4.3. dynamic economy

The term "destructive creativity", although not invented by Joseph Schumpeter, actually the term was used for the first time by Werner Sombart, is responsible for the fact that Joseph Schumpeter is known by a greater public. The term is a good example for the role of titles in the marketing of books. If someone want to write a book about economic theory he shouldn't give a name like "Development of economic thinking or something like that. The book should have a title like "Ideas that move the world. The great economic thinkers in their time" o something like that.

It seems that people are fascinated by the idea that a charismatic entrepreneur changes completely the productive structure, although that happens very seldom. Perhaps Bill Gates and Microsoft is an entrepreneur of this kind, or Larry Page and google.

What we see more often is a basic technology, whose inventor is unknown, that leads to an infinitive number of little innovations. We have therefore small qualitative changes in the production structure, although Joseph Schumpeter tries to convince it of the opposite.

There is no doubt that the invention of a combustion engine has a larger impact on economy than a vacuum cleaner, but actually the combustion engine exceeds only quantitavily and qualitativly the vacuum cleaner. It is doubtful, to take another example, whether the smart phone is a "creative destruction" or only a qualitative change of a mobile phone. A tablet is not a "creative destruction" it is just a modification of a laptop computer.

Another problem with his theory is that innovations that comes out of the blue doesn't exist. Before the telephone, existed the telegraph, before the mobil phone existed the telephone, before the smartphone the mobile phone and so on. Most of the innovations nowadays are based on planned and publicly financed research and development. We have entrepreneurs that a more successful than others, but we don't have the creative destructor.

The statement that radical changes in the technological basis originate at the production side and not at the demand side is true, although this is only valid because it is sure that these radical changes in the production structure will be accepted by the market.

The problems of Carl Benz, the inventor of the combustible engine, are due to the fact that his first "car" was not really much efficient than carriage drawn by horses. If he had offered a Tin Lizzy from the very beginning he would had sold it as bread.

If someone succeds in inventing a solar driven Zeppelin, something easier to construct than a solar driven airplane, because less energy is needed and there is more space solar modules, that runs with 100 miles per hour avoiding automatically all kind of obstacles it find on its way and able to find the way from A to B itself for 10 000 dollars for four persons there is no doubt that it will be a success.

Given certain obvious advantages, the possibility to get connected to the internet and use all the services of the internet including voice / video connections, maps, the possibility to take photos and upload them etc. etc. etc. it was obvious that the smartphone is going to be a success once offered at a affordable price. (A nice example by the way for the fact that prices DECREASE with an increase of demand and that the marshallian cross is only true in the short run. In the short run we can abstract from the fix costs, in the long run the fix costs have an impact on the price companies will offer a product.)

The slow penetration of the market of the computers in the 80th was due to the fact that at the beginning nobody really knew what to do with these machines. From the moment on that it was possible to do word processing with theses machines they sold well.

The statement that revolutionaly innovations originate always on the supply side is therefore not completely true. Revolutionary innovations requires always big investments in research and development and these investments are only possible if the acceptance of the market is sure. Beside that, only a successful innovation will become famous and the others not. Therefore Joseph Schumpeter can have the impression, that they originate always on the supply side, because if they fail on the demand side, they never become famous.

At first glance the paragraph below seems to be correct. If one thinks about it, one realises that it is wrong.

Diese spontanen und diskontinuierlichen Veränderungen der Bahnen des Kreislaufs und Verschiebungen des Gleichgewichtszentrums treten in der Sphäre des industriellen und kommerziellen Lebens auf. Nicht in der Sphäre des Bedarfslebens der Konsumenten der Endprodukte. Wo spontane und diskontinuierliche - ruckweise - Veränderungen in den Geschmacksrichtungen dieser letzteren auftreten, liegt eine plötzliche Veränderung der Daten vor, mit denen der Geschäftsmann zu rechnen hat, möglicherweise ein Anlass und eine Gelegenheit für andere als schrittweise Anpassungen seines Verhaltens, aber nicht schon solche andere Erscheinungen selbst.

Joseph Schumpeter, Theorie der wirtschaftlichen Entwicklung, Das Grundphänomen der wirtschaftlichen Entwicklung

These spontaneous and abrupt changes in the course of the circulation and changes of the center of the equilibrium happen in the sphere of the industrial and commercial live, but not in the sphere of the needs of the consumers. If there are spontaneous and discontinuous - abrupt - changes of the tasts of consumers, we have only a change of data a business man has to calculate with. Perhaps they induce more than a pure step by step adaptation of his behaviour, but in no way they have the impact of the changes described before.

We repete: At the end Schumpeter will tell us something new and almost true about the function of money, but the bigger part of book illustrates a well known phenomenon. People have a certain theory about reality and what doesn't fit with their concept about reality is silently ignored.

The second thing we will see in the next paragraph is that people in general have serious problems to detache themselves from basic concepts they learned in their youth. For Jospeph Schumpeter it is completely unthinkable that the resources needed by the charismatic and destructive-creative leader and entrepreneur can come from resources which are not in use, because he can't immagine that there are resources unemployed. The charismatic leader can therefore only use resources already employed in a different way, something only possible, if they pay them more than what they have earned before.

He wants to tell us, to illustrate that with an example, that smartphones can only be produced at the expense of saussages and houses.

It is impressive to see, a similar case is Karl Marx, how fixed notions about reality impedes to see reality how it actually is even if the contradictions are visible with the naked eye.

In nur teilweisem Zusammenhang mit diesem Moment ist zweitens zu beachten, dass wir uns die Durchsetzung der neuen Kombination und das Entstehen ihrer Verkörperungen grundsätzlich niemals so vorzustellen haben, wie wenn sie ungenützte Produktionmittel in sich vereinigen. Es kann wohl sein und es wird dann als fördernder Umstand, also günstige Bedingung und selbst als Anlass der Durchdringung neuer Kombinationen erscheinen, dass gelegentlich arbeitslose Arbeitsmassen vorhanden sind, aber Arbeitslosigkeit in großem Ausmaß ist nur Folge welthistorischer Ereignisse - wie z.B. des Weltkrieges - oder eben der Entwicklung, die wir untersuchen. In keinem von beiden Fällen kann ihr Vorhandensein eine Rolle bei der prinzipiellen Erklärung spielen und in einem ausbalancierten normalen Kreislauf kann es sie nicht geben.

