See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/324903275
SchumpeterrS Theory of Economic Development: A Study of the Creative
Destruction and Entrepreneurship Effects on the Economic Growth
Article in SSRN Electronic Journal · June 2017
DOI: 10.2139/ssrn.3153744
CITATIONS
READS
6
7,800
1 author:
Farrokh Emami Langroodi
Goethe-Universität Frankfurt am Main
7 PUBLICATIONS 8 CITATIONS
SEE PROFILE
Some of the authors of this publication are also working on these related projects:
Hedge Funds View project
Financial Forecasting & Risk Analysis View project
All content following this page was uploaded by Farrokh Emami Langroodi on 08 May 2018.
The user has requested enhancement of the downloaded file.
SCHUMPETER’S THEORY OF ECONOMIC DEVELOPMENT:
A STUDY OF THE CREATIVE DESTRUCTION AND ENTREPRENEURSHIP
EFFECTS ON THE ECONOMIC GROWTH
FARROKH EMAMI LANGROODI★
ABSTRACT
This paper provides a multifaceted review and analysis of the Schumpeter’s Theory of Economic
Development and specifically the creative destruction effect intertwined with the business cycles, and
their effectiveness in explaining the long-run economic growth by first, looking into the main features of
this theory; second, comparing the fundamental similarities and differences of Schumpeter theory with
respect to Marxism and Keynesianism, third; a comparison of “Schumpeter” effect vs. the “refugee”
effect in recent published researches, and finally, the relationship of Schumpeterian and Kirznerian
opportunities in modern entrepreneurship.
Keywords: Schumpeter, Creative Destruction, Capitalism, Kirznerian, Marxism, Keynesianism, Economic
Growth, Business Cycle, Entrepreneurship
JEL Classification: A12, B13, B31, B52
★
Goethe University Frankfurt, Graduate School of Economics, Finance, & Management (GSEFM), Department of Finance,
Germany (2017). farrokh.emami@stud.uni-frankfurt.de
1. INTRODUCTION
It is well known that Joseph Alois Schumpeter always explained that “analyzing business cycles means
neither more nor less than analyzing the economic process of the capitalist era” (Schumpeter, 1939).
Consequently, his Theory of Economic Development - naturally embodies what today we would consider
an integrated growth and cycle analysis. Starting with his early contributions on crises theory and
business-cycle theory (Hagemann, 2003), Schumpeter strived continuously to understand the
fundamental elements in the explanation of economic fluctuations. From his Theory of Economic
Development (1911) until his monumental two volumes on Business Cycles (1939) and Capitalism,
Socialism and Democracy (1942), he mainly investigated the ways growth and cycle dynamics
communicate.
The Schumpeterian system of economic thought was built in such a way as to realize a necessary
symbiosis between economic, historical, political, social and all other elements of the process of the
functioning and development of the capitalist world. All of these specific aspects of capitalist society
could be approached as separate entities because this was considered to be the most appropriate way to
effectively access the economic aspects of reality (Croitoru, 2012). Certainly, from the Schumpeterian
point of view, economic phenomena are not an isolated and undetermined, but this is not a reason to
explain the economic world through external factors. The Theory of Economic Development was a first
step in this Schumpeterian effort to create the theoretical tools and concepts which were needed to
approach the economic sphere of reality while assigning phenomena such as wars, political upheaval,
and cultural or spiritual issues a secondary significance. The important influence of these latter are not
effaced, rather Schumpeter succeeded in elegant fashion in focusing the analysis of the economic
development of the capitalist world on exclusively economic elements of the process. The central
argument of his system of thought assigned the most significant role to Entrepreneurship with its
inseparable and embedded innovative nature (Croitoru, 2012).
Schumpeter identified two main interaction channels (Croitoru, 2012). Business cycles, first are
interpreted as the unavoidable joint-product of economic development dynamics. Schumpeterian
competition drives innovation, but it also begets imitators, “swarms” of which copy their rival’s
innovation, attracting investment, and leading to a boom. When the original innovator’s profit advantage
1
is eliminated, investment moves elsewhere, and the sector may even shrink, until the next disruptive
innovation, which restarts the cycle. However, the Great Depression seemed to challenge Schumpeter’s
vision: why were entrepreneurs not jump-starting the economy? Schumpeter’s reply was the ponderous,
unlovely Business Cycles (Schumpeter, 1939), a monumentally ambitious two-volume book that
attempted nothing less than a history of capitalist processes, and that moreover, attempted to model
business cycles as the product of interacting medium (40 months), long (8-10 years) and very long (5060 years) wave cycles. Schumpeter’s desire for an exact economics led him to abandon the uncertainty
and complexity of “irregularly regular” for the false precision of three-cycle wave theory. Paul
Samuelson said that the book “smacked of Pythagorean moonshine”.
