Schumpeter and Entrepreneurship in the Large, Established Firm
Last week, Nicolai Foss posted a short blog piece on entrepreneurship in the established firm. In the subsequent exchanges of commentary, it was noted that Schumpeter wrote of this beginning in the late 1920s (in German) and in two of his most most cited (and sometimes read) books, The Theory of Economic Development and Capitalism, Socialism, and Democracy – written in English after his move to Harvard University. Unlike his early writings, wherein the entrepreneurship cycle was about new firms supplanting old firms, these books allowed for innovation to happen as a strategic choice within large oligopolistic firms. Naturally, this type of innovation does not supplant the existing firm – a strategic suicide, but permits a number of production functions to coexist in the large, established firm. And any of these may be jettisoned over time in response to their failure to sustain profits.
These insights from Schumpeter are scattered in these two books and his other writings. And if a reader hasn’t gotten past the paragraphs on creative destruction, these insights remain unseen.
Fortunately, one scholar has invested the time and intellect necessary to bring these scattered insights together and formalized a model that contrasts with the small-firm entry/exit model of Schumpeterian competition. Esben Sloth Andersen is a professor of evolutionary economics and industrial dynamics at Aalborg University. His scholarly portfolio brings together his work on simulation models of innovation and industry evolution, his examination of theories and models from evolutionary biology, and a series of erudite publications on Schumpeter and his work. Andersen has written three books that are must-reads for persons working in evolutionary economics, entrepreneurship, and strategy and competition. The first is a mid-1990s volume titled Evolutionary Economics: Post-Schumpeterian Contributions (Pinter), in which he uses simulation methods to elucidate Nelson and Winter’s 1989 classic book, while relating it to other models of firm and market dynamics. The two recent books – Schumpeter’s Evolutionary Economics (Anthem, 2009) and Joseph A. Schumpeter: A Theory of Social and Economic Evolution (Palgrave Macmillan, 2011) – are truly marked by erudition. That is, they are comprehensive, clear, and have a “spine” constructed by the author that makes the subject matter coherent.
At the risk of offending Professor Andersen by offering caricatures of his works, I would say that the 2009 book is more comprehensive. It is very complete in covering Schumpeter’s work on economic dynamics, with specific contrast to prevailing static economic theory, from the first German texts of 1908 and 1912 through the complex tome of Business Cycles (1939), and to the posthumous History of Economic Analysis. In this book, Andersen introduces his conceptions of three Schumpeterian evolutionary models, which he calls Mark I, Mark II, and Mark III. The first contains the small-firm entry/exit model and contains the elements of the cyclical innovation model. The second introduces the “trustified” economy and permits large, oligopolistic firms to evolve without self-destruction within the innovation cycle. The third considers the social dynamics which were evident in the early Schumpeter’s interest in evolutionary social science: the interlocking social, political, and economic systems which he wrote about in Capitalism, Socialism, and Democracy. Andersen makes it clear that there is not one Schumpeterian evolutionary model, although he gently notes that in a casual reading of any or all of Schumpeter’s books, one will not find this obvious.
The most recent book, which is part of the Palgrave series on Great Thinkers in Economics, contains all of the main arguments of Andersen’s 2009 book and presents them in an exceptionally clear exposition. Some of the historical details and some elaborations are left out to more effectively highlight the Mark I, II, and III models. I have purchased a dozen copies of this book to share out with graduate students and colleagues and find it to be a superb way to enter the literature by Schumpeter and about Schumpeter. There is some interesting biographical material, as well. I would argue that this is a place to begin, then one gets even more from reading McCraw’s Prophet of Innovation and Andersen’s Schumpeter’s Evolutionary Economics.
Finally, for skimmers, I point to chapter 9 in Schumpeter’s Evolutionary Economics and chapters 10 and 14 in the Palgrave book as the places to see the model of innovation in the large, established firm. Then, we can respond to Professor Foss’ call to arms.