Joseph Schumpeter, Theorie der wirtschaftlichen Entwicklung, Das Grundphänomen der wirtschaftlichen Entwicklung

There is a second phenomenon, only in part related to the first one, that we have to take into account. We never should believe that the imposition of a new combination [a change in the production structure] happens by using means of production that were idle until this moment. It may be a beneficial circumstance and a favorable condition for the implementation of new combinations that sometimes masses of unemployed people are available, but umemployment in a large extent can only be the result of historical events - as for instance a world war - or due to the development we are analysing. In both cases their existence can play a role in the explanation of the issues we are discussing and in a normal balanced cycle unemployment can't exist.

The statement that in a balanced, normal economy unemployment is inexistent is true, but the the problem is, that most of the time it is not balanced. What Joseph Schumpeter actually wants to say is that in a market economy at least in the long run there is no unemployment.

The fact that he ignores completely reality is nothing really stunning. That's normal for economists. Even in an acute hunger crisis in Bangladesh they will tell us that that there is a equilibrium in Bangladesh, what is even be true. Those who are willing and able the price for rice bought rice and those who are willing to sell it for this price has sold it. The rest has starved, but this has no impact on the equilibrium.

The first edition of "Theory of economic development" appearead in 1911. The quote above is taken from the edition of 1934, in other words after the crisis of 1929 in other words after the crises that shaked the whole world, lead to a dramatic increase of unemployment and destabilised politicaly most countries of the western hemisphere. That was no problem for Joseph Schumpeter. Unemployment is impossible and even unthinkable.

Concerning the crises of 1929 can't explained either by historical events, because this crises originated in the financial sphere and proved that market economies are actually instable and let alone they don't get back on track.

But even if we say that Joseph Schumpeter was to lazy to revise the edition of 1934, the statement is strange. Unemployment was a phenomenon extensively discussed in public debate and in economics long before 1911.

While the crises of the nineteen-thirties induced Keynes to refute basic classical and neoclassical concepts and to elaborate a theory that explains better what actually happens, Joseph Schumpeter took the heroic decision to simply ignore the facts of reality. This is a typical behaviour of academic economists, who were not paid to resolve concrete problems and have no incentive to do that.

Actually there is only one concept in the whole theory of Joseph Schumpeter that contains at least a kernel of truth. He was aware that not the owner of capital decides how the resources are used, but the one who has access to credits and these credits don't rely necessarily on prior savings. The banking system can create credits out of nothing.

[If someone gets his wage, lets say 3000 dollar at the beginning of the month and he spends each day 100 dollar, we assume that for the sake of simplicity, a more realistic assumption wouldn't change the logic, he has on average 1500 dollars on his bank account and that money the banks can use to grant credits. If millions of people behave the same way, the banking system can grant almost any amount of credit and there is no prior saving needed. For a more detailed discussion see interest rates.]

The fact that prior savings are not needed overthrows the whole classic and neoclassical theory including, by the way, the theory of the exchange value. In classical and neoclassical theory it is necessary that the added surplus of labour is materialised before in a commodity. By selling this commodity the "capitalist" gets this added surplus in its most liquid form, in a form than can be used for any purpose, in other words in money. If this money however can be generated without labour, the theory of exchange value doesn't make sense any more. The capitalists are not expropriated by the working class, but by the banking system and contrary to what Karl Marx assumed, there is no historical process needed to do that.

Only Keynes in the General Theory of Employment, Interest and Money draw all the consecuences of this fact, see the little book downloadable from the startsite of this website. That is possibly due to the fact that Keynes didn't depend from a job as an academic teacher. The problem is not only that savings ar not needed for investments, that the famous equation savings = investments is only true EX POST, but not EX ANTE, the problem is that in a situation of unemployment savings are even harmful. Any investment that is able to pay back the loan, is useful. The only condition is that the money created at the moment the loan is granted must be destroyed afterwards when the loan is paid back. That means that it is enough that the interest raste covers the administration costs of the banks and the risk, see interest rate.

However Schumpeter assumes full employement and undert the condition of full employement credit can be generated "out of nothing" as well, but in this situation it is not useful, and the schumpeterian logic leads to inflation, as he himselfs admits.

However the Schumpeterian logic is wrong. He assumes that the charismatic and creative - destructive entrepreneur has to pay higher interest rate than his competitors in order to get a loan and higher prices for the needed resources, for instance qualified labour, because the workmen will always work for hin, he assumes that they have a job, if he pays higher wages. All that together leads to inflation. This is not completely wrong, although in practise central banks tend to increase the interest rates in this case in order to avoid an overheating of the economy.

Actually in a situation of full employment it can be doubted that it is a good idea to finance investments with credit generated by the bank system and in general the central banks will not allow to let that happen. They will increase the interest rates or reduce the amount of money. That will induce people to save more and more savings means less consumption and less production of consumer products. The resources released in the consumption sector can than be used to produce capital goods.

In other words, the theory of Schumpeter, investments are financed with credits generated by the banking system without prior savings, saving defined of not consumed income of the past, is only true in a situation of UNEMPLOYEMENT, a phenomenon he explicetely declares inexistent.

In the case of full employment, investments will automatically be financed by savings in the classical meaning, not consumed income of the past. If interest rates raises, savings will increase, because it becomes more attractive to save money. That will lead to a reduction of consumption and to a release of productive factors that can than be used otherwise.

To summarise that: If we talk about credit financed investments, investments financed with money generated by the banking system, we have to distinguish very carefully between a situation of unemployment and a situation of full employment. The impact on savings, the consequences of savings, the impact on interest rates, the way interest rates should be interpreted, as a price for money fixed by the central bank or as a price in the sense of a market economy, the impact on inflation etc. etc. is completely different depending on the situation.

