measure is the relative
significance of his means of production. He needs a standard
with the help of which to regulate his economic conduct; he
needs indexes to which he can conform. In short, he requires a
standard of value. According to Schumpeter, the individual he
has such a thing directly only for his consumption goods; for
only these immediately satisfy his wants, the intensity of which
is the basis of the meaning of his goods to him. For his stock
of services of labor and land there is in the first instance no
such standard, and likewise none, we may now add, for his
produced means of production:
“It is clear that these other goods also owe their importance
merely to the fact that they likewise serve to satisfy wants. They
contribute to the satisfaction of wants because they contribute to
the realisation of consumption goods. Therefore they receive their
value from the latter; the value of the consumption goods, as it
were, radiates back to them. It is “imputed” to them, and on the
basis of this imputed value they receive their place in each economic scheme” (Schumpeter, 1934: 24).
We can say that in this sense, Schumpeter is highly utilitarian with respect to the motives that lie behind economic behavior. For this purpose, Schumpeter (1934: 10) states that the
economic conduct might have an economic motive; the meaning behind this action, even it is spiritual, is the satisfaction of
wants. Hence, even generated socially, main motive in economic conduct is the satisfaction of wants. This individual may
not perform a rational action and, he eventually may not be
satisfied. However, in principle, the individual acts in order to
satisfy any of his wants.
Here, Schumpeter draws attention to the reaction of the social environment against one who wishes to do something new.
This reaction may manifest itself first of all in the existence of
legal or political impediments. It may even come to physical
prevention or to direct attack. Any deviating conduct by a
member of a social group is condemned. Surmounting this
opposition is always a special kind of task which does not exist
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
41
in the customary course of life. According to Schumpeter
(1934: 87), the majority of individuals oppose to these individuals since they are afraid of change.
Schumpeter, over this standard individual, brings his analysis to the individual, who dares to go outside this pattern. In his
view, individuals, who are prepared to step outside the boundaries of routine, are unique. Schumpeter calls these unique individuals as entrepreneurs. For Schumpeter (1934: 92-93, these
individuals serve an important purpose in the capitalist system
and become the motivator forces of change. However, these
unique individuals, who bravely go beyond these boundaries,
must overcome a number of difficulties. First, since they are
venturing into areas outside the ‘accustomed channels’, entrepreneurs must deal with uncertain situations, which may lead
to failures and setbacks. Another difficulty refers to the special
‘effort of will’ required to conceive of the new combination. A
third difficulty is the reaction by the wider ‘social group’ against
the individual who wishes to do something new. Therefore,
Schumpeter views the entrepreneur as a unique individual who
exercises the ‘mental freedom’ to conceive of a new way of doing things and is brave enough to follow this vision even if it
means risking the possibility of failure and incurring the ridicule
of other members of the social group - business or otherwise
(Whelan and O'Gorman, 2007: 82).
Schumpeter (1934: 106) takes a view of the agent as an endogenous factor in the emergence of innovations. What is
needed, therefore, is an analysis of the entrepreneurs or, more
specifically, of the nature of the entrepreneurs’ economic behavior and of the social circumstances which allows them, with
the emergence of capitalism, to carry out their activities. In
other words, what is required is an investigation of the economic sociology of innovations. Economic sociology, thus, leads to
an examination of the institutional environment that encourages the emergence of an actor-type different from the Walrasian agent (Legris, 2002: 100). When began to develop his
model, he did not begin with the economy in a state of Walsarian General Equilibrium. Rather, he began with a more general
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view of individual general behavior” in a state of general stability
(McFarling, 2000: 710). At this point, Schumpeter analyzed entrepreneurs’ actions by comparing with those of homo economicus, (Legris, 2002: 100), and regarded their individual
characteristics, such as motives and attitudes, and qualities as
their motivator powers in creating new things (Livengood,
2009: 159).
As noted by Donzelli (1986), the fundamental merit of
Schumpeter’s approach lies in the definition of different and
contrasting forms of behavior. His distinction of “hedonistic
egoism” and “energetic egoism” underlies its importance (cited
by Legris, 2002: 100). What Schumpeter labels ‘hedonistic
egoism’ prevails in the circular flow, whereas ‘energetic egoism’
plays a central part in the realm of economic development.
While hedonistic egoism can be thought of as an equivalent to
routine-based behavior and adaptive rationality, energetic egoism applies to entrepreneurs only and is essentially an active
form of behavior. Entrepreneurs do not adapt to their environment but, instead, shape it according to their own needs and
purposes. Therefore, their rationality is not compatible with
maximization or optimization, and their desire, or their will,
cannot be measured or calculated because ‘the will to found
personal kingdom’ or ‘the joy of creating’ (cannot be maximized on the basis of a single Walrasian utility function (Legris,
2002: 100). In this context, Schumpeter, while using the concepts of hedonistic egoism and energetic egoism, also sets
forth contrasting forms of behavior. According to him, hedonistic egoism defines the Walrasian rational behavior, whereas energetic egoism is reduced to an effective and “voluntarist” behavior based on a different rationality. This distinction puts
forth a type of entrepreneur different from other producers who
follow routine behavior (Festré and Garrouste, 2008: 380).
In this respect, for instance, pecuniary gain is not the main
motive for entrepreneurial action, but it is important in respect
of being a very accurate expression of success, especially of
relative success (Brouwer, 2002: 101). The entrepreneur exists
then by virtue of a specific task, to wit that of forcing through
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
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new productive combinations. This sets him apart from routine
behavior based on an individualistic, rational and hedonistic
logic (Legris, 2002: 100). Thus, the entrepreneur is defined by
a unique set of motivational factors that sets him apart from
the average product of capitalist culture. The dream and the
will to establish a private kingdom; the will to succeed and the
joy of creating that motivate the entrepreneur disturb the existing equilibrium, and elevate it to a new level. Therefore, the innovative entrepreneur becomes the main factor that leads to
economics, rather than facilitating it (Kalantaridis, 2004: 489).
This shows us that at the center of Schumpeter’s conception of entrepreneurship, it seems, is a strong theory of social
control resting upon the constraints of convention, routine,
habit and social sanction. These social controls act to regulate
behavior, in this case limiting the extent to which individuals will
be prepared to engage in “deviant” innovative entrepreneurial
action (see: Goss, 2005: 205-218). As Endres and Woods
(2010:593) state, the distinctive characteristic of the Schumpeterian entrepreneur is that he has a “psychological profile”
that provides him with the ability to make decisions under these extraordinary conditions.
ENTREPRENEUR AS SOCIAL LEADER
The view that entrepreneurship is a special case of the special phenomenon of leadership is a fairly constant theme in
Schumpeter (Prendergast, 2006: 259). In Schumpeter, as mentioned above, human motives are never strictly individual. Rather, they are always embedded in a social and historical context under which they have emerged (Festré and Lazaric, 2008:
16). For Schumpeter, human motives are never strictly individual. Rather, they are always embedded in a social context.