Second he elaborated his famous process of Creative Destruction: the selective mechanism exerted in
the recession and depression phases of the cycle which although it has a short-term negative impact,
Schumpeter regarded as positive for long-run economic dynamics. The Creative destruction in fact refers
to the incessant endogenous mutation of the economic structure through the destruction of the old,
established behavior and plans, and the creation of new ones by entrepreneurs. It is clear then that for
Schumpeter growth and cycle dynamics are mutually influencing (Legrand & Hagemann, 2017).
Creative destruction although certainly the most famous Schumpeterian concept is also rather complex,
i.e. the outcome of a liquidation process and a reallocation of productive resources during a recession,
and particularly a depression phase. Both mechanisms can have rather damaging economic consequences
in the short run. For that reason, and also because of his earlier position on lack of justification for
intervention to help the economy to escape the Great Depression, Schumpeter is generally considered a
non-interventionist or a pure liquidationist (Legrand & Hagemann, 2017).
2. MAIN FEATURES OF THE THEORY OF ECONOMIC DEVELOPMENT
The main features of Schumpeter’s theory of economic development are as follows (Schumpeter, 1961):
1) Circular Flow
2) The Role of the Entrepreneur
3) Cyclical Process or Business Cycle
4) End of Capitalism
2
2.1.
Circular Flow
According to Schumpeter, in the first chapter of the Theory of Economic Development, “in a circular flow, from
which we always start, the same products are produced every year in the same way. For every supply
there awaits somewhere in the economic activities are repetitive”. It means that the supply and demand
are in equilibrium at each point of time and the economy is in its stationary state. Circular flow is based
upon a state of perfect competitive economy which is in stationary state and there is perfect competitive
equilibrium (Schumpeter, 1961).
The costs of the firms are equal to the receipts; the prices are equal to average costs. There are no profits
no interest rates, no savings, no investment and no unemployment. According to Schumpeter this
stationary equilibrium is characterized by the circular flow which continues to revive itself every year in
the same system as the blood circulates in a human body.
As regards economic development Schumpeter in his theory states that, “the development is spontaneous
and discontinuous change in the channels of the circular flow, disturbance of equilibrium which forever
displaces the equilibrium state previously existing”. Schumpeter theory of development is the key
element of dynamic process which basically consists of new resource combinations, so called innovations
or technological changes. When innovations or changes (economic, social, political and technical) take
place in the economy, the stationary equilibrium or circular flow is displaced and the process of
development starts. These features imply that the circular flow is used in static setting. To make it
dynamic and consistent with development, changes must take place in the economic system. These
changes can be brought through innovations.
Innovations may be defined as a change in the existing production system introduced by the entrepreneur
with a view to making profits and reducing costs. The innovation is closely linked with Schumpeter
defined development as a “spontaneous and discontinuous change in the channels of flow, disturbance
of equilibrium which, forever alters and displaces the equilibrium state previously existing” (Schumpeter,
1961).
He assumed that change is the basic element of dynamic process and those changes come in the form of
innovations. The innovations may consist of the following aspects:
3
1. The discovery of the new source of raw-materials.
2. The presentation of a new product.
3. The implementation of the modern method of production.
4. The search of new markets.
5. The creation of monopoly or establishment of a new type of industrial organization.
Schumpeter, thus, lays emphasis on the introduction of new products through the improvements in the
technological and other economic and non-economic resources which lead to economic development.
2.2.
The Role of the Entrepreneur as an Innovator
Entrepreneur is the key figure in Schumpeter’s analysis of the process of development. Schumpeter’s
model starts with the breaking of circular flow with an innovation in the form of a new product. He
occupies the central place in the development process because he initiates development in a society and
carries it forward. As a matter of fact, entrepreneurship is different from the functions of a manager. A
manager simply manages the affairs of an enterprise whereas the entrepreneur also takes high degree of
risk. The role of an entrepreneur has been glorified by Schumpeter on the basis of functional abilities.