Keynes called his theory a GENERAL Theory of Employment, Interest and Money because he describes with a coherent logic both cases, the situation of unemployment and the situation of full employment. Most of the errors in economic thinking is due to the fact that people don't distinguish clearly between these two very different situations. For a more detailed discussion see interest rates.

Joseph Schumpeter, for whatever reason, assumes full employment. In this situation the credit serves to reallocate resources. What he describes, the elimination of companies due to a radical change is a truism. It is true that sometimes entire companies disappear because they are not aware that a radical change is happening. IBM and Nixdorf focused on mainframe computing but didn't realised that the business are the PCs and that PCs became as powerful than a former mainframe computer. IBM became irrelevant (Nixdorf disappeared) and was eliminated by Microsoft. Nokia and Motorola didn't realise the impact of smartphones and were elimininated by Apple, Samsung, HTC etc.. However this is not always true and especially it is not necessarily like that. New technologies for instance in medicine will not eliminate existing technologies. They will simply allow to cure some illnesses that couldn't be cured before. Improvements in the solar technology or wind power plants can make this technology affordable in underdevelopped countries and promote a general growth. It is thinkable as well that in the future it will be possible to stop the spread of the deserts with genetic manipulated plants. The internet is a problem for publishers of all kind in developped countries, because nobody will pay 20 dollars for a book he can get on the kindle for 1 dollar. For underdevelopped countries the situation is different. There are no publishers, because people can't pay 20 dollars for a book. In this case the internet allows a spread of knowledge, because the can get access to knowledge for free. Reality is much more complex than Schumpeter assumed.

Based on the creative destruction Schumpeter developped a business cycle theory. This is not very convincing. Creativity can as well destroy a problem and resolve it. In this case the secondary effects he describes don't happen.

In der Regel muss die neue Kombination die Produktionsmittel irgendwelchen anderen Kombinationen entziehen - und aus den erwähnten Gründen können wir sagen, dass sie das grundsätzlich immer tut. Auch das löst, wie wir sehen werden, insbesondere für den Konjunkturverlauf wichtige Folgen aus, und ist eine zweite Form des Niederkonkurrierens alter Betriebe. Die Durchsetzung neuer Kombinationen bedeutet also - was eine zweite Definition von Form und Inhalt der Entwicklung in unserem Sinne abgeben könnte - Andersverwendung des Produktionsmittelapparates der Volkswirtschaft.

Joseph Schumpeter, Theorie der wirtschaftlichen Entwicklung, Das Grundphänomen der wirtschaftlichen Entwicklung

In general a new combination [actually he means change in the production structure] of the means of production has to be withdrawn from other combinations - and for the reasons mentioned before [full employment] we can say that this always happens. This has, as we will see later on, consecuences for the business cycle and is another reason for the disappearance of established companies. The imposition of new combinations means - this is a second defintion of the content and development of what we say - that the means of production of an economy are used in a different form.

The credit, wherever it comes from give, is used by the charismatic and creative-destructive entrepreneur to attract the means of resources he needs and to withdraw them from the previous use. In other words: A company can employe the credit to pay higher wages to, for instance, an engineer and induce him to dismiss from his former job and work on the project of the creative-destructive entrepreneur. This is, following Schumpeter, the difference between a revolutionary innovation and a slow improvement of the production structure that happens in a static economy.

It is doubtful that this really happens. Even in the case of a change in the production structure that has a very strong impact on the whole economy, as for instance the internet, people will adapt their skills very quickly to the new requirements. Depending on the efficiency of the formal and informal educations system, it can happen that there exists unemployed skilled labour even at that level.

Another problem with the theory of Schumpeter is, that very often the competing companies are able to adapt themselves very quickly. The ability to concentrate fruit juice in vacuum an transport juice over long distances allows nowadays to buy orange juice everywhere at any time at relatively low prices. However this technique was adopted very quickly by all the producers of juice and therefore the effect described by Schumpeter didn't happen.

Beside that it is unclear if this innovative technique is revolutionary in the sense of Joseph Schumpeter or still belongs to the static economy.

The author would say, that the charismatic creative - destructive entrepreneur, a single person that changed the fondamentally the whole production structure, doesn't exist. In the course of history we saw techniques that changed the world, steam engine, electricity, telefon, aircrafts, computers etc. etc.. but thousands if not millons of little charismatic creative - destructive entrepreneur used these techniques for thousands if not millons different purposes.

To put it short: The idea of the creative destruction is meaningless, the expression as famous as vague and the description of this figure by Joseph Schumpeter, see below, is kind of layman's psycholgoy. Perhaps an interesting figure in a novel, but nothing a cycle business theory could be based on.

However we have to admit that Schumpeter introduced a very important figure in the market economy which is completely absent in economic thinking, especially in the neoclassical theory: the entrepreneur.

In neoclassical theory the resources are automatically allocated in an optimal way by the "foreces of the market" and "economic laws". They are steered by the "economic laws" in such a clear way as the planets follow their course steered by the law of physics. There is no human decision making needed. Human decision making would even be negative, because it could impede the "economic laws" from working correctly, see methological approach.

Joseph Schumpeter constructed, see below, a whole business cycle theory on the speficic psychology of the charismatic and creative - destructive entrepreneur. That perhaps too much entrepreneur, but it is better than a theory where there is no human decision making necessary.

In the ordoliberalism we have an entrepreneur, but this entrepreneur resemble more to a driver of a car in the traffic. He reacts on the street signs and the traffic light, that means that he respects some rules if he goes from A to B, but no more bridges and roads are constructed in this economy. The really dynamic part of the economy is not addressed in this line of thinking either.

Without any doubt the theory of Schumpeter is meritory and should be introduced in academic teaching, where it is completely excluded today.

However his explanations for the fact that the charismatic creative - destructive leader always show up in swarms and never isolated is wrong.