Therefore, men are always divided into categories: leaders and
followers (Arena and Dangel-Hagnauer, 2002: 3-4). Schumpeter regards followers as playing a more passive role in that they
are the mere recipients of leaders' decisions, acting to diffuse
them. They can reinforce these decisions and contribute to
their social generalization through the adoption of imitative be-
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havior or the manifestation of trust. So, they are the important
actors of the diffusion process (Hagemann, 2008: 230). But
they can also resist them, slowing down the process of diffusion or sometimes even preventing the mechanisms of social
diffusion from working. What differs leaders from followers is
that leaders’ motives are related to their ‘instinctive urge to
domination’, an ‘excess energy’ or ‘activity urges springing
from capacities and inclinations that had once been crucial to
survival (Arena and Dangel-Hagnauer, 2002: 4). Here, their
success does not only depend on their intrinsic characteristics,
but also on their social leadership, i.e., on their ability to make
novelty being accepted by the community of followers or imitators (Festré and Garrouste, 2008: 383).
It should, however, be noted that Schumpeter does not regard leaders as superior or “great men”. They are not in possession of special intellectual qualities that would lead them to
play a pre-eminent social role:
“As to the question of leadership, if we are to be properly understood, all the romance and gibberish surrounding this term must
be discarded. We are not concerned with the individual leadership
of the creative mind or of the genius. We do not care whether this
phenomenon is of big or small importance in social science or
whether it is irrelevant; whether it plays a causal role, direct or indirect; whether such individuals function autonomously or by their
own laws. In short, the entire problem of the “great man” has no
bearing on our subject. Nor do we by any means insist that group
leadership, which alone concerns us here, necessarily "leads" in
the direction where it desires to go of its own free will, or that it
creates the realm of possibility into which it leads-a realm realized
only under its leadership. We are content to say that social leadership means to decide, to command, to prevail, to advance As
such it is a special function, always clearly discernible in the actions of the individual and within the social whole. It emerges only
with respect to ever new individual and social situations and would
never exist if individual and national life always ran its course in the
same way and by the same routine” (Schumpeter, 1966: 165).
Schumpeter, in the above quote, clearly sees social leadership as deciding, commanding, prevailing and advancing.
From a sociological perspective, therefore, the entrepreneur's
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
45
conduct is discernible as a particular manifestation of the basic
type of social action that Schumpeter calls 'leadership (Osterhammel, 1987: 114). Therefore, leadership, leadership is not
independent from the social context in which it appears. While
Schumpeter strongly stresses this aspect of social behavior
(Arena, 2008: 73), he also points out that this sociological concept of leadership should not be confused with 'individual leadership of the great mind or of the genius’ (Osterhammel, 1987:
114). Schumpeter, who, in his famous work, Capitalism, Socialism and Democracy, considers the entrepreneur in this
social context, describes “social function” of entrepreneurship
as follows:
“We have seen that the function of entrepreneurs is to reform or
revolutionize the pattern of production by exploiting an invention
or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by
opening up a new source of supply of materials or a new outlet for
products by reorganizing an industry and so on. To undertake
such new things is difficult and constitutes a distinct economic
function, first, because they lie outside of routine tasks which everybody understands, and secondly, because the environment resists in many ways that vary, according to social conditions, from
simple refusal either to finance or buy a new thing, to physical attack on the man1 who tries to produce it. To act with confidence
beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction
of the population and that define the entrepreneurial type. This
function does not essentially consist in either inventing anything or
otherwise creating the conditions which the enterprise exploits. It
consists in getting things done.” (Schumpeter, 1942: 132).
Thus, in Schumpeter’s view, a leader’s basic function is
“getting things done”. “Leadership does not consist simply in
finding or creating the new thing but in so impressing the social group with it as to draw it on in its wake” (Schumpeter,
1934: 88). Schumpeter says though the phrase "getting a new
thing done" may be adequately comprehensive, it covers a
great many different activities, which as the observer stresses
one more than another or as his material displays one more
than another, may, locally, temporarily, or generally, lend dif-
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ferent colors to entrepreneurship. While in this case, it may be
the activity of "setting up" or "organizing" that stands out from
the others; in other cases, or it may be the breaking down of
the resistances of the environment, or simply leadership, it
seems to Schumpeter (1947: 154), this is a type of entrepreneur that is best described as a “fixer”. Thus, according to
Schumpeter, successful innovation is a task sui generis, and it
is a feat not of intellect, but of will (Schumpeter, 1928: 379). In
this sense, leader is not the static person, who is passive; who
seeks equilibrium and, who repeats what has already been
done, but the man of action, who is dynamic; who breaks out
of an equilibrium, and who does what is new (Swedberg, 2008:
190).
Here, Schumpeter highlights a major characteristic of leaders’ behavior. Leaders do not follow the logic of prevailing
rules, namely minimizing their efforts in order to reach a given
objective. Quite the contrary, they invent new rules to reach
new objectives. This invention - or, more precisely, this ‘innovation’ - requires effort. Leaders are able to produce this effort
because they possess an excess of energy that is obviously useless when individual behavior relies on routines and is purely
‘hedonistic’. Schumpeter defines social leadership in relation to
social and institutional change. According to him, it is universal
and constitutes a fundamental moving force at all levels of human communal life from the family to the nation state (Ostherhammel, 1987: 114). Schumpeter’s this definition shows that
the entrepreneur and the creative talents of the entrepreneur
are individual in origin and not a product or result of one particular institutional system (McDaniel, 2005: 487).
So, Schumpeter characterizes the entrepreneur by a social
function that differs him from other individuals. The most significant feature of this function is that the entrepreneur must be
able to overcome the psychological and social resistances,
which stand in the way of doing new things. This is the most
important leadership characteristic of the Schumpeterian entrepreneur (Sweezy, 1943: 93-96). The entrepreneurs with this
leadership quality are exceptional people, who have the ability
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
47
to appreciate the possibilities of doing things differently, and
materialize it (Stolper, 1994: 59). This conception of entrepreneurship leads Schumpeter to locate the source of economic
change in the personal traits of a certain group of men
(Sweezy, 1943: 94). Here, Schumpeter’s entrepreneur cannot
simply reap the rewards of his vision, but faces a formidable
task in getting things done. This action-orientation, and
Schumpeter’s interest in the particular motivations which drive
action, it may be remarked, are entirely absent from standard
choice theory, in which incentive and information are quite sufficient to ensure that all choices are effectively implemented
(Loasby, 2007: 1096). In Schumpeter, the qualities of individuals, thus leaders, become the fundamental elements that explain the effectiveness of their actions (Festré and Garrouste,
2008: 378). Moreover, according to Schumpeter, different abilities like leadership are special functions that can be clearly perceived in individuals’ actions in a social whole (Schumpeter,
1934: 278). Therefore, it is the abilities of some individuals that
explain the emergence of new aptitudes, i.e. new patterns of
behavior, and that enable deviation from routinized motives
(Festré and Garrouste, 2008: 378). In this respect, Schumpeter
regards the entrepreneurial act as requiring in fact greater conscious rationality than routine activity. Routine behavior requires less conscious rationality, because it is essentially “preprogrammed” through trial-and-error learning. However, the
entrepreneur requires adequate conscious rationality for the
task of innovation (Langlois, 2007: 37).