According to him, entrepreneurs is to:
a. Appreciate the possibilities of innovation,
b. Overcome the socio-psychological barriers against the introduction of new things,
c. Direct the means of production into new channels,
d. Persuade the banker to provide him with necessary finance for innovations,
e. Induce other producers in his branch of activity for taking risk,
f. Create an environment conducive to the satisfaction of wants as the normal motive,
g. Provide leadership, and
h. Take high degree of risk in the economic world.
Though Schumpeter has given a comprehensive explanation about the role of entrepreneur, it cannot be
considered an adequate explanation of the general theory of capitalistic development. For entrepreneur
4
himself is a product of social environment, which compels him to innovate or get eliminated, because of
the forces of competition. Despite this fact, credit goes to Schumpeter who has emphasized the role of
an entrepreneur in the capitalist development.
The entrepreneurs require two things to perform his functions. Firstly, there must exist technical
knowledge with which the entrepreneur can introduce new products or new combinations of factors of
production. This according to Schumpeter does not pose a problem because there always exists the
reservoir of unused technical inventions, which can be explored and exploited by the prospective
entrepreneurs; secondly, in order to carry out the new inventions the entrepreneur requires the services
of the factors of production. For this he needs purchasing power in the form of credit and capital, which
can be provided by banks and other financial institutions. Therefore, credit and banks play an important
role in the economic development of a country (Schumpeter, 1961).
Role of profits: An entrepreneur innovates so as to earn profits. Profits are conceived, “as a surplus over
costs – a difference between the total receipts and outlay – as a function of innovations” (Schumpeter,
1961). According to Schumpeter, under competitive equilibrium, the price of each produce just equals
its cost of production and, thus, there are no profits. According to him, profits arise on account of dynamic
changes resulting from innovation. They continue to exist till the innovation becomes general.
Breaking the circular flow: The central theme of the Schumpeterian theory of economic development
lies in the breaking up of the circular flow with innovation in the form of a new product by an
entrepreneur raising the level of investment in the economy. The bank credit can help largely in this
context (Schumpeter, 1961). Since investment in innovations is risky, the entrepreneurs must pay interest
on it. Once the new innovations prove to be more profitable and quite successful, other entrepreneurs
also follow them in ‘swarm like clusters’. Innovations in one field may stimulate innovations in other
allied fields. However, the trend of the expansion of innovations in other firms is never found to be 100%.
5
2.3.
Cyclical Process or Business Cycle
The next component of development according to Schumpeter is the business cycle. To analyze the
business cycle is to analyze the economic process under capitalism. Schumpeter’s approach to business
cycle or crisis is historical, statistical and analytical. He believes that business cycles are not merely the
result of economic factors but also of non-economic factors. Schumpeter concludes that crisis is the
“process by which economic life adapts itself to the new economic conditions” (Schumpeter, 1961).
Bank credit is an essential element of Schumpeter’s model. According to Schumpeter, the creation of
bank credit is assumed to accelerate money incomes and prices in the economy. It creates a cumulative
expansion throughout the economy, with the increase in the purchasing power of the consumers, the
demand for the products increases in relation to supply. The rising prices and high rates of profits
stimulate producers to raise investments by borrowing from the banks.
The secondary wave of credit inflation starts with the entrance of new entrepreneurs in the field of
production which superimposes on the primary wave of innovations. This may be called ’boom’ or
‘prosperity’. Extreme optimism and speculation in business also further enhance prosperity.
During prosperity new products start appearing in the market with the entrance of new entrepreneurs.
These products displace the old ones and thus decrease their demand and in the market. Consequently,
the prices of old products fall, with a view to liquidating their stocks, the old firms start selling their
goods at a low price and hence most of the firms incur losses. Investment declines and unemployment
starts, leading to a fall in the aggregate demand. As the entrepreneurs start repaying bank loans, the
quantity of money in circulation is reduced and prices start falling. Profits too decline and come to zero,
uncertainty and risk increases. A wave of pessimism sweeps the entire economy, boom ends, and phase
of depression starts.
Schumpeter believes in the existence of the long wave of upswings (boom) and downswings
(depression). Once the upswing begins, ultimately, the economic force of recovery comes into operation
and brings about a revival, once again the economies come across new equilibrium, and the new boom
period starts.
6
2.4.
End of Capitalism
Like Karl Marx, Schumpeter also believes that capitalism is self-destructive. He stated, ”there is inherent
in the capitalist system a tendency towards self-destruction, those factors make not only for the
destruction of the capitalist system but for the emergence of socialist civilization” (Schumpeter, 1961).