Warum treten die Unternehmer nicht kontinuierlich, in jedem Augenblick also vereinzelt, sondern scharenweise auf? Ausschließlich deshalb, weil das Auftreten eines oder einiger Unternehmer das Auftreten anderer erleichtert und eben dadurch bewirkt. Das heißt erstens: Aus den im II. Kapitel auseinandergesetzten Gründen ist das "Durchsetzen neuer Kombinationen" schwer und nur Leuten mit bestimmten Eigenschaften zugänglich, wie man am besten sieht, wenn man sich Beispiele aus früheren Zeiten vergegenwärtigt oder die wirtschaftliche Lage in dem Stadium, das einer entwicklungslosen Wirtschaft am meisten ähnelt, in dem Stadium fortgeschrittener Stockung vergleicht. Nur wenige Leute haben diese "Führereignungen" und nur wenige können in einer solchen Lage, d.h. einer Lage, die nicht schon selbst "Aufschwung" ist, in dieser Richtung Erfolg haben. Wenn aber Einer oder Einige mit Erfolg vorangegangen sind, so fallen manche jener Schwierigkeiten weg.

aus: Joseph Schumpeter, Theorie der wirtschaftlichen Entwicklung, Der Zyklus der Konjunktur

Why the entrepreneur don't show up continuously, in other words in a sporadic way at any moment, but in swarms? The can only be explained by the fact that the appareance of one or several of them simplifies the appearence of others and causes therefore the appearence of the later. This means: Due to the reasons mentioned in chapter II it is difficult to impose new combinations and only possible for people with certain characteristics as it is easy to see by observing examples of the past or the economic situation that most resembles to an economy without any development, an economy in stagnation. Only few people have the required characteristics of leadership and only few can in such a situation, in a situation where there is no upturn, be successful in this sense. But if one or some has preceded successfully, some of the hindrances vanished.

Beside the fact that we don't know exactly what distinguishes his entrepreneur from a normal entrepreneur and that it is therefore imposible to say if they show up continuously or not the explanation is much simpler.

Basic technologies, for instance in the field of molecular biology, have a strong impact on many fields, medicine, agriculture, criminalistics, livestock farming, pharmaceutics etc. etc.. and we will therefore see a lot of start ups who realised different kind of projects based on the same technology.

There is no doubt that very often we see on the internet that a business modell is just a copy of an already existing modell, in other words that companies just repeat what someone else has done before, something less risky than doing it for the first time, but we can't generalise this fact.

His conception of the entrepreneur would be well suited for a novel, it is somehow romantic, what explains that the term creative destruction has become so famous. The problem is, that constructed a whole business cycle theory based on this figure.

Beside that it is unclear how this romantic figure, who by definition of Joseph Schumpeter doesn't posssess any fortune can convince the banks to lend him money or to grant him a loan. Banks fear risks as the devil the holy water what has led to the situation that really innovative and risky business modells are financed by venture capitals. Banks become more and more irrelevant. Without securities the romantic entrepreneur will be taken for a dreamer and will get no money at all, at least from the banks.

We don't say that his description of the charismatic creative - destructive entrepreneur is completely wrong, in other words that figure like that doesn't exist. However ever it is doubtful that this is a description of the typical entrepreneur or that this description can be generalised.

Furthermore it is no problem to add any amount of other possible characteristics. Most people for instance will always found a reason why something is not going to work. The reader can test that, by asking people what they think about that idea. (Let's assume that this is tecnically possible. The point is not whether it is a good idea or not. the point is, that most people will focus on the reasons why that is not going to work and very, very few will spontaneously follow the idea and extend it.)

For some people it would be helpfull if they got informed about the amount of calories they have in their cups. That would allow them to calculate the amount of calories they drink. If the reader of this text asks people what they think about this idea, he will get two kind of answers. The first answer is, that if it were a good idea, it would exist already and the other answer is, in case that it exists already, that this is not going to work, because it exists already.

[The author of these lines worked a while as a teacher for marketing and he asked his students about their opinion about different kind of ideas. Some examples seemed absurd at first glance, but existed and were successful. Something the students didn't know. An example for instance is a refrigerator with a stunning and practical interieur or a paste to repair heels.]

Entrepreneurs in general earn their money by changing things. More than other people they are therefore interested in find reasons why something can work instead of looking for reasons why it is not going to work. Things that are not going to work are not very interesting from a financial perspective. An entrepreneur will look for possibilities to overcome problems.

For a similar reason they have a tendency to question the way things are done. If everything works fine, as most people assume, there are little opportunities for business.

A second possible charakteristic of an entrepreneur is their obsession. Entrepreneurs are very often obsessed by resolving a certain problem. There is strong identification with what they are doing and sometimes they are not even very interested in getting rich. In this sense an entrepreneur can ressemble to a scientist.

Of course the opposite exists as well. There are entrepreneur who would just sell anything in order to make money. They don't care if they sell cars, insurances or potatoe chips, while other entrepreneurs only leave their bed in the morning if they believe they are working on a project that can save the entire world.

To put it short: Some entrepreneurs have the some motivation as just any criminal, getting rich quickly, although they try to achieve this goal in al legal way. Others are motivated by the project itself. They are more like a scientiest or an artist.

The description of Joseph Schumpeter in any case seems to come out from a novel and is nothing that can be generalised.