Schumpeter approaches to leadership also within the context of social class. For Schumpeter, social class occupied an
important place in evolutionary development as a whole, but
his conception of social class was not confined to the economic area but consisted of more open social dynamics derived
from leadership formation in various social areas (Shionoya,
2008: 19). Schumpeter, therefore, believes that the concepts of
leadership and social class should be meticulously distinguished. In this sense, in a market economy, for instance leaders, i.e. entrepreneurs do not form a social class (Schumpeter,
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1934: 78; Schumpeter, 1939: 104). Entrepreneurs, as an innovator and thus, contributor to the evolution of social structure,
have powerful influence. This, however, does not mean this entrepreneurial function will lead to certain class positions for the
entrepreneur and his family. Moreover, the function of the entrepreneur itself cannot be inherited (Schumpeter, 1934: 7879).
In this context, Schumpeter’s conceptualization of entrepreneur as a leader in the process of innovation (Ebner: 2003:
118) generates a specific type of leadership. The reason is that
in this respect the leader is the vehicle of innovation, and at the
same time, he behaves differently than the majority of people
with ordinary behavior (Michaelides and Milios, 2005: 102).
Schumpeter held that innovation is not limited to invention or
to what is normally called ‘technical progress’ in economic literature. Instead, he analyzed entrepreneurial innovation in
terms of the social function that permits capitalist economic
development. This definition, which derives directly from the
characterization of entrepreneurship as a specific type of leadership, excludes a view of entrepreneurs as permanent economic agents. It is therefore easy to see why, from an economic standpoint, ‘being an entrepreneur is not a profession and as
a rule not a lasting condition (Arena and Romani, 2002, 175).
For Schumpeter (1934: 78), even though the entrepreneurial
function will lead to certain class positions for the successful
entrepreneur and his family, because being an entrepreneur is
not as a rule not a lasting condition, entrepreneurs do not form
a social class in the technical sense, contrary to landowners or
capitalists or workmen.
The transitory nature of entrepreneurial activity also explains
the specific features that account for the difference between
this form of social leadership and those that prevail in noncapitalist societies. First, contrary to other types of social leaders, entrepreneurs have ‘no cultural tradition or attitude’; their
only role is that of an ‘upstart’ in capitalist society (Schumpeter,
1934: 90). Secondly, they lack the ‘glamour’ of other social
leaders such as, for example, medieval warlords, which is why
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
49
‘only in rare cases [do they] appeal to the imagination of the
public (Schumpeter, 1934: 89). Thus, Schumpeter also states
that the entrepreneurial function lacks the glamour of other
types of leadership. Here, “personal weight” is not entirely trivial. However, this is not so important for the entrepreneur,
whose primary task is to lead the means of production into new
channels. Therefore, this feature is sufficient to buy the means
of production or their services, and to provide financing to the
entrepreneur. Moreover, the entrepreneur leads others in the
same branch to follow (Schumpeter, 1934: 89).
In this case, the motivating factors for entrepreneurship assume importance. For Schumpeter (1934: 93-94), the motivating factors are three fold. First of all there is the dream and the
will to found a private kingdom. Its fascination is especially
strong for people we have no other chance of achieving social
distinction. Then there is the will to conquer - the impulse to
fight, to prove one superior to others, to succeed for the sake,
not of the fruits of success itself. From this aspect economic
action becomes akin to sport - there are financial races, or other boxing- matches. Finally, there is the joy of creating of getting things done or simply of exercising one’s energy and ingenuity. Our type seeks out difficulties, changes in order, delight
in ventures. This group of motives is the distinctly anti-hedonist
among the three.
On the other hand, leadership, leadership is not independent from the social context in which it appears. Schumpeter, in
his essay of 1927, refers to Marx and, while explaining the reasons for the change in family positions, he also evaluates the
effect of social classes on individual motives and behavior:
“Manifestly, the captured surplus value does not invest itself but
must be invested. This means on the one hand that it must not be
consumed by the capitalist, and on the other hand that the important point is how it is invested. Both factors lead away from the
idea of objective automatism to the field of behavior and motive in other words, from the social "force" to the individual - physical
or family; from the objective to the subjective. It may be objected
that the logic of the social situation forces the individual to invest
his profits, that individual motivation is only a fleeting intermediate
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phase. This is true, as far as it goes, and must be acknowledged
by any reasonable person. Naturally the individual psyche is no
more than a product, an offshoot, a reflex, and a conductor of the
inner necessities of any given situation. But the crucial factor is
that the social logic or objective situation does not unequivocally
determine how much profit shall be invested, and how it shall be
invested, unless individual disposition is taken into account”
(Schumpeter, 1966: 118-119).
Hence, Schumpeter emphasizes that the basic factor that
leads to economic leadership is the individual structure. The
entrepreneur, working within the societal institutional framework will adjust and adopt his actions based on the incentive
structure he faces. Without a conducive framework in which he
can pursue the activities of innovation and leadership, Schumpeter’s entrepreneur will fail to carry out his function (Boettke
and Coyne, 2003: 71).
INNOVATOR ENTREPRENEUR AND CREATIVE
DESTRUCTION
Probably the best-known concept of entrepreneurship in
economics is Joseph Schumpeter’s idea of the entrepreneur as
innovator. The entrepreneur-innovator is introduced in Schumpeter’s Theorie der Wirtschaftcilhen Entwicklung in 1911 and
developed further in his two-volume work, Business Cycles
(1939). (Foss and Klein, 2005). In conventional approaches,
innovation is conceptualized as an exogenous shock, largely
located outside the scientific subject area of political economy.
(Legris, 2002: 99). The concept of entrepreneur has long been
disregarded in static mainstream economics, because the entrepreneur causes change and it thus leads to disequilibria
(Lambooy, 2005: 1137). Schumpeter, on the contrary, asserts
in TED that the aspect of the capitalist system which has received the least attention is not equilibrium but structural
change caused by innovation. Hence, realizing that the entrepreneur has no place in the general-equilibrium system of
Walras, whom he greatly admired, Schumpeter, by maintaining
that innovations constitute the central concept of dynamic
(Legris, 2002: 99), and therefore, dynamic theory rejects the
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
51
idea of equilibrium (Swedberg, 2008: 190), gives the entrepreneur a role as the source of economic change.