Schumpeter agrees with the Marxian thesis that capitalism has itself the seeds of its own destruction and
ultimately it will come to an end. The very success of capitalism will bring about its decay.
Three forces are discernible, that are the beginning of the creeping death of capitalism. They are:
1. The decadence of the entrepreneurial function,
2. The disintegration of bourgeoisie family, and
3. The destruction of the institutional framework of the capitalist society.
The tendency towards concentration into big concerns weakens and destroys the twin institutions of
private property and freedom of contract. According to Schumpeter, “capitalism cannot survive; it will
die on its own accord”. It will ultimately give place to socialism”.
3. SCHUMPETERIAN VS. MARXISM AND KEYNESIANISM
3.1.
Who is the Hero?
In political economy, the tragedy is a genre of the “growth” story, which is to be contrasted with the
“equilibrium” story. All equilibrium narratives end in the same place; in equilibrium. Growth stories, in
contrast, are more open-ended, uncertain, and path-dependent. In growth stories, history matters. Even
tragedies, which also end predictably, must tell the beginning first. Thus, political economy’s best-known
growth stories provide a hero (McCraw, 2009).
Adam Smith’s hero was the prudent man. Commercial society depends upon the prudent man, who
behaves virtuously even when it is in his material interest to do otherwise.
Marx, too, wrote in the growth genre. So, even Marx’s determinism – wherein capitalism necessarily
seeds its own destruction – found room for a hero: the radical intellectual. Never mind that the death of
capitalism was preordained: it is the radical intellectual who can pierce the veil of his false consciousness
7
to correctly see the truth of historical inevitability, and it is the radical intellectual who can lead the
vanguard of proletarian revolt (McCraw, 2009).
For John Maynard Keynes, the hero was the economist qua expert. The hero economist sees the folly of
crushing war reparations, and the error of Say’s Law, and urges upon the powerful a new law -- that
prudent monetary and fiscal stimulus can restore traction to aggregate demand temporarily mired in a
liquidity trap (McCraw, 2009).
Schumpeter was not averse to Keynes’ economist-as-hero construct. But Schumpeter thought that
Keynes’ stagnationist ideology provided intellectual cover to those far more hostile to capitalism than
he, and, moreover, that Keynes’ emphasis on the short run invited trouble from governments naturally
inclined to profligacy and incompetence (McCraw, 2009). It was naïve, Schumpeter believed, to hope
that the state would do what its economic experts tell it to do. And, government fecklessness to one side,
what if the experts have got it wrong?
Schumpeter’s hero, of course, was the entrepreneur, “the agent of innovation,” and, Schumpeter said,
“the pivot on which everything turns” (McCraw, 2009).
3.2.
Schumpeter vs. Marx
It is well-known that Schumpeter postulated an “inevitable decomposition of capitalist society”
(Schumpeter, 1942). “Can capitalism survive?” he asked pointedly. “No, I do not think it can”
(Schumpeter, 1942). Capitalism's prospective demise is not perceived to emanate from “its breaking
down under the weight of economic failure ....” Instead, “its very success undermines the social
institutions which protect it, and inevitably creates conditions in which it will not be able to live and
which strongly point to socialism as the heir apparent” (Schumpeter, 1942). In short, the “paradoxical
conclusion” is not the result, but the process: “capitalism is being killed by its achievements”
(Schumpeter, 1942). Popular expositions generally present a sharp dichotomy between the themes of
Marxian contradiction (“capitalism cannot survive because of economic failure”) and Schumpeterian
paradox (“capitalism is being destroyed because of its very creative success”).
The “essential point to grasp” about capitalism, according to Schumpeter, is that it is an “evolutionary
process,” as “was long ago emphasized by Karl Marx.” Capitalism is “by nature a form or method of
8
economic change and not only never is but never can be stationary” (Schumpeter, 1942). This
evolutionary dynamic of capitalist development has three salient characteristics: It comes from within
the economic system and is not merely an adaptation to exogenous changes. It occurs discontinuously
rather than smoothly. It brings qualitative changes or “revolutions,” which fundamentally displace old
equilibria and create radically new conditions. Economic development is ac- companied by growth, i.e.,
sustained increases in national income. As Marx expressed it in the Communist Manifesto the bourgeoisie
“has played a most revolutionary role in history.”
