Respect For The Masters: Joseph Alois Schumpeter

Joseph Alois Schumpeter (8 February 1883 – 8 January 1950) was an Austrian American economist and political scientist. He briefly served as Finance Minister of Austria in 1919. One of the most influential economists of the 20th century, Schumpeter popularized the term "creative destruction" in economics (See:

The source of Joseph Schumpeter's dynamic, change-oriented, and innovation-based economics was the Historical School of economics. Although his writings could be critical of the School, Schumpeter's work on the role of innovation and entrepreneurship can be seen as a continuation of ideas originated by the Historical School, especially the work of Gustav von Schmoller and Werner Sombart.

Schumpeter's relationships with the ideas of other economists were quite complex in his most important contributions to economic analysis – the theory of business cycles and development. Following neither Walras nor Keynes, Schumpeter starts in The Theory of Economic Development with a treatise of circular flow which, excluding any innovations and innovative activities, leads to a stationary state. The stationary state is, according to Schumpeter, described by Walrasian equilibrium. The hero of his story is the entrepreneur.

The research of entrepreneurship owes much to his contributions. He was probably the first scholar to develop theories in this field. His fundamental theories are often referred to as Mark I and Mark II. In the first one, the early one, Schumpeter argued that the innovation and technological change of a nation come from the entrepreneurs, or wild spirits. He coined the word Unternehmergeist, German for entrepreneur-spirit. Mark II was developed when Schumpeter was a professor at Harvard. He asserted that the agents that drive innovation and the economy are large companies which have the resources and capital to invest in research and development. These arguments may be complementary today.

Schumpeter identified innovation as the critical dimension of economic change. He argued that economic change revolves around innovation, entrepreneurial activities, and market power. He sought to prove that innovation-originated market power could provide better results than the invisible hand and price competition. He argues that technological innovation often creates temporary monopolies, allowing abnormal profits that would soon be competed away by rivals and imitators. He said that these temporary monopolies were necessary to provide the incentive necessary for firms to develop new products and processes.

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