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SchumpeterrS Theory of Economic Development: A Study of the Creative
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Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81
Schumpeter’s Theory of Economic Development:
A Study of the Creative Destruction and
Entrepreneurship Effects on the Economic Growth
Farrokh Emami Langroodi a,*
a
Goethe University Frankfurt, Graduate School of Economics, Finance, & Management (GSEFM), Department
of Finance, Germany
ARTICLE INFO
Article History
Submitted
Accepted
Available online
11 Aug 2021
12 Aug 2021
13 Aug 2021
JEL Classification
A12
B13
B31
B52
Keywords
Schumpeter
Creative Destruction
Capitalism
Kirznerian
Marxism
Keynesianism
Economic Growth
Business Cycle
Entrepreneurship
ABSTRACT
This paper provides a multifaceted review and
analysis of 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 recently published
researches, and finally, the relationship of
Schumpeterian and Kirznerian opportunities in
modern entrepreneurship.
Journal of Insurance and Financial Management
*Corresponding Author:
farrokh.emami@gmail.com
Author(s) retain copyright of the submitted paper (Please view the Copyright Notice of JIFM).
This work is licensed under a Creative Commons Attribution 4.0 International License.
Journal of Insurance and Financial Management (ISSN-Canada: 2371-2112)
Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81
66
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 to 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 isolated and undetermined, but this is not a reason to
explain the economic world through external factors. The Theory of Economic
Development was the 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 is not effaced,
rather Schumpeter succeeded elegantly 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.
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When the original innovator’s profit advantage 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 (50- 60 years) wave cycles. Schumpeter’s desire
for exact economics led him to abandon the uncertainty and complexity of “irregularly
regular” for the false precision of the three-cycle wave theory. Paul Samuelson said that
the book “smacked of Pythagorean moonshine”.
Furthermore, 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. Creative Destruction 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 noninterventionist 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
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2.1.
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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 in time
and the economy is in its stationary state. The circular flow is based upon a state of perfect
competitive economy which is in a 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 a
spontaneous and discontinuous change in the channels of the circular flow, disturbance of
equilibrium which forever
displaces the equilibrium state previously existing”.
Schumpeter's theory of development is the key element of a dynamic process that
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 a 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 to make profits and reduce 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 a dynamic process and those changes come
in the form of innovations. The innovations may consist of the following aspects:
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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 for new markets.
5. The creation of a monopoly or the establishment of a new type of industrial
organization.
Schumpeter, thus, emphasizes 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
The 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
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.
Entrepreneurship is different from the functions of a manager. A manager simply
manages the affairs of an enterprise whereas the entrepreneur also takes a high degree of
risk. The role of an entrepreneur has been glorified by Schumpeter based on 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 risks,
f. Create an environment conducive to the satisfaction of wants as the normal motive,
g. Provide leadership, and
h. Take a high degree of risk in the economic world.
Though Schumpeter has given a comprehensive explanation of the role of the entrepreneur,
it cannot be considered an adequate explanation of the general theory of capitalistic
development. For entrepreneur himself is a product of the social environment, which
compels him to innovate or get eliminated, because of the forces of competition. Despite
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this fact, credit goes to Schumpeter who has emphasized the role of an entrepreneur in
capitalist development.
The entrepreneurs require two things to perform their 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, to
carry out the new inventions, the entrepreneur requires the services of the factors of
production. For this, she 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 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 product 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 in 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%.
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 the business
cycle or crisis is historical, statistical, and
analytical. He believes that business cycles are not merely the result of economic factors
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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 with
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, intending to liquidate 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 increase. 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.
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
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destruction and ultimately it will come to an end. The very success of capitalism will
bring about its decay.
Three noticeable forces 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 pathdependent. In growth stories, history matters. Even tragedies, which also end predictably,
must tell the beginning first. Thus, the 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 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
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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 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 t h e 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 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 accompanied by growth, i.e.,
sustained increases in national income. As Marx expressed it in the Communist Manifesto the
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74
bourgeoisie “has played a most revolutionary role in history.”
Marx's emphasis on capitalism's creative propensities is reinforced 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 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 the cause as well as the 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 long-run vision in an accounting system in which “a century
is a short-run …” (Schumpeter, 1942).
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 their perceptions of the
socialist future, differences in perspective are both clear and significant.
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3.3.
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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 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 a new combination
through innovation created by the entrepreneur, backed by the sponsor (Velde, 2001).
Schumpeter disagreed with the 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
economists, disagrees with this assumption. He believed any form of government
intervention would impair capitalistic behavior (Smithies, 1951).
Although both Schumpeter and Keynes's 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 how 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).
4. SCHUMPETER EFFECT VS. RFEUGEE 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., unemployed people 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.
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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 needs to consider a variety of factors such as regional factors, cultural
factors, legal factors, political and social factors, education systems, 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 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 newfirm 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 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 startups are positively linked to GDP but also that unemployment has a positive effect on newfirm 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
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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
an obviously 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 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
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78
exist, in the market and, by doing so, through price adjustments, brings back the system
into equilibrium.
Although the identification and exploitation of opportunities are 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) proposes 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 businesses
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's
perspectives are not antithetic but instead represent the variety of opportunities that can
simultaneously be present in the economy; they define a typology of 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 explaining the emergence of Schumpeterian vis-avis Kirznerian type of opportunities. Thus, the nature of opportunities pursued reflects,
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Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81
among other factors, the strategic orientation of the entrepreneur; this is an element of
distinction that Kirzner in more recent writings asserts as fundamental. Furthermore, 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. Concerning 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.
6. SUMMARY
In summary, this paper tries to introduce 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 the 20th and 21st centuries are presented by focusing on the role and
importance of the entrepreneur, entrepreneurship, and their effectiveness in creating
economic growth, especially in the capitalist economies. This paper addresses separate
phenomena and topics by comparing the so-called “Schumpeter” effect vs. the
“refugee” effect in recently 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 a positive and significant effect on the
economic growth and disrupting the business cycles, however, other factors 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 emphasis on the role of the entrepreneur to
create the growth singlehandedly.
Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81
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