Marx's emphasis on capitalism's creative propensities is rein- forced by the Grundrisse. Capitalism, Marx
argues in this work, destroys the old pre-capitalist economy “and constantly revolutionizes it, tearing
down all the barriers which hem in the development of the forces of production, the expansion of needs,
the all-sided development of production, and the exploitation and exchange of natural and mental forces”
(Marx, 1973). Interestingly, Schumpeter virtually identified his own position on creative destruction in
this sense with that of Marx.
Although the content and emphases are different, the analyses of capitalism's dysfunctional properties in
Marx and Schumpeter share important common elements. For both, capitalism is tremendously creative
and successful. Its dysfunctional propensities, from creative destruction perspective, actually serve as
cause as well as effect of its development process. And whatever its tendencies toward system-decay, it
is not in danger of imminent economic collapse.
Schumpeter's analysis of capitalism's prospects is “not pure economics, of course,” but economics “seen
in a wide context and with a broad historical horizon.” The combination of economic theory, politics,
sociology, and history, which is Schumpeter's “major characteristic” (Stolper, 1979), is strikingly similar
to Marx's endeavor “to unite economic history, sociology and economics in a kind of ménage a trois...”
(Meek, 1967). Furthermore, Schumpeter's vision, like Marx's, contains no timetable. Its constituent
elements, “while everywhere discernible, have as yet nowhere fully revealed themselves.” Superficial
“temporary reverses” on the “surface” may easily mask “the tendency toward another civilization that
slowly works deep down below.” The Schumpeterian outlook, no less than the Marxian one, is a longrun vision in an accounting system in which “a century is a short-run …” (Schumpeter, 1942).
9
In this comparison, we focused exclusively on the vision(s) of capitalism's creatively destructive
properties and preparation for socialism, where parallels between Marx and Schumpeter are strongest.
In ideological commitment, in the details of their respective technical analyses of the behavior of the
capitalist economy, and in their perceptions of the socialist future, differences in perspective are both
clear and significant.
3.3.
Schumpeter vs. Keynes
Both Schumpeter’s Theory of Economic Development and Keynes’ General Theory famous masterpieces
contained problems with classical economics. Keynes explicitly attacks the classical framework (Dillard,
1948), Schumpeter on the other hand implicitly accepts it and uses it as a base to explain his own dynamic
model (Velde, 2001). They both share two different views on how capitalism operates, Keynes believed
government policies are essential to sustain a capitalistic economy (Dillard, 1948). Schumpeter, however,
believed that the process of capitalistic development is initiated by the introduction of new combination
through innovation created by the entrepreneur, backed by the sponsor (Velde, 2001).
Schumpeter disagreed with unchanging production function that Keynes’ based his analysis on in the
General Theory (Smithies, 1951). Schumpeter believed a changing production function is essential to
capitalistic development. In the General Theory, Keynes strongly advocates for government policies and
Schumpeter, like most Austrian economist, disagrees with this assumption. He believed any form of
government intervention would impair capitalistic behavior (Smithies, 1951).
Although both Schumpeter and Keynes theories are primarily concerned with two different things, they
do have similarities in their work. In terms of monetary theory, they both share two common points of
view. First, in contrast to mainstream theory, both state that the diffusion of money induces a radical
modification into the way in which an economy works (Bertocco, 2006). Secondly, they both describe
reasons why money and financial aggregates are not neutral, they highlight the crucial role of the credit
market and the banks (Bertocco, 2006).
10
4. Schumpeter effect vs. refugee effect
Entrepreneurship refers to an individual allocation of human capital that depends upon the economic
situation (Aubry et al., 2015). According to the “refugee” effect, unemployment can lead to new-firm
start-ups, i.e. People who are unemployed choose to create their own job. The “Schumpeter” effect rather
conveys the fact that new-firm start-ups reduce unemployment, i.e. in an entrepreneurial society, most
new jobs are created by new-firm start-ups. Indeed, revealing the causality from new-firm start-ups to
the unemployment rate may reflect the presence of the “Schumpeter” effect while the existence of
causality from the unemployment rate to new-firm start-ups may reflect the existence of the “refugee”
effect.
The analyses of the cross-correlations between these two variables will make it possible to characterize
the effects. Generally, to study the unemployment and new-firm start-ups causalities, one need to
consider a variety of factors such as regional factors, cultural factors, legal factors, political and social
factors, education sustems, even natural resources, workforce availability, etc.