Die speziell „unternehmerische“ Art von privater Führerschaft im Wirtschaftsleben ist gefärbt und geformt – sowohl dem Verhalten als auch dem Typus nach – von ihren besonderen Bedingungen. Die Bedeutung der „Autorität“ fehlt nicht, gilt es doch oft soziale Widerstände zu überwinden und „Beziehungen“ zu erobern und Belastungsproben auszusetzen. Aber sie ist geringer insofern, als es einer „Befehlsgewalt“ über die Produktionsmittel nicht bedarf und das Mitziehen der andern Berufsgenossen zwar immer eine sehr wichtige Folge des Beispiels und Erklärungsgrund wesentlicher Erscheinungen, aber oft nicht zum individuellen Erfolg nötig – im Gegenteil ihm abträglich und vom Unternehmer nicht gewünscht – ist und ohne darauf gerichtetes Tun eintritt. Hingegen ist die Bedeutung jener besonderen Vereinigung von Schärfe und Enge des Gesichtskreises und der Fähigkeit zum Alleingehen um so größer. Und das entscheidet auch über den Typus. Ihm fehlt aller äußere Glanz, wie er bei andern Arten von Führerschaft dadurch gegeben ist, daß gehobene Organstellung die Voraussetzung ihrer Ausübung ist. Ihm fehlt aller persönliche Glanz, wie er bei vielen andern Arten von Führerschaft gegeben sein muß, bei jenen, wo durch „Persönlichkeit“ oder Geltung in einem kritischen sozialen Kreis geführt wird. Seine Aufgabe ist sehr speziell: wer sie lösen kann, braucht in jeder andern Beziehung weder intelligent noch sonst interessant, kultiviert oder in irgendeinem Sinn „hochstehend“ zu sein, kann selbst lächerlich wirken in den sozialen Positionen, in die ihn sein Erfolg ex post stellt. Er ist typisch – dem Wesen nach, aber außerdem (was nicht zusammenzufallen brauchte) historisch –, Emporkömmling und traditionslos, daher oft unsicher, anpassend, ängstlich – alles andere als ein Führer – außerhalb seines Bureaus. Er ist der Revolutionär der Wirtschaft – und der unfreiwillige Pionier sozialer und politischer Revolution –, und seine eignen Genossen verleugnen ihn, wenn sie um einen Schritt weiter sind, so daß er mitunter im Kreis etablierter Industrieller nicht rezipiert ist. In allen diesen Punkten gibt es Analogien mit Führertypen andrer Art. Aber keine dieser erregt so viel Aufsehen und, aus den verschiedensten Gründen, abfällige Kritik.

aus: Joseph Schumpeter, Theorie der wirtschaftlichen Entwicklung, Das Grundphänomen der wirtschaftlichen Entwicklung

The special typ of entrepreneurship in business live is dyed and formed - concerning the behaviour and the type - by its special conditions. "Authority" plays a role, because resistance has to be overcome and "relationships" has to be established and kept alive even in situations of pressure. But authority is less relevant because there is no need to "command" the means of production and it is more important to convince the colleagues by example and authority is not necessary for success, is even harmful and not desired by the entrepreneur and exists without really be desired. However this special mixture of focusing on details and narrowing of the perspective together with the ability to follow his own way is crucial. All kind of exterior glamour we know from other kind of leadership, where it derived from the position in the organisation, is missing. The glamour we know from other kind of leadership where it is important to convince by ones "personality" a crtain critical social circle is missing. His task is very special and in order to perform it there is no need to be intelligent in other spheres or interesting, well educated or to be "superior" in any other way. It is even possible to be ridiculous in the social position he was brought to by his success. Typically - concerning his character or historically (to issues not necessarily connected) - he is not a leader outside his office. He is a revolutionary of the economy - and the involuntary pionier of social and political revolution - and his own colleagues will deny him if they are one step further so that very often he is not accepted in the circle of well established industrial leaders. Concerning all this points there are analogies to leaders in other fields, but none of these cause such a stir and generates, for different reasons, such amount of dismissive critique.

Perhaps Schumpeter had someone special in mind and the paragraph describes Schumpeters phantasies about this person, but a general description of an entrepreneur or a special kind of an entrepreneur it is just nonsense, especially because the crucial characteristic is missing. Someone who really induces a change in the fundamental production structure needs a very good understanding of the industry he is working in. It is possible to be the manager of Boeing Industries without any clue about aircrafts, but it is not possible to start an aircraft company without having a very detailed knowledge about aircrafts.

Perhaps the expression "this special mixture of focusing on details and narrowing of the perspective" referes to competence on a certain field, but the expression is so vague and obscure, that it can be understood in just any way.

We assume that Schumpeter never really founded a company and that he had no real working experience beside of his short time in the bank that went bankrupt. This is something he shares with all his academic colleagues.

His whole theory about the business cycle, see below, is based on the psychology of the his charismatic creative - desctructive entrepreneur. This is a very instable basis.

Nobody knows really who innovation and technological progress happens and especially how it can be improved. It is quite obvious that the formal and informal education system play a role and governmental investments in research and development. It is very plausible that clusters plays a role as well. If we have in a certain region a lot of high tech companies, for instance the silicon valley in the United States or regions like Stuttgart and München in Germany, more and more companies will concentrate around them. Beside that a certain complexity is needed for training on the job. That means that developping countries should focus on creating some industrial centers on things they can do well instead of just doing anything.

It doen't make a lot of sense to analyse the theory of Schumpeter mor in detail, especially because 12 year after he will say good bye to his romantic entrepreneur and underline the importance of the institutional framework.

Nevertheless Joseph Schumpeter is an important figure. He was completely aware that neoclassical theory, especially Léon Walras, is about static equilibrium and that analysing static equilibriums doesn't allow us any insights in what actually happens in a market economy, see markets where products are only changed, but not produced.

[We put aside the fact that Joseph Schumpeter assumes that the classical theory is static. That's actually not true or in any case less than the neoclassical theory, see static economy.]

We have always advocated for considering economics as a transversal science, see for instance preliminaries. We can indeed say that psychology plays an important role in economic development. A lack of entrepreneurial personalities for instance can be a problem. Perhaps it would be a good idea to talk about these issue at school. Therefore the approach of Joseph Schumpeter is a good beginning. However if we talk about psychology in the economic context a framework of study is needed and a way to test the results against empirical data. This is not the case concerning the theory of Joseph Schumpeter. His "insights" are obtained in a more or less "intuitive" way.