For Schumpeter, economic development can be analyzed
as a problem of economic history or as a theoretical problem
where the concentration is on the general mechanisms. The
theoretical problem was Schumpeter’s perspective in TED, i.e.
the core process of the implementation of new combinations
by entrepreneurs (Helge, 2003: 222). Schumpeter, holding this
point of view, emphasizes that the key element of a capitalist
economy is change, and his aim is to elaborate a theory that
can explain the continuous evolution process typical of the capitalist economy. Thus, he declares that the more important
problem is to explain change, which he insists is ‘a distinct
phenomenon (Loasby, 2007: 1094-1095). In this context,
Schumpeter’s major economic contribution may have been his
identification of change as central to the continuing viability of
the system coupled with his explanation of how change takes
place (McKee, 1990: 298). For Schumpeter (1934: 62), “if the
change occurs in the non-social data (natural conditions) or in
non-economic social data (here belongs the effects of war,
changes in commercial, social, or economic policy), or in consumers’ tastes” then this not a fundamental change. This process, which is defined as “development” by Schumpeter, comprises the innovations introduced by entrepreneurs, who, by
their nature, are an economic factor (Bertocco, 2008: 1162).
Therefore, as also stated by Drucker (1986), Schumpeter was
highly insistent that innovation was a vital component of economics, more important of modern economics. In this respect,
Schumpeter is an economist, whose pioneering role in introducing innovation into economic studies is recognized by everybody (Godin, 2008: 355).
Schumpeter, while developing a dynamic conception of the
role of the entrepreneur, breaking with the static framework of
general equilibrium (Gloria-Palermo, 2002: 22), thought capitalism was a system of economic change, and thus the general
equilibrium model could never be applied to capitalism (Loasby, 1982: 240). In Schumpeter’s approach, innovation is the
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only factor that disturbs circular flow. And it thus has major
impact on the industrial structure (Hebert and Link, 2006: 99).
In this sense, Schumpeter used the concept of the circular flow
as a point of reference to indicate the changes that are caused
by the introduction of innovations (Brouwer, 2002). But in the
Schumpeterian view, the static economic analysis remains inadequate in explaining the innovation process
“But “static” analysis is not only unable to predict the consequences of discontinuous changes in the traditional way of doing
things; it can neither explain the occurrence of such productive
revolutions nor the phenomena which accompany them. It can
only investigate the new equilibrium position after the changes
have occurred” (Schumpeter, 1934: 62-63).
As also Rosenberg (2003: 7) states, Schumpeter’s one of
the most important characteristics is this emphasis he lays on
the inability of static equilibrium to capture the essential longterm features of capitalist reality. The reason is that in Schumpeter’s view, the static analysis is incapable of analyzing social
and evolutionary change (Helge, 2003: 227-228). Therefore, he
intended to complement this static framework with a dynamic
theory that would explain the economic development that particularly characterized capitalism and the main cause of change
in the capitalist economy (Dahms, 1995: 4).
While explaining the concept of entrepreneur, Schumpeter,
parallel to the static-dynamic contrast, also used the adaptive
response-creative response contrast. Whenever an economy or
a sector of an economy adapts itself to a change in its data in
the way that traditional theory describes, whenever, that is, an
economy reacts to an increase in population by simply adding
the new brains and hands to the working force in the existing
employments, or an industry reacts to a protective duty by expansion within its existing practice, we may speak of the development as adaptive response. And whenever the economy or
an industry or some firms in an industry do something else,
something that is outside of the range of existing practice, we
may speak of creative response. Creative response has at least
three essential characteristics. First, from the standpoint of the
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
53
observer who is in full possession of all relevant facts, it can always be understood ex post; but it can practically never be understood ex ante; that is to say, it cannot be predicted by applying the ordinary rules of inference from the pre-existing facts.
This is why the "how" in what has been called above the
"mechanisms" must be investigated in each case. Secondly,
creative response shapes the whole course of subsequent
events and their "long-run" outcome. Thirdly, creative response-the frequency of its occurrence in a group, its intensity
and success or failure-has obviously something, be that much
or little, to do with quality of the personnel available in a society; with relative quality of personnel, that is, with quality available to a particular field of activity relative to quality available, at
the same time, to others, and with individual decisions, actions,
and patterns of behavior. After making this distinction, Schumpeter gives the entrepreneur response as example to creative
response (Schumpeter, 1947: 150-151). Seen in this light, the
entrepreneur and his function is “simply the doing of new
things or the doing of things that are already being done in a
new way (innovation)” (Schumpeter, 1947: 151). Thus, a creative response requires that actors do something outside the
range of existing practice. Schumpeter associates with entrepreneurial activity and with the agent of this activity, the entrepreneur Schumpeter (Bloch and Finch: 2008: 4). Therefore,
the study of the process, where entrepreneurs create these innovations, thus leading to creative destruction in the economy,
should be made by a different method than the existing economic mentality (Schumpeter, 1934: 65).
According to Schumpeter, the mechanisms of economic
change in capitalist society pivot on entrepreneurial activity.
Thus, Schumpeter’s main point of focus is major changes in an
economy initiated by entrepreneurs and the effects of these
changes on the economic system (Swedberg, 2000: 14). Accordingly, a study of entrepreneurship becomes quite essential
in discussing the economic change in the capitalist system
(Schumpeter, 1947: 150). In Schumpeter, the main factor that
ensures economic change is innovation. For Schumpeter
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(1934: 66), innovation, as a source of economic change, covers the following five cases: (1) the introduction of a new
good, (2) the introduction of a new method, (3) the opening of
a new market, (4) the conquest of a new source of supply of
raw materials, and (5) the carrying out of the new organization
of any industry, like the creation of a monopoly position or the
breaking up of a monopoly position.
Schumpeter (1934: 66) defines these five innovations as
“the carrying out of new combinations”. As Swedberg (2008:
192) emphasizes, the concept of “a new way of combining
things” became Schumpeter’s central concept in general while
defining the economic process and entrepreneurship. Schumpeter, in his article titled Development, which was coincidentally found in 1993, and which was later translated into English by
Markus and Knudsen, clearly associates development with innovation or the carrying out of new combinations.
“A continuous increase in population and wealth immediately
explains an equally continuous improvement of roads and an increase of the mail coaches in circulation in a step-wise adapting
manner. But add as many mail coaches as you please, you will
never get a railroad in that way. This kind of "novelty" constitutes
what we here understand as "development," which can not be exactly defined as: transition from one norm of the economic system to another norm in such a way that this transition can-not
be decomposed into infinitesimal steps. In other words: Steps between which there is no strictly continuous path (Schumpeter,
2005: 114-115).
For this reason, according to Schumpeter, creative action is
the basic principle of the economic development, and the entrepreneur is its main cause (Dahms, 1995:6). Major innovations carry long cycles of business activity, and bring in their
train a series of secondary waves (Godin, 2008: 353). The new
combinations, the scope and forms of economic development,
lead to an economic development process, which is defined by
Schumpeter as creative destruction that results in instability in
the market (Schumpeter, 1942: 81-86). To Schumpeter, development is a dynamic process, a disturbing of the economic
status quo. He looked upon economic development not as a
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
55
mere adjunct to the central body of orthodox economic theory,
but as the basis for reinterpreting a vital process that had been
crowded out of mainstream economic analysis by the static,
general equilibrium approach. The entrepreneur is a key figure
for Schumpeter because, quite simply, he is the persona causa
of economic development (Hebert and Link: 1989: 42). In this
sense, Schumpeter terms this replacement of old structures
with new structures as the process of “creative destruction.”
