Download Schumpeterian Theories

NS4053
Winter Term 2014
Schumpeterian Theories
of Growth and Development
Schumpeter I
Basic Schumpeterian Model
• 1. Same basic production function as the Classicals and
Marx – output function of labor, capital, land and
technological progress
• Introduced the entrepreneur as critical element combining inputs
• 2. Savings depends on wages, profits and the interest rate –
savings increase with the interest rate, with workers now
saving.
• Introduced idea of financial markets as critical in growth – transfer
resources from surplus to deficit individuals
• 3. Total investment divided into induced investment and
autonomous investment
• Induced investment depends on the level of profits and the interest rate
• His innovation was to show that induced investment stimulated by
recent increases in output income, sales or profits
• Autonomous investment brought forth by such long run considerations
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as technological change
Schumpeter II
• Schumpeter felt the process of innovation was the
critical element in autonomous investment
• He though of innovation in general as any change in
the production function which would bring about an
increase in output – five major forms
• Introduction of a new good – that is one which consumers not
yet familiar or a new quality of good;
• The introduction of a new method of production– not previously
tested by experience
• The opening of a new market
• The development of a new source of supply of raw
material/production inputs
• The carrying out of the new organization of an industry
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Schumpeter III
• 4. Technological progress and the rate of resource discovery
(innovations) depend on the supply of entrepreneurs
• Entrepreneur is a visionary – sees opportunity for profits in
new discoveries.
• Often the entrepreneur simply uses other people’s money
and ideas -- an intermediary between the financial and
scientific communities
• He raises the money to launch new enterprise, assembles the factors of
production, chooses top managers and sets the organization going
• He may not provide any funds of his own
• He may not be a day-to-day manager
• Nor is he usually an inventor or explorer
• Schumpeter argues inventions or discoveries by themselves
have little economic effect– patent registry filled with files
of inventions that never see light of day.
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Schumpeter – Entrepreneurship II
His model one of the first to explain the business cycle:
• Innovation sets up only a temporary monopoly gain which is
soon wiped out by imitation
• For profits to continue, it is necessary to keep ahead of one’s
rivals
• New bank credit finances the innovation, which once
successfully set up is more easily imitated by competitors
• Innovations are not isolated events evenly distributed in time,
place and sector
• They arise in clusters as a result of lowered risk
• Eventually the waves of entrepreneurial activity not only force
out old firms but also exhaust the limited possibilities of gain
from innovation
• As borrowing diminishes and loans are repaid, the
entrepreneurial activity slackens and finally ceases
• Innovation, saving, credit creation, and imitation explain
economic growth whereas their ebb and flow determines the
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business cycle.
Schumpeter IV
• 5. The supply of entrepreneurs depends on the rate of
profits and the social climate
• Like Mark Schumpeter put considerable stress on
sociological factors
• “Social Climate” a complex phenomenon reflecting the
whole social political and socio-psychological atmosphere in
which entrepreneurs operate
• Includes the social values of a particular country, the class
structure, the educational system
• While entrepreneurs usually non-conformists, and often
outcasts, social climate includes the attitudes of society
toward business success and the nature and extent of the
prestige and other social rewards apart from profits
• Particularly important factor in “climate” is the
entrepreneur’s understanding of the “rules of the game” –
the conditions under which he must operate
• Sudden changes in the rule of the game are particularly
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harmful to investment and enterprise
Schumpeter V
• 6. The social climate is reflected by the distribution of income
• Imperfect measure, hard to come up with good operational
definition of entrepreneurship
• Schumpeter felt any development tending to squeeze profits
such as growing strength of trade unions, progressive income
taxes, social welfare programs or any other government
intervention designed to limit profits or redistribute income
caused a deterioration of the climate.
• Explained depth and duration of depression in 1930s in terms
of labor legislation, social security, public works spending
progress tax structure – changed rules of the game
• In model the entrepreneurial success drives economies to high
levels of prosperity – creative destruction needed for
advancement
• Problem: prosperity supports a whole class of people –
academics, politicians and the like who are not part of
capitalism and thus do not understand its workings
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Schumpeter VI
• Over time, these groups undermine public support for
entrepreneurs – increase restrictions on entrepreneurial
activities.
• One of motives of entrepreneurs is to leave a large estate to
their children/relatives
• Progressive taxation, wealth taxation undermines the
motive for entrepreneurial activity
• With time the supply of entrepreneurs slows and the
capitalist countries converge with communism:
• a hybrid system of large firms built around managers,
teams and organizations where the individual plays a small
role
• As in Marx, the capitalist system destroys itself.