[Obviously there are thousands of website trying to define the characteristics of entrepreneurs, this is one 10 Personality Traits Every Successful Entrepreneur Has. However all this statements are as "intuitively" obtained as the charismatic creative destructor of Schumpeter. On characteristic for instance is always missing. A successful entrepreneur has to have a lot of luck. All this websites mentiones willing to take risks as a crucial characteristics of an entrepreneur. The author would say that a successful entrepreneur finds out how the market works without taking too much risks. This is called intelligence.]

[By the way: There is really a dramatic difference between the english speaking internet and the german speaking internet concerning this issues. In the english speaking internet the entrepreneur is looked at in a positive way and very often entrepreneurs are described as "burning" for their ideas and motivated by none monetary goals. In the german speaking internet the entrepreneur is conceived negatively. Either as someone unscrupoulos or as someone who didn't find a job. It seems that Germany or even Europe has a problem concerning this issue.]

Most of the studies dealing with entrepreneurship focus on the psychology of the entrepreneur. This is not a scientific framework the topic can be discussed with. The existence or non-existence of entrepreneurs depends on the interactivity between the social conditions and the individuum. Discussing the entrepreneur as a standalone system is almost as useful as analysing equilibriums.

To be successful the entrepreneur needs complex teams and if the needed skilled labour is available or not on the market, doesn't depend on him. Furthermore he depends on the possibilities to get credits in whatever ways: by banks, by venture capital, by crowdfunding, by borrowing money from individuals and so on. Last not least he needs the infrastructure and purchasing power.

Developing countries are therefore confronted with two contrasting tendencies. At one side it is easier in highly industrialised countries to impose an innovation, although competition is much higher and the markets are saturated. At the other side developing countries can just copy existing business modells. In theory we could have a win / win situation through a transfer of know how, but reality shows that this doesn't happen. Institutional investors prefer to lend money to governments or to speculate with it on the stock market instead of investing it in a productive way. It seems that they are overhelmed by the complexity of real investments.

From today's perspective, after Keynes had developed a complete theory of the money market, something not to confuse with the market for capital, that derives in the classical logic from not consumed income of the past, the schumpeterian theory doesn't seem very spectacular. From a historical point of view it presents a break with the classical and neoclassical theory, although Schumpeter, similar to Adam Smith and David Hume, see balance of payment, was not fully aware of the consequences.

If money, or purchase power as he calls it, is not covered by fortune, by production of the past, that's what classical theory assumes, if it can be created out of nothng and added to the already existing purchase power, the interest rate is no longer a price in the sense of a market economy, see interest rates. The interest rate is no longer a price that balances savings and investments, but a simple hindrance for investments and there is no reason for not activating idle resources with this extra purchasing power under the condition that the loan is paid back. With the extra purchasing power it is possible to reallocate resources, as Schumpeter stated, but also to activate unemployed resources. However he assumed that unemployment never exists and there is therefore no need to resolve this problem.

Schumpeter realised that from the moment on that money has the same function as "capital", a term never really defined in classical and neoclassical theory and defined in an absurd way in marxist theory, the "capitalist" is dethroned. The private banking system or the central banks can create in one night more purchasing power than all the capitalists together in one year. It is only necessary that this purchasing power is backed by a productive potential high enough to absorbe this money. The value of money derived from the future, not from the past.

The banking system doesn't "deal" with "purchasing power", in other words it doesn't collects saving and redistribute it to investors, it produces purchasing power. To put it more straightforward: It is true that the actual savings as well as the money earned by depreciation is parked on the bank account, but banks can also generate money. It is therefore not the "capitalist" who decides how the resources are going to used, but the banks. This is even more true, if we take into account the "capitalist" is described in the classical / neoclassical theory and in marxism. The "capitalist" is not an entrepreneur, the only thing that distinguishes him from the rest of human beings is the fact that he has capital. He lacks therefore the necessary knowledge to invest money.

Der Bankier ist also nicht so sehr und nicht in erster Linie Zwischenhändler mit der Ware "Kaufkraft", sondern vor allem Produzent dieser Ware. Da aber heute normalerweise auch alle Rücklagen und Sparfonds bei ihm zusammenfließen und sich das Gesamtangebot sei es vorhandener, sei es zu schaffender freier Kaufkraft bei ihm konzentriert, so hat er gleichsam den privaten Kapitalisten ersetzt oder entmündigt, ist er selbst der Kapitalist geworden. Er steht zwischen jenen, die neue Kombinationen durchsetzen wollen und den Besitzern von Produktionsmitteln. Er ist im Kerne eine Erscheinung der Entwicklung, allerdings nur dort, wo keine Befehlsgewalt den sozialen Wirtschaftsprozess leitet. Er ermöglicht die Durchsetzung der neuen Kombinationen, stellt gleichsam im Namen der Volkswirtschaft die Vollmacht aus, sie durchzuführen. Er ist der Ephor der Verkehrswirtschaft.

Joseph Schumpeter, Theorie der wirtschaftlichen Entwicklung, Das Grundphänomen der wirtschaftlichen Entwicklung

The banker is therefore less a trader of the merchandise "purchasing power" but most of all a producer of this merchandise. But due to the fact that today all reserves and funds are kept deposited in the banks and the total supply of existing as well the purchasing power created is concentrated on banks the banker has substituted the private capitalist and has become a capitalist himself. He stands in between those aiming to impose new combinations and the owners of the means of production. He is a figure of development, however only in the case, that the economy is not steered by orders. He allows the enforcement of new combinations, in the name of the economy he issues the authorization to realise it. He is the ephor (public employee in ancient Greece) of a market economy.

Given the fact that the savings of the people are in general not high enough to be invested on their own account and beside that in general people are not able to invest directly, beside in houses, it is obviously true that the money is kept on the bank account.

A big part of the savings are the result of write-offs. If a company buys a machine for 100 000 dollars and this machine has to be substituted in ten years, they will write off every year 10 000 dollars. That has the effect that its earnings are reduced and that they don't pay taxes for these 10 000 dollars. In order to be able to substitute the machine in ten years it has to save this 10 000 dollars and in average there are 5000 dollars on the bank account that the bank can use that money to grant credits to other companies.