Successive innovations represent “industrial mutation” that incessantly revolutionizes the economic structure from within,
constantly destroying the old one, while creating the new one
(Kiessling, 2004: 84).
Thus, for Schumpeter, the carrying out of new combinations is quite difficult; only people with specific qualities can do
it. These are the special type of entrepreneurs (Schumpeter,
1934: 81). What distinguish such entrepreneurs is their different motives (Witt, 2002: 13). According to Schumpeter (1934:
228), hence, another feature of innovations is they are discontinuous as they are achievable only for people with such qualities,
Hence, creative destruction “revolutionizes the economic
structure from within,” Joseph Schumpeter famously said, “incessantly destroying the old one, incessantly creating a new
one” (McMillan, 2004). Pure economic theory provides a theoretical framework for the exploration of the mechanisms leading to equilibrium. However, it also mirrors concrete situations
experienced by economic systems when the effects of real
shocks, responsible for dynamic imbalances, have subsided.
An important illustration of this view, according to Legris
(2002: 95), is provided by the process of creative destruction
through ‘new combinations’. In the real world, the reality of the
static state largely assumes the existence of a ‘subterraneous
force’. This process is seen to ensure the elimination of some
firms through competition, as well as the creation of new ones
managed by entrepreneurs who introduce new products, techniques, markets or forms of organization to the economy. ‘Creative destruction’ is then equated or associated with biological
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evolution, implying an organic transformation of the economic
system (Arena and Dangel-Hagnauer, 2005: xi). In other words,
Schumpeter’s entrepreneur constitutionally cannot abide continuation of an equilibrium. He is driven to search constantly
for innovation opportunities, but an innovation, by its very nature, upsets any equilibrium that provided the opportunity for
the novel product or process that the entrepreneur introduces
(Baumol, 2003: 59).
In conclusion, Schumpeter’s theory of entrepreneurship
usually characterizes the entrepreneur’s central role in economic development as the ability to disturb the economic status
quo through innovations (Goss, 2005). In this context, the entrepreneur, by introducing innovations, disturbs the equilibrium
of the economy; threatens the existing structures and prompts
industrial dynamics and economic development. Thus, although Schumpeter’s fame rests on his contributions to many
subjects, such as his work on economic development and crisis, his theory of entrepreneurship, his work on business cycles,
his history of economic thought, his econometric initiatives,
how he relates economic phenomena and ideas to the wider
context of social analysis, and his vision of a socialist society,
what actually identify with him are the concepts of innovative
entrepreneur and creative destruction he causes (Senn, 2003:
318). Hence, Schumpeter, with his studies based on the entrepreneur’s relationship with innovation and change, shows how
the entrepreneur is an important actor in the economic structure. According to many philosophers, According to many philosophers, Schumpeter’s assigning such a key role to the entrepreneur in the economic development process is his most
important feature. For example, while Cole (1959: 28), about
Schumpeter’s contributions, says “the thought that the entrepreneur is central figure in modern economic history has been
acknowledged thanks to Schumpeter”, according to Higgins
(1968: 93), “The stress on the leading role of the entrepreneur
in economic development under capitalism is the main feature
of the Schumpeter system”. Accordingly, most economists,
who study technological innovation, refer to Schumpeter and
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
57
his pioneering role in introducing innovation into economic
studies, and promote him as the “father” of innovation studies
(Godin, 2008: 343).
THE DISTINCTION OF ENTREPRENEUR,
CAPITALIST, MANAGER AND INVENTOR IN THE
PROCESS OF CREATIVE DESTRUCTION
Schumpeter, in his works, determines the role of entrepreneur in the process of creative destruction as innovator, and
distinguishes him from some other groups in the economy.
Firstly, he argues that the entrepreneur is never the risk bearer,
thus distinguishes the entrepreneur from the capitalist. Though
he does not entirely reject the idea that innovation involves certain risk factors, he does not see entrepreneurs as risk takers:
“Risk obviously always falls on the owner of the means of production or of the money-capital which was paid for them,
hence never on the entrepreneur as such” (Schumpeter, 1934:
75). According to Schumpeter (1934: 137), risk-taking is in no
case an element of the entrepreneurial function. Even though
he may risk his reputation, the direct economic responsibility of
failure never falls on him. This task is assigned to the capitalist,
who provides financing for entrepreneurship. In this sense, his
entrepreneur need not own capital (Foss and Klein, 2005: 59).
Secondly, Schumpeter distinguishes the entrepreneur from
the manager. Thus, for Schumpeter, while the entrepreneur is
the one that gives character to capitalism, managers are secondary actors. The reason is that the “entrepreneurial function”
is distinct from the mere “managerial” function (Schumpeter,
1928: 380). Management, or leitung as Schumpeter calls it in
the German text, is defined differently from entrepreneurship. It
involves largely routine administration including “decisionmaking” and “the control of others”. Managerial decisionmakers, however, simply draw conclusions from known circumstances, and the control function essentially consists of
correcting individual aberrations from a predetermined course
of events (Hartmann, 1958: 431). Therefore, according to
Schumpeter (1939: 102) “the economic function of deciding
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how much wool to buy for one's process of production and the
function of introducing a new process of production do not
stand on the same footing, either in practice or logic”. In this
context, the clear difference between a manager and entrepreneur is the carrying out of new combinations in the production
process. Schumpeter explains the difference between manager
and entrepreneur as follows:
“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 to
running it as other people run their business” (Schumpeter, 1934:
78).
For Schumpeter, defining entrepreneurial activities require
introducing new methods and innovations into the economic
process. From the Schumpeterian perspective, without these
activities, the entrepreneur becomes nothing more than a
manager: “The manager chooses from the most advantageous
among the methods which have been empirically tested and
become familiar at a certain point in time, whereas the entrepreneur looks for the best method possible at the times”
(Schumpeter, 1934: 83). In other words, not all managers or
owners of business are entrepreneurs, because one can run a
business without trying new ways of doing business. This trying
of new ideas and new production methods separates a group
of pioneers known as entrepreneurs and this Endeavour is referred to as innovation (McDaniel, 2000: 279). Therefore, in
Schumpeter, in the capitalist system, the entrepreneur plays
the definitive role. In this respect, Kirzner explains the effect of
Schumpeter’s entrepreneur on the market and his difference
from other factors as follows: “For Schumpeter, the essence of
entrepreneurship is the ability to break away from routine, to
destroy existing structures, to move the system away from the
even, circular flow of equilibrium” (Kirzner, 1973: 127).