• In Marx it is to productive causing output to run ahead of demand -unemployment,
• In Schumpeter it is too successful in creating a large surplus, thus
facilitating the growth of groups that undermine the its foundations.
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Schumpeter – Extensions
Schumpeter’s model assumes that perfect competition is the norm. In
today’s world:
• Many economists now see pressures for innovation under
oligopolistic competition with a few giant firms dominating the
market providing incentives for unprecedented growth in the last
century or so
• Among large, high-tech business firms, innovation has replaced
price as the important competitive weapon in the market
• Capitalism is more likely to encourage productive
entrepreneurship rather than rent seeking (non- productive)
pursuit of profit.
• Problem – Schumpeter’s concept of the entrepreneur is somewhat
limited in developing countries.
• The majority of LDC Schumpeterian entrepreneurs are trades
whose innovations are opening new markets
• Also, entrepreneurship in developing countries is often gap filling
– seeing opportunities and responding.
• In light of technical transfers from advanced economies the
development of entirely new combinations should not unduly limit9
what is and is not considered entrepreneurial activity.
Modern Innovation I
• Oxford Analytica, United States: Innovation Hubs Create
Wealth, Division, June 24, 2013
• Innovation now is very different from what Schumpeter
had envisioned.
• While rugged entrepreneur still a factor, but probably much less
than he anticipated
• While the social climate is not necessarily one of encouraging
entrepreneurship it does not appear as stifling as he forecast.
• Innovation has taken on a geographical dimension not
envisioned by Schumpeter
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Modern Innovation II
• The new theory of innovation stresses the creation and
growth of hubs and clusters.
• The ultimate success or failure of investments or businesses in
the U.S. depends more than ever on geography
• The U.S. edge in key high-tech sectors will likely continue to
promote job creation – even if global growth weakens
• The end of the housing collapse, which restricted labor mobility
will promote faster growth
• Immigration reform if it occurs would almost cetrtinly help
maintain the U.S. edge in innovative sectors
• Labor productivity is much higher in innovation hub cities than
elsewhere – makes them relatively resilient during cyclical
downturns
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Modern Innovation III
• Jobs associated with this new innovation economy are
highly concentrated in a relatively small number of cities:
• San Francisco/San Jose
• Boston
• Seattle,
• Austin
• Raleigh/Durham
• These are “brain hub” cities
• Highly educated workforces and business-university research
links have made these areas
• Rich in human capital and
• Encouraged employers and firms to locate there
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Modern Innovation IV
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Modern Innovation V
• Turns out that the new technologies all depend on highly
educated employees
• Usually means those with at least a relevant four-year university
degree
• Most have post-graduate training
• Result is a dynamic clustering effect where cities that already
have highly educate work forces experience dynamic growth
• Attracting yet more highly educated workers
• Key cities, San Francisco Bay Area, Austin and Seattle
• Those cities outside the innovation economy experience
brain drain and further decline.
• Cities outside the high tech areas include, Detroit,
Cleveland and Flint
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• Most US Cities are somewhere in between
Modern Innovation VI
• Clustering around innovation industries is selfreinforcing
• Once a hum such as Silicon Valley becomes and
established center of new industries
• Attracts more creative and innovative individuals and
entrepreneurs
• Opposite occurs in other cities such as Detroit where the
innovation economy is small
• Problems:
• Great divergence between different US geographical
areas
• Hubs focused on innovation in high value added sectors
wile traditional cities cling to manufacturing industries
much more exposed to competition and globalization
• Splitting apart of income and geographical income
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distributions.
Modern Innovation VII
• Hubs drive job creation not just at the top end of the
market but among lower-end service employers
• However such regions still produce relatively few
positions that pay wages near the median, outside the
public sector.
• Dynamic helps explain both the relative resilience of the
us Economic recovery
• Why the trend towards increasing wealth polarization is
likely to persist
• Will there be a backlash similar to that Schumpeter
predicted against the entrepreneur? This time:
• Sharply progressive income taxes?
• Protectionism?
• Expanded welfare state?
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Expeditionary Economics I
• The Schumpeterian model has recently formed the starting
point for a new branch of applied economics, expeditionary
economics (ExpECON)
• ExpECON was introduced in a path-breaking article in the
May/June 2010 issue of Foreign Affairs by then Kauffman
Institute President and CEO Carl Schramm
• ExpECON offered as an alternative to the top-down aiddriven approaches taken in Iraq and Afghanistan
• Schramm’s basic points:
• Economic growth is vital for stabilizing post-conflict/disaster settings
• The U.S. military as often the dominant player in these environments
must sharpen its ability to encourage indigenous entrepreneurship
• The conventional US approach in recent post-conflict recoveries has
failed largely because it has abandoned approach so successful in
building the U.S. Economy – the encouragement and support of
indigenous entrepreneurial initiative and activity.