There is no doubt that banks are "traders" of "purchase power", to stick with the somehow strange terms of Schumpeter, but this is a function that is perfectly compatible with the classical and neoclassical concept of capital as not consumed income of the past.

What can actually be said is, that even if banks are only "traders" of "purchase power" they decide how the resources are allocated. Classical and neoclassical theory assumes that "capital" moves alone steered by the invisible hand of the market to the best and most profitable use. There is no need to mention that in practice things are a little bit more complicated. A bank manager decides how the "purchase power" is used and he is less interested in the theoretically most profitable use, but in securities. Banks grant loans to the entrepreneurs that can offer them the best securities and not to the company who has the most interesting business concept. The "invisible hand of the market" is true as a tendency, but it is to assume that a lot of very profitable investments are not realised due to a lack of securities.

That the banking system is the "producer" of "purchase power", that the banking system or the central bank can create money itself, is not compatible with classic and neolclassical theory or to be more precise, these theories assumes that any "purchase power" that is not the result of not consumed income of the past leads to inflatioon. For a more detailed discussion see interest rates.

The logic behind is simple. If a bank knows that their clients only withdraw part of their balance in cash they can borrow the rest. Another possibility, there are a lot of others, is the hypothecation of financial assets by the central banks. In both cases they extend the amount of circulating money or purchase power as Schumpeter calls it.

That means that the charismatic creative destructor can get "purchasing power" that nobody has "saved" before in the classical sense of the term and with that money he can reallocate resources, for instance hire the engeeners formerly employed by the classical capitalist.

This sounds very strange to a lot of people and some people never understand that, although an increase in the amout of money is a necessary condition for an increase in national income. Always. This becomes more evident if we look at the quantity theory of money.

Q * P = M * U

with Q real national income (the income evaluated with the price level of an arbitrarily chosen period), P = the increase of the price level happened between now and the arbitrarily chosen period, M = the amount of money, U = the circualation speed of money (the times a coin goes from one hand to the other)

If we increase Q without increasing M the prices has to fall. That is something that never happens and very hard to imagine how that could happen in practice. (The supplier would have to lower the prices in order that the consumers save money, that they bring to the banks who grant credits with this money. Hard to see why the suppliers should do that.)

Another possibility would be that U increases, but it is hard to see why that should happen, unless we don't interprete an increase of U as a decrease of the deposits of the banks. That make work for a while, but contradicts the classical theory anyway, because it assumes that there is no money not used and therefore deposits can't decrease because they are already zero.

Q can therefore only increase if the amount of money has increased. First we have an increase in the amount of money and AFTERWARDS an increase in the national income.

The only way to circumvent this problem is by substituting old machines which more powerfull new ones at the same price than the old ones and that is something that actually happens. Every time a company substitutes their old computers by a new one for example they increase their productivity, because a new computer, although the price is the same, is more efficient than the old one.

The equation credit = savings, the idea that credits can only be granted if someone has saved money before, is therefore wrong.

What Schumpeter didn't do is to draw from this a obvious conclusion. The classical theory, especially Adam Smith and David Ricardo but also Karl Marx, assumed that capital is needed to employ more workers. In other words, in order to get to full employment, savings are needed. If "purchase power", "money" or "capital" can be generated by the banking system, this is no longer needed. Theoretically all the labour available can be employed immediately. The real problem is another one: It is not so easy as the classical theory and Karl Marx assumed to use all this labour in a productive way, in other words in a way that the result of this labour allows to pay back the credit and eliminate the money that was created at the moment the credit was granted. Schumpeter assumes full employment and therefore this problem cannot be resolved that way, because following the logic of Schumpeter it doesn't exist.

Both, Schumpeter and Keynes, distinguishes clearly between the capital market and the money market. The last one explicetely and the first on implicetely, the perspective however is completely different.

For Keynes an increase in the amount of money, or more precisely lowering the interest rates, can reduce unemployment, because it lowers the level of profitibality an investment has to overcome in order to be realised.

Schumpeter assumes full employment and the aim of an increase of money is a more efficient allocation of resources. That means implicetely that interest rates must increase, because otherwise the charismatic creative - destructive entrepreneur wouldn't get this money.

It is true that in the keynesian theory interest rates raise if an economy reaches full employment, but for Keynes this is necessary in order to prevent an overheating of the economy that leads to inflation. For Schumpeter inflation is a side effect produced by the reallocation of resources.

Dramatic changes in the economic structure, something very seldom, where a quick adaptation of the resources is needed, will lead to inflation. Only in the case that resources are better paid in the new use than in the previous one, this adaptation will happen.

If more complex monetarian transfer mechanisms are taken into account, the schumpeterian logic is not very convincing. By trying to reallocate resources in a situation of full employment we would see similar effects than the ones described in the context of the Phillips Curve. Higher inflation will lead to a raise of the interest rates, because lenders will anticipate inflation. Furthermore a raise in prices will increase the demand for money for tansactional purposes and a decrease of the amount of money disposable for investment purposes, what will strengthen the effect of increasing interest rates and kick out of the market less profitable companies if the central bank is not willing to feed the inflation. We will discuss all these effects in the chapter about monetarism.

An increase of the amount of money in case of full employment is a risky projects, but nobody knows why Schumpeter introduced this assumptions in his theory. The basic message can be formulated in a much easier, straightforward and correct way. It is possible to activate with money, that not necessarily derives from not consumed income of the past, idle resources. If is very irrelevant if the production structure is changed this way or not. A pure quantitative increase of the national income is as good as a qualitative one.

The statements of the next paragraph are trivial at first glance, however not as trivial if we take a look in modern textbooks of microeconomics. The producer surplus only exists for a certain time, it exists only as long as one company is the only producer of a product or as long as there are differences in the production structures. It is to assume that both things will vanish in the long run.

In detail things are a little bit more complicated, because real innovations are normaly protected by patents. This is necessary, at least for a certain time, because nobody can invest money in research and development if the results of these investments can be copied afterwards for free.