As an example of recent research regarding these causalities, Aubry et al. (2015) tried to study the
influences of new start-ups on growth in its two main dimensions: the regional dimension because
entrepreneurial firms flourish in an ecosystem of innovation which is specific, and the macroeconomic
dimension in order to identify the existence of the “refugee” effect versus the “Schumpeter” effect. They
analyzed the interactions in the short run and long run between regional new-firm formation, Gross
Domestic Product (GDP), and the regional rate of unemployment, in France, during the 1993–2011
period. Their empirical results highlight many interactions between new-firm startups, economic growth
and employment. At the national level, GDP fluctuations are an early indicator of new-firm start-ups. In
the long term, no relationship between GDP and new-firm start-ups could be established. The results
obtained at the national level are confirmed at the regional level, but the “refugee” effect seems to be
dominant at this level.
Several authors have in the past focused their research on the measure of the “refugee” and the
“Schumpeter” effects. Their results are mixed and most of them failed to measure the real dimension of
these two effects because they analyze relationships from a static perspective. Storey (1991) noticed the
ambiguity of the results when some studies argue for the “pull” (i.e. Schumpeter) effect, while other
11
studies support the “push” (i.e. refugee) effect. For example, Evans and Leighton (1989), Acs et al.
(1994) find a “refugee” effect with American data. Storey (1991) finds a mixed effect with American
data as do Tervo and Niittykangas (1994) at the regional level for Finland and Audretsch et al. (2001)
for OECD countries. Audretsch and Acs (1994) consider that new-firm start-ups are positively linked to
GDP but also that unemployment has a positive effect on new-firm start-ups that seems to be
contradictory with their first result. Thurik et al. (2008) reconcile ambiguities by measuring the two
effects using a vector autoregression model. Finally, Koellinger and Thurik (2012), using panel data from
22 OECD countries for the period 1972–2007, demonstrate that new-firm start-ups cause, in the sense of
Granger, macroeconomic cycles at the global level: opportunity motives for new-firm start-ups lead the
cycle by two years at the global level.
Therefore, it can be observed that a large literature trying to ascertain the relationship between
unemployment and entrepreneurship has produced ambiguous results at best. While some studies find a
positive link between unemployment and entrepreneurship (the “refugee” effect), still others find
evidence supporting a negative relationship (the “Schumpeter” effect). Audretsch et al. (2001) study has
attempted to disentangle what is obviously a complex relationship. Based on empirical evidence from
OECD countries for a recent period, the evidence suggests that the relationship between unemployment
and entrepreneurship is, in fact, both negative and positive. Changes in unemployment clearly have a
positive impact on subsequent entrepreneurship.
At the same time, changes in entrepreneurship have a negative impact on subsequent unemployment.
Because these are essentially dynamic inter-temporal relationships, previous studies estimating
contemporaneous relationships have confounded what are essentially two relationships with each
working in the opposite (dynamic) direction (Audretsch et al. (2001)).
5. SCHUMPETERIAN ENTREPRENEUR VS. KIRZNERIAN ENTREPRENEUR
Shane (2003) proposes “the nexus between enterprising individuals and valuable opportunities” as the
general framework to understand entrepreneurship. The individuals who engage in the entrepreneurial
process, are those that identify, perceive as valuable, and exploit opportunities to meet or create new
market demands, or to fulfill existing demands in new ways, by mobilizing and organizing resources in
12
new organizational forms. The existence of a closely connected nexus implies that different individuals
will pursue different types of opportunities through the entrepreneurial process.
Perhaps the most known characterization of opportunities reflects Schumpeter (1934) and Kirzner (1973)
views, generally regarded as antithetic, about the role of the entrepreneur in the process of market
competition. In Schumpeter’s view, the entrepreneur is an innovator and a leader who, by introducing
new combinations in an economic system in equilibrium, temporarily undermines the economic rents
and lives of incumbent firms, leading to a dynamic process of “creative destruction”.
In Kirzner’s view the entrepreneur is an arbitrager who, by being passively alert and in a position to see
opportunities that others do not see, because of specific and unevenly distributed prior knowledge,
exploits imperfections currently existing, or perceived to exist, in the market and, by doing so, through
price adjustments, brings back the system into equilibrium.
Although the identification and exploitation of opportunities is central in many modern theories of
entrepreneurship, empirical investigations of opportunity types are scarce. Several scholars in the
Entrepreneurship and Austrian economics literature have extensively elaborated on the elements that
distinguish Schumpeter and Kirzner’s views.