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Expeditionary Economics II
• Scharamm’s work draws on many of the frustrations with
the lack of success in Iran and Afghanistan as well as
conventional economic approaches to development also
critiqued by:
• Dambisi Moyo – ineffectiveness of aid
• Hernando DeSoto’s – lack of property rights as an element restricting
entrepreneurship
• To apply ExpECON Shramm feels the military needs to
• Expand its areas of competence,
• Rid itself of its central planning mentality, and
• Become a more flexible force that can facilitate economic growth while
stabilizing the regions in which it is engaged
• ExpECON has generated considerable interest because
provides deeper understanding than aid-based strategies of
the dynamics at work in most conflict and post conflict
disaster settings
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Expeditionary Economics III
• It lays out an optimistic plan to quickly jump-start economies
in what were previously considered impossible situations.
• ExpEcon has the potential to provide a considerably less
expensive alternative than direct foreign assistance
• There is also growing feeling in the U.S. military that economic
conditions are increasingly important relative to military action
in creating long-standing peace and stability in many trouble
spots
• At a minimum ExpEcon has shifted the focus of much work on
post-conflict recovery to the role of entrepreneurship
• ExpEcon main propositions:
• The strategic use of economic development to fix failed economies
in crisis states
• Fundamentally about business development
• Based on the assumption that economies growth when businesses
grow; and
• Focused on local communities and local businesses
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Expeditionary Economics IV
• ExpECON is not:
• A blueprint for Western foreign direct investment;
• A call for promoting multinational corporations to set up
businesses in conflict zones; and
• Focused on empowering Western aid agencies or NGOs.
• The recent experiences of Afghanistan and Iraq are cited
as a reason for shifting to ExpECON leading to these
propositions
• Afghanistan
• Despite billions of dollars spent over past decade in Afghanistan,
the capacity of the Afghan government to deliver basic services has
remained severely limited
• In the more remote areas, the government’s presence is sporadic at
best
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Expeditionary Economics V
• With little in the way of local governance or finance, illegal
activity continues to thrive, further undermining the
authority and influence of the central government
• Still the aid effort has been so massive that an estimated 97
percent of Afghanistan’s licit gross domestic product (GDP)
is derived from NATO’s military activities and donor
community present
• Little evidence aid has been effective in stabilizing the
country
• Some argue that aid facilitated corruption of government
officials has made the situation even worse.
• Similarly little indication the aid effort has stimulated
private sector activity and associated job creation.
• Rather than benefit the population and prepare them for
the future, billions of aid dollars have gone to foreign
contractors and Afghan elites
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Expeditionary Economics VI
• Given the fact that by 2015 the US and its allies plan to
hand over security and other responsibilities to the Afghan
government
• There will be significant cuts in spending and assistance
with little or no indigenous production (outside of drugs) to
pick up the slack
• A recession is likely to occur, derailing the transition
process and condemning the country to a long period of
further violence and conflict
• From the perspective of ExpECON – despite government
and donor community neglect of the private sector, this
segment of the economy had tremendous potential for
growth and employment generation
• Further many of the broad based stereo-types often painted
of entrepreneurs in conflict settings were completely
wrong.
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Expeditionary Economics VII
• Extensive surveys have found:
• Afghan businesses are responding rationally to economic incentives in a
highly distorted economic environment
• Uncertainty and unpredictability, not physical insecurity are the
fundamental obstacles to business
• Business are adapting strategies such as vertical integration, pursuing
short term trading over long-term enterprise and “buying” security in
multiple ways
• Many business people believe that the Afghan government not only fails
to provide basic services but also engages in corruption that directly
threatens their businesses; and
• International actors distort the business environment in
ways harmful to Afghan businesses
• From these findings, easy to conclude the Afghan private
sector had the poential for growth and positive change – if
only given a chance in the form of some degree of stability
and institutional reliability
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Expeditionary Economics VIII
Some questions concerning the application of expeditionary
economics in Afghanistan:
• What other kind of activities should complement this model or
even be a prerequisite for it at the local level?
• How should the U.S. military reinvent themselves in the eyes of
many Afghans from military actors to agents for economic
opportunities and peace?
• How can the U.S. military ensure that what they does to create
economic opportunities does not create new sources of conflict
by destabilizing existing forces in the communities?
• How can the U.S. military ensure that expeditionary economics
does not delegitimize the government at the national and local
level?
• How should the transition from military-led to civilian-led
reconstruction take place? and
• How can the U.S. military ensure that what they do in terms of
reactivating the economy is sustainable after they leave?
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