The next paragraph is a good illustration for a general problem of the theory of Schumpeter. He overestimates the importance of the charismatic creative - destructive entrepreneur. While the neoclassical theory underestimates the role of the entrepreneur, actually the entrepreneur or any kind of human decision making is inexistent in neoclassical theory and in economic thinking in general, Schumpeter overestimates this role.

What is still worse, the special characteristics of an entrepreneur are genetically determined, see below. That kind of thinking can lead to fatal errors, because the effect can be confused with the cause. The lack of entrepreneurship is explained by a lack of entrepreneurs, although the lack of entrepreneurs is the result of the circumstances.

Beside that the doubts he mentions in the following paragraph arise mostly on the production side, the technical feasibility is questioned. This is at least the case with the type of innovation his theory is based on, innovations with a large impact on all sectors of the economy, things like the combustion engine. If there is no heavy impact on the whole economy an innovation will not trigger a business cycle as he assumes.

However he affirms that the typical entrepreneur is not the one who invented the new technology, he is just the one who imposes it or makes a marketable product out of it. If someone constructs a smartphone with a very small beameer and a very small video camera able to follow the gesture of the hands allowing this way to comand the smartphone through the screen thrown on just any surface by the beamer there is no doubt that this would be a commercial success, especially if it is not more expensive than the smartphone we have. The problem is, that at least rigth now that is technically not feasible. Even if we consider that his characterisation of an entrepreneur is correct, it is hard to see why that doesn't apply for the inventor of a new technology.

[The original version uses a vocabulary, we are not willing to translate as it is and it is disconcerting that Joseph Schumpeter didn't change the vocabulary in this edition published in 1934.]

By the way. If it were so simple to just copy already existing business models, know how transfer wouldn't be very complicated. However in practice it is very complicated.

Ich komme nun zu dem zweiten Akt, den das Drama der Durchsetzung des Neuen in der geschlossenen Wirtschaft hat. Auch in der geschlossenen Wirtschaft lebt der Unternehmergewinn nicht ewig. Auch hier treten notwendig Veränderungen ein, die ihm ein Ende machen. Die neue Kombination ist durchgesetzt, ihre Resultate liegen vor, alle Zweifler sind zum Schweigen gebracht, die Vorteile sind nunmehr einleuchtend. Zugleich die Art, wie man sie zu erlangen hat. Da bedarf es nun höchstens eines Leiters oder Vormannes, nicht aber der Schöpferkraft und Herrschergewalt des Führers. Man braucht ja nur das Getane zu wiederholen, um die gleichen Vorteile zu erlangen. Und man wird das auch ohne den Führer tun können und tun. Mögen die Reibungswiderstände auch immer noch zu überwinden sein, im Prinzip ist die Sache anders, leichter geworden.

Josef Schumpeter, Theorie der wirtschaftlichen Entwicklung, Der empresariogewinn oder Marktvalor

Now I get to the second act of the drama showing the imposicion of something new in a closed economy [an economy that abstract from international trade]. Also in a closed economy profits are not forever. Changes will happen that make these profits vanish. The change in the production structure is accomplished, the results are obvious, the doubters are silenced, the advantageous and the way they can be obtained are obvious. From now on only an administrator is needed and not the creativity of a charismatic leader. In order to get the same advantageous it is enough to just copy what already exists and that can be achieved without any charismatic leader. Maybe there are still some resistence to overcome, but basically everything is much simpler now.

In the following paragraphs he addressed the same question that has been already discussed by Jean Baptiste Say, see entrepreneur. He got to the same results as Jean Baptiste Say, the remuneration of the entrepreneur is a different type of income and not the same thing as a wage, although the argumentation is different. Adam Smith, see natural price / market price, and the neoclassical theory assumed that each productive factor is paid with its (monetary) marginal output. The entrepreneur is just a special kind of labour, but actually this figur is inexistent in these theory.

However, this is the argumentation of Joseph Schumpeter, the entrepreneur will reallocate the resources and they will become more productive and therefore the (monetary) marginal output will increase. The difference between the (monetary) marginal output in the old use and the (monetary) marginal output in the new use is the profit of the entrepreneur. (Say argues in a different way. If remuneration of an entrepreneur would just be a wage, he would offer its workforce to someone else and borrow his capital, in the case he have one, to other people.)

There is no doubt that we have a fundamental problem in academic economics. The market economy is a process of trial and error. This process costs money, because some expectations will not be met. There is therefore a need for entrepreneurs, who are well informed about the sector they work in, well informed about their abilities, the possible alternatives and willing to take certain risks. However the logic of academic economics denies the necessity to take risks, because everybody is perfectly informed and equilibrium can be reached by some equations. For academic thinking the equilibrium is more interesting and described in at least three different way, the general equilibrium of Léon Walras, the partial equilibrium of Alfred Marshall and the Pareto optimum of Vilfredo Pareto, than the process which leads to equilibrium. In practice it is the other way round. The equilibrium is almost irrelevant, market economies works perfectly if there is a tendency towards the equilibrium, if there is a process that lead to the optimal allocation of resources. Only the austrian school, disregarded by academic economics, focuses on the processes.

In a certain sense we can say, that economics is at the point zero, because human decision making is a topic not even mentioned in academic economics and still less the interaction between human decision making and social circumstances. Joseph Schumpeter puts this issue in the center of his theory, although not very successful.

The term "creative destruction" a term actually used by Joseph Schumpeter only in 1942 in his book Capitalism, Socialism and Democracy, is well chosen from a marketing point of view, however it wouldn't have been so successful if it didn't contain a statement everybody understands "intuitivly", although in a vague way. Normal people know that economics is about human decision making and can't be described with some simple equations.

Academic economists has in general no real working experience at all and still less they had experience with founding a company. That may induce them to believe that entrepreneurial profits can be calculated in the same simple way than their pensions. That is not the case, not at all.

Beside Joseph Schumpeter there is only