One major framework is that Shane (2003) propose in summarizing these perspectives into a typology
of entrepreneurial opportunities. Shane identifies five bipolar dimensions to differentiate Schumpeterian
and Kirznerian opportunities: (I) disequilibrating / equilibrating; (II) requires new information / does not
require any new information; (III) very innovative / less innovative; (IV) rare / common; and (V) involves
creation / limited to discovery (Shane 2003).
De Jong and Marsili (2011) empirically explore the distinction between Schumpeterian and Kirznerian
opportunities by analyzing survey data of 184 high tech small business in the Netherlands entrepreneurs
engaging in opportunity exploitation using the framework proposed by Shane (2003).
De Jong and Marsili (2011) outcome supports the view from the opportunity-based entrepreneurship
theory that Schumpeter and Kirzner perspectives are not antithetic but instead represent the variety of
opportunities that can simultaneously be present in the economy; they define a typology of
13
entrepreneurial opportunities. Such reconciliation between the two perspectives is expressed in Kirzner's
(2009) words:
“In spite of the contrast with Schumpeter that I emphasized in 1973, the truth is that my understanding
of the dynamic market process certainly can (and should!) also encompass the consequences of
Schumpeterian entrepreneurship (…) Casual observation surely confirms Schumpeter’s insights into
entrepreneurial creativity (…) Apparently, there must be scope for both a creative entrepreneur (…) and
a passive, alert entrepreneur (…) It seems reasonable to see the full dynamic of the capitalist system as
being the outcome of two distinct kinds of entrepreneur-driven changes” (p. 148-149).
De Jong and Marsili (2011) found that the way individual entrepreneurs perceive opportunities that shape
their business strategy, whether they see them realizing in the future or in present time, contributes to
explain the emergence of Schumpeterian vis-a-vis Kirznerian type of opportunities. Thus, the nature of
opportunities pursued reflects, among other factors, the strategic orientation of the entrepreneur; this is
an element of distinction that Kirzner in more recent writings asserts as fundamental.
Fuethermore, De Jong and Marsili (2011) observe that more creative and pro-active entrepreneurs, who
actively search for innovation, and those that are more strongly oriented towards growing their ventures
to satisfy future needs through proactive product development, are more likely to identify and exploit
Schumpeterian opportunities than Kirznerian opportunities, while individuals with a strategic focus on
the exploitation of present demands are more likely to pursue Kirznerian opportunities. In contrast, the
risk taking propensity of the individual entrepreneur does not seem to matter in our data when it comes
to the nature of the opportunity exploited. With regard to the entrepreneur’s experience, the formal
education of the entrepreneur does not help to predict the type of opportunity exploited, although the
results observed for the entrepreneur’s age could suggest that it is life experience more than formal
education to direct entrepreneurs towards Schumpeterian opportunities as compared to Kirznerian
opportunities.
14
6. Summary
In summary, in this paper it is tried to introduce the Schumpeter’s Theory of Economic Development
and its main features, centered around the entrepreneur and the concept of Creative Destructive, followed
by a brief historical comparison of Schumpeterian theory vs. Marxism and Keynesianism. Then a
multifaceted review and analysis of the researches in 20th and 21st centuries is performed by focusing on
the role and importance of the entrepreneur, entrepreneurship, and their effectiveness in creating
economic growth especially in the capitalist economies. The paper addresses separate phenomena and
topics by comparing the so-called “Schumpeter” effect vs. the “refugee” effect in recent published
researches, as well as the relationship of Schumpeterian and Kirznerian opportunities in modern
entrepreneurship. All of the reviewed papers get to the conclusion that entrepreneurship and creating new
businesses, especially since the great depression, has had positive and significant effect on the economic
growth and disrupting the business cycles, however, there are other factors that affect the
entrepreneurship and/or changes in the business cycles which is one of the main critics of the
Schumpeter’s theory that puts too much emphasize on the role of the entrepreneur to create the growth
singlehandedly.
15
REFERENCES
Acs, Z.J., Audretsch, D.B., & Evans, D.S. (1994). “Why does the self-employment rate vary across countries
and over time?”, C.E.P.R, Discussion Papers.
Aubry, M., Bonnet, J., & Renou-Maissant, P. (2015). “Entrepreneurship and the business cycle: the “Schumpeter”
effect versus the “refugee” effect—a French appraisal based on regional data”, The Annals of Regional
Science, 54(1), 23-55.