Schumpeter’s sharp distinction between the roles of entrepreneurs and managers should be considered within the
framework of this approach. He argues that the entrepreneur is
concerned with change, whereas the manager is concerned
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
59
with routine problems (Scott, 1998, 104). In TED, Schumpeter
explains the difference between the two as follows “carrying out
a new plan and acting according to a customary one are as different as making a road and walking along it” (Schumpeter,
1934: 85).
Thus, as Schumpeter sees entrepreneurs as the primary vehicle, who develops an economy by breaking away from the
static equilibrium, by threatening existing structures and by destroying economic equilibrium via innovations, thus leading to
creative destruction, he emphasizes that no one, who fails to
perform this function, can become an entrepreneur, whatever
his position in a firm is. In this context, Schumpeter believes
that the entrepreneur should also be distinguished from the
“inventor” (Metcalfe, 2004: 163). According to Schumpeter,
According to Schumpeter, the process of economic development can be divided into three clearly separate stages. The first
stage implies technical discovery of new things or new ways of
doing things, which Schumpeter refers to as invention. In the
subsequent stage innovation occurs, i.e. the successful commercialization of a new good or service stemming from technical discoveries or, more generally, a new combination of
knowledge (new and old). The final step in this three-stage process - imitation - concerns a more general adoption and diffusion of new products or processes to markets (Braunerhjelm
and Svensson, 2010: 414). The starting point is his claim that
innovation is logically separate from invention. Schumpeter’s
concern was not the laboratories and the test-tubes that make
the new discoveries. Rather, his concern was the process
through which new developments become commercialized into
a new production-function (Reisman, 2004: 66). In this sense,
Schumpeter’s innovation is entirely immaterial whether innovations involve any element of scientific novelty (Schumpeter,
1939: 84). Innovation is a purely economic process in terms of
cause and effect and involves nothing less than putting available resources to new uses (Metcalfe, 2004: 163). To Schumpeter (1947: 152), many inventors have become entrepreneurs,
but there is no necessary connection between the two func-
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tions: “The inventor produces ideas; the entrepreneur "gets
things done". Although Schumpeter, who believes logic typically prevails over technological logic (Swedberg, 2008: 192), admitted that many innovations were based on inventions, he still
adheres to their distinction on the grounds that they need different means and personalities:
“…the making of the invention and the carrying out of the corresponding innovation are, economically and sociologically, two entirely different things. They may, and often, have been performed
by the same person; but this is merely a chance coincidence
which does not affect the validity of the distinction. Personal aptitudes - primarily intellectual in the case of the inventor, primarily
volitional in the case of the businessman who turns the invention
into an innovation - and the methods by which the one and the
other work, belong to different spheres. The social process which
produces inventions and the social process which produces innovations do not stand in any invariant relation to each other and
such relation as they display is much more complex than appears
at first sight” (Schumpeter, 1939: 85-86).
An invention is a breakthrough in the world of knowledge
(that is, science and technology), while innovation is that in the
world of economy; in the latter world, it is not enquirers but entrepreneurs who are heroes, and the effective means is not
knowledge but money or capital. Therefore, entrepreneurs and
inventors – innovations and inventions – are people of two different spheres (Yagi, 2008: 205). Thus, Schumpeter distinguishes the roles of inventors and innovators as follows:
“Economic leadership in particular must hence be distinguished
from ‘invention’. As long as they are not carried into practice, inventions are economically irrelevant. And to carry any improvement into effect is a task entirely different from the inventing of it,
and a task, moreover, requiring entirely different kinds of aptitudes. Although entrepreneurs of course may be inventors just as
they may be capitalists, they are inventors not by nature of their
function but by coincidence and vice versa ... it is, therefore, not
advisable, and it may be downright misleading, to stress the element of inventions as much as many writers do” (Schumpeter,
1934: 88-89).
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
61
Schumpeter views innovation as much more than invention.
Invention becomes an innovation only when it is put to productive use. That is, an invention becomes an innovation only
when the invention is applied to an industrial process and a
new production function results from this application (McDaniel, 2000: 278). In this respect, enterprises should be classified
not according to the institutional forms as before, but according to different criteria. Schumpeter (1947: 153) refined this
classification by the following distinctions: enterprise that introduces "new" commodities; enterprise that introduces technological novelties into the production of "old" commodities; enterprise that introduces new commercial combinations such as
the opening up of new markets for products or new sources of
supply of materials; enterprise that consists in reorganizing an
industry, for instance, by making a monopoly out of it.
Schumpeter, thus, limited the source of economic evolution
(or development) to the innovation that generates a new production function. His distinction of inventor and innovator is
highly important in reaching this conclusion. Schumpeter’s
main motive in making a strong distinction between invention
and innovation is that he considers innovation as a clear internal factor of change. Therefore, as Schumpeter defined production as the combinations of materials and forces that are
within our reach, the producer is not an inventor. Schumpeter
emphasized the role of the entrepreneur in development. By
definition, he is the man who sees that the new combination is
made. He is to be distinguished from the capitalist (who bears
the risk) and from the inventor (who has the ideas), although it
is possible for one man to be all three. In this sense, he ascribed the role of innovation to the entrepreneur who, without
being a capitalist, might exist only in the framework of the capitalist regime (Michaelides and Milios, 2005: 108).
THE ROLE OF ENTREPRENEUR IN THE FUTURE OF
CAPITALISM
Schumpeter’s views on entrepreneurship and economic development are important in terms of his approach to the capi-
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talist system. The reason is that Schumpeter’s manner of defining capitalism is directly related with the entrepreneur’s role
within the system. As Schumpeter sees capitalism as a system
of disequilibria mainly based on the economic change, it is
quite different from the system defined by the orthodoxy, which
he resorts to as a basic comparison model. Schumpeter, in his
preface to Japanese edition of TED, wrote that he aimed “to
construct a theoretic model of the process of economic
change in time, or perhaps more clearly, to answer the question how the economic system generates the force which incessantly transforms it”, and he tried to put forward the relationship of capitalism with change (Clemence and Swedberg,
1989: 165). Thus, Schumpeter (1934), along with the economic context, studied entrepreneurs in the context of psychological and sociological context as well, and aimed to show the entrepreneur’s role especially within the capitalist system.
To Schumpeter, if one adheres always to the assumptions
of a stationary economic process, one must be implicitly supposing that the changes that occur in economic life are
brought about by events which are external to the process,
such as natural catastrophes, wars, and so on (Douglas, 1961:
445). But in Schumpeter (1947: 150), disequilibrium is the key,
and the mechanisms of economic change in capitalist society
pivot on entrepreneurial activity. Therefore, primary engine of
change is the entrepreneur. Schumpeter sets the boundaries of
the concept of “entrepreneur” in line with this perspective:
“The carrying out of new combinations we call “enterprise”, the
individuals whose function it is to carry them out we call “entrepreneurs”. These concepts are at once broader and narrower than
the usual. Broader, because in the first place we call entrepreneurs
not only those “independent” businessmen in an exchange economy who are usually designated, but all who actually fulfill the
function by which we define the concept, even if they are, as becoming the rule, “dependent” employees of company, like managers, members of board of directors, and so forth, or even if their
actual power to perform the entrepreneurial function has any other
foundation such as the control of a majority of shares. As it is the
carrying out of new combinations that constitutes the entrepre-
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
63
neur, it is not necessary that he should be permanently connected
with an individual firm; many “financiers,” “promoters,” and so
forth are not, and still they may be entrepreneurs in our sense. On
the other hand, our concept is narrower than the traditional one in
that it does not include all heads of firms or managers of industrialists who merely may operate an established business, but only
those who actually perform that function” (Schumpeter, 1934: 7475).
To McDaniel (2005: 488), if Schumpeter was correct in his
description of the entrepreneur being viewed as a sociologically
distinct individual, then it would appear that the individual
transcends any particular institutional system. Schumpeter described the entrepreneur as a creative innovator and stated that
when an innovation occurred, an entrepreneur was present
creating the innovation. Schumpeter’s model is based on revealing how the capitalist system changes, and the role of the
entrepreneur in this change. Therefore, here, for Schumpeter
(1942: 84), the problem that is usually being visualized is how
capitalism administers existing structures, whereas the relevant
problem is how it creates and destroys them. This process
what Schumpeter calls creative destruction is the essential fact
about the capitalist economic development. Therefore, the
process of creative destruction is possible only under capitalism (Loasby, 1982: 240), and its major actor is the entrepreneur.
Thus, Schumpeter, in his work, Capitalism, Socialism and
Democracy, studied the history of capitalism and its future. He
argued that the capitalist development process would not last
forever; capitalism would be replaced by socialism: “The capitalist process not only destroys its own institutional framework
but it also creates the conditions for another” (Schumpeter,
1942: 162). In conclusion, Schumpeter, like Marx, predicted –
though for different reasons - that capitalism would ultimately
destroy itself. Schumpeter’s scenario for transition from capitalism to socialism consists of following stages: 1) the bulk of innovations will be made in large corporations. 2) large corporations will be increasingly predominant in the economy 3) new
and smaller firms will play a declining role in the economy 4)
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the concentration of ownership will grow over time 5) the general public, not least the intellectuals, will grow increasingly
hostile towards capitalism 6) socialism will eventually replace
capitalism (Henrekson and Jakobsson, 2001: 335).
In Schumpeter’s later writings, one of the reasons for the
decline of capitalism is its transformation into a “trustified” system, dominated by a small number of large firms, where innovation itself is being reduced to routine (Bianchi and Henrekson, 2005: 367). By using the proceeds from their monopoly
power to finance new innovations, large corporations will improve their monopoly position. According to Schumpeter, capitalism will survive as long as individualism in its origin prevails
(Henrekson and Jakobsson, 2001: 334). With this change in
the role of industrial sovereignty, however, the control of industry will be taken over by the salaried managers; thus, the position of the bourgeois will deteriorate (Rima, 2001: 394-395).
According to Schumpeter, with the institutional development,
the entrepreneur’s role in the institutional framework will vanish, and eventually will affect the position of the entire bourgeois stratum:
“The perfectly bureaucratized giant not only ousts the small or
medium-sized firm and “expropriates” its owners, but in the end it
also ousts the entrepreneur and expropriates the bourgeoisie as a
class which in the process stands to lose not only its income but
also what is infinitely more important, its function” (Schumpeter,
1942: 134).
Schumpeter’s argument for the collapse of capitalism is
founded on the obsolescence of entrepreneurial function. As
what shapes the future of capitalism, i.e. the motor force of
capitalism, is the behavior of the entrepreneur (Heertje, 1981),
the obsolescence of the entrepreneur’s function will jeopardize
the future of capitalism as well. Hence, the increasing success
of entrepreneurial activity to some extent and the large part of
the entrepreneurial role will be incorporated in the institutional
framework of big enterprises. The entrepreneur’s own success
will result in his reduced prestige (Schumpeter, 1942: 132).
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
65
Thus, Schumpeter defines capitalism as an economic system that is constantly revolutionized through the innovative efforts of particularly gifted economic agents, the entrepreneurs.
However, the expansion of monopolistic organization threatens
the very nature of this source of permanent renewal. Progress
becomes increasingly automatized, undermining the role of
leadership. According to Schumpeter (1942: 131), this phenomenon may affect entrepreneurship and capitalist society
nearly as much as the cessation of economic progress would.
The reason is twofold: first, by qualifying the role played by private ownership and by imposing bureaucratic procedures, large
companies tend to interpose a distance between innovative activity and the personality of an individual. Secondly, this effective erosion of the purpose of the individual entrepreneur has
serious repercussions for the social or class structure of a capitalist society in that it undermines the role of the bourgeoisie
(Lakomski, 2002: 153).
This explanation emphasizes the more strictly sociological
implications of the process, and, in particular, its effect on the
class structure of capitalist society. According to Schumpeter,
although entrepreneurs do not form a social class of their own,
they are a vital component of the bourgeoisie which depends
on their dynamic influence on the system (Lakomski, 2002:
155). Therefore, for Schumpeter, in the capitalist economic
system, the role of entrepreneur is a major definitive role.
Hence, the position of the whole of the bourgeoisie largely depends on the entrepreneur: “Economically and sociologically,
directly and indirectly, the bourgeoisie therefore depends on
the entrepreneur and, as a class, lives and will die with him …”
(Schumpeter, 1942: 134). For this reason, in the capitalism,
the disappearance of driving forces, i.e. the effectiveness of entrepreneurs, will destroy the foundations of the bourgeoisie that
has an important role in the system.
Here, the increase in company size provides the economic
system with stability and efficiency; it nevertheless promotes a
bureaucratic form of organization which radically modifies the
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nature of innovation. An increasingly bureaucratic form of organization works against the entrepreneurs:
“Thus, economic progress tends to become depersonalized and
automatized. Bureau and committee work tends to replace individual action…Rationalized and specialized office work will eventually blot out personality, the calculable result, the “vision.” The
leading man no longer has the opportunity to fling himself into the
fray. He is becoming just another office worker - and one who is
not always difficult to replace” (Schumpeter 1942: 133).
In the early history of capitalism charismatic inventors, innovators, entrepreneurs played a much more important role.
However, as capitalism came to be dominated by highly rationalized businesses, there was less and less of a role for such
charismatic figures (Ritzer, 2008). These have been replaced by
salaried managers. Schumpeter draws a much different conclusion from this observation. To Schumpeter, the crucial fact
about the modern corporation is that its managers cannot fill
the strong social role played by the entrepreneur (Langlois,
2007: 39). Therefore, “Thus the same economic process that
undermines the position of the bourgeoisie by decreasing the
importance of the functions of entrepreneurs and capitalists, by
breaking up protective strata and institutions, by creating an
atmosphere of hostility, also decomposes the motor forces of
capitalism from within” (Schumpeter, 1942: 161-162).
In Capitalism, Socialism and Democracy, Schumpeter, referring to the disappearance of the social leadership of armored
knights, who incited the mechanization of war activity in the
medieval age, considers the emergence of big business organizations as a major factor in the decline of entrepreneurship:
“Now a similar social process – in the last analysis the same social process - undermines the role and, along with the role, the
social position of the capitalist entrepreneur. His role (that of the
entrepreneur), though less glamorous than that of medieval warlords, great or small, also is or was just another form of individual
leadership acting by virtue of personal force and personal responsibility for success. His position, like that of warrior classes, is
threatened as soon as this function in the social process loses its
importance” (Schumpeter, 1942: 133).
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
67
Moreover, the decline of entrepreneurship, by triggering further changes, has important reflections on other institutions of
capitalism. So, the concept of private property rights, one of
the major mechanisms of capitalism, is interrupted: “The capitalist process, by substituting a mere parcel of shares for the
walls of and the machines in a factory, takes the life out of the
idea of property” (Schumpeter, 1942: 142). Thus, those, who
take part in the businesses, do not fight, economically, physically, politically, for the future of the business like actual owners. As a result of this process, the entrepreneur ceases to identify with his firm and the success of innovation ceases to be
linked to the individual’s desire to win and to climb the social
ladder (Lakomski, 2002: 155).
With this development, a new structuring with three types of
economic agents appears: salaried managers (executives,
managers and submanagers), big stockholders and small
stockholders. According to Schumpeter (1942: 141), not only
no element of any of those three groups into which I schematized the typical situation unconditionally takes the attitude
characteristic of the entrepreneur, but also this tendency towards the decline of entrepreneurship adversely affects the
freedom of contracting, which is in the same boat, in favor of
“stereotyped, unindividual, impersonal and bureaucratized”
contract of today.
This stage capitalism has reached will also change the actions and behavior of the participants. Schumpeter argues that
the entrepreneurial activity functions as the prime mover; with
the increasingly growing institutions, the shape of the economy
and thus the people’s vision of capitalist institutions will change
as well:
“Thus the capitalist process pushes into the background all
those institutions, the institutions of property and free contracting
in particular, that expressed the needs and ways of the truly “private” economic activity. Where it does not abolish them, as it already has abolished free contracting in the labor market, it attains
the same end by shifting the relative importance of existing legal
forms - the legal forms pertaining to corporate business for instance as against those pertaining to the partnership or individual
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firm - or by changing their contents or meanings. The capitalist
process, by substituting a mere parcel of shares for the walls of
and the machines in a factory, takes the life out of the idea of
property…… Eventually there will be nobody left who really cares
to stand for it - nobody within and nobody without the precincts of
the big concerns” (Schumpeter, 1942: 141-142).
The eventual breaking up of the protective strata of capitalism of also brings about an attack to the value system of bourgeoisie in class terms:
“The capitalist process, so we have seen, eventually decreases
the importance of the function by which the capitalist class lives.
We have also seen that it tends to wear away protective strata, to
break down its own defenses, to disperse the garrisons of its entrenchments. And we have finally seen that capitalism creates a
critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its
own; the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes
on to attack private property and the whole scheme of bourgeois
values” (Schumpeter, 1942: 143).
Thus, according to Schumpeter, capitalism will decline not
because of the increasing pains of the exploited proletariat, but
rather because of the fact that the bourgeois will eventually lose
control over the entrepreneurial process. This sociological explanation partly comes from Schumpeter’s identity as an interdisciplinary social scientist (Reisman, 2004: 97). This can be
particularly observed in his frequent reference to sociology in
his studies, which he believed it was necessary for a comprehensive economics (Schumpeter, 1954: 20-21). Because a very
few people have the opportunity for individual action in a bureaucratic society, despite technical superiority, the system will
lose its general support. However, Schumpeter still stressed the
importance of individual entrepreneurs, albeit in a different institutional setting: for example, a production engineer in the research and development department of a large firm could be
regarded as an ‘entrepreneur’ in Schumpeter’s sense of the
word. Thus, despite envisaging the demise of the entrepreneurs
and their partial replacement by a new mode of economic or-
The Creative Destruction of Economic Development:
The Schumpeterian Entrepreneur
69
ganization, he never completely abandoned his initial model of
the entrepreneur as the agent of technological and economic
change (Michaelides and Milios, 2005: 108).
CONCLUSION
For Schumpeter, the main agent of change in an economy
is the entrepreneur. In this context, he criticizes the incapability
of static general equilibrium to explain the complex structure of
economic development, and stresses that it is the entrepreneurial ability to create disequilibrium. Assigning such an important role to the entrepreneur in the system mainly stems
from his distinctive individual qualities. Thus, Schumpeter's entrepreneur is characteristically motivated by different psychological motives than the personal interest-oriented ones, such
as the dream to found a private kingdom and the joy of creating.
Schumpeter defines the entrepreneur as a social leader performing the functions of commanding, prevailing and advancing, as a result of his approach to these individual motives in
social and historical context. Thus, he considers the primary
function of leadership in a broad context like “getting things
done”.
Schumpeter sees the economic development as the process
of creative destruction caused by the innovative activities of the
entrepreneur. In a static economy without innovations, habitual
and traditional behavior prevail the business life. However, this
peaceful state is disturbed by the new combinations introduced
by entrepreneurs. In this respect, the entrepreneur is a key figure for Schumpeter, because he is the persona causa of economic development. As, given the exceptional qualities attributed to the entrepreneur, it stands to reason that, in
Schumpeter’s mind, entrepreneurs are a more special type of
people than managers, capitalists and inventors.
Schumpeter, in his important work, Capitalism, Socialism,
and Democracy, states that he is not optimistic about the future of capitalism. According to him, the survival of capitalism
largely depends on the continuation of strict individualism of
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early capitalism. However, with the emergence of the dominant
role of institutions at the stage of trustified capitalism, the control of industry passed from entrepreneurs to salaried managers. This development would deteriorate the position of bourgeoisie, whose existence depended on the entrepreneur. In
conclusion, Schumpeter, like Marx, argued that capitalism
would collapse. But his reasons were different than Marx’s.
Schumpeter maintained that capitalism would decline not because of the increasing pains of the exploited proletariat.
Schumpeter's forecast that capitalism would pass away was
grounded in the perception that the bourgeois would eventually
lose control over the entrepreneurial process.
One of the most powerful aspects of Schumpeter’s analysis
of both the role of innovative entrepreneur in the process of
creative destruction and the role of entrepreneur in the future
of capitalism is that it is based on broad historical, sociological
and psychological foundations. This comes from Schumpeter’s
identity as an interdisciplinary social scientist.
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