Audretsch, D.B., & Acs, Z.J. (1994). “New-firm startups, technology, and macroeconomic fluctuations”,
Small Bus. Econ. 6(6):439–449
Audretsch, D.B., Carree, M.A., & Thurik, A.R. (2001). “Does entrepreneurship reduce Unemployment?”,
Tinbergen Institute Discussion Papers 01–074/3, Tinbergen Institute, revised 24 Oct 2008.
Bertocco, G. (2006). “The Characteristics of a Monetary Economy: a Keynes-Schumpeter Approach”, Cambridge
Journal of Economics, Vol. 31, 101-122.
Croitoru, A. (2012). “Schumpeter, J.A., 1934 (2008), The Theory of Economic Development: An Inquiry into
Profits, Capital, Credit, Interest and the Business Cycle”, Journal of Comparative Research in Anthropology
and Sociology, (2), 137-148.
De Jong, J., & Marsili, O. (2011). “Schumpeterian and Kirznerian opportunities: An empirical investigation of
opportunity types”, Innovation, Strategy, and Structure-Organizations, Institutions, Systems and Regions,
DRUID, 15-17
Dillard, B. (1948). “The Economics of John Maynard Keynes”, London: Crosby Lockwood & Son Ltd.
Evans, D.S., & Leighton, L.S. (1989). “The determinants of changes in US self-employment, 1968–1987”,
Small Bus. Econ. 1(2):111–119.
Hagemann, H. (2003). “Schumpeter’s Early Contributions on Crises Theory and Business-Cycle Theory”, History
of Economic Ideas, XI (1), 47-67.
Koellinger, P.D., & Thurik, A.R. (2012). “Entrepreneurship and the business cycle”, R. Econom. Stat. 94(4):1143–
1156.
Kirzner, I. (1973). “Competition and Entrepreneurship”, Chicago, IL, US: University of Chicago Press.
Kirzner, I.M. (2009). “The Alert and Creative Entrepreneur: A Clarification”, Small Business Economics, 32: 145152.
Legrand, M.D.P., & Hagemann, H. (2017). “Business Cycles, Growth, and Economic Policy: Schumpeter and the
Great Depression”, Journal of the History of Economic Thought, 39(1), 19-33.
16
Marx, K. (1973). “Grundrisse (Introduction to the Critique of Political Economy)”, translated, with a Foreward by
Martin Nicolaus, New York: Vintage.
McCraw, T.K. (2009). ”Prophet of innovation”, Harvard University Press.
Meek, R.L. (1967). “Economics and Ideology and Other Essays”, London: Chapman and Hall.
Schumpeter, J.A. (1934). “The Theory of Economic Development”, Cambridge, MA, US: Harvard University
Press.
Schumpeter, J.A. (1939). “Business Cycles. A Theoretical, Historical and Statistical Analysis of the Capitalist
Process”, 2 Vols., New York: McGraw-Hill.
Schumpeter, J.A. (1942). “Capitalism, Socialism and Democracy”, New York and London: Harper & Brothers,
2nd edition, 1947.
Schumpeter, J.A. (1961). “The Theory of Economic Development: An Inquiry into Profits, Capital, Credit,
Interest, and the Business Cycle” translated from the German by Redvers Opie (1961) New York: OUP.
Shane, S.A. (2003). “A General Theory of Entrepreneurship: The Individual-Opportunity Nexus”, Aldershot, UK:
Edward Elgar.
Smithies, A. (1951). “Schumpeter and Keynes”, The Review of Economic and Statistics, Vol. 33, No.2, 163-169.
Stolper, W. (1979). “Joseph Alois Schumpeter-A Personal Memoir”, Challenge, XXI (Jan. / Feb.), 64-69.
Storey, D.J. (1991). “The birth of new firms—does unemployment matter? A review of the evidence”, Small
Bus. Econ. 3(3):167–178.
Tervo, H., Niittykangas, H. (1994). “The impact of unemployment on new firm formation in Finland”, Int.
Small Bus. J. 13(1):38–53.
Thurik, A.R., Carree, M.A., van Stel, A., & Audretsch, D.B. (2008). “Does self-employment reduce
unemployment?”, J. Bus. Ventur. 23(6):673–686.
Velde, R. (2001). “Schumpeter’s Theory of Economic Development Revised”, Eindhoven Centre for Innovation
Studies.
17
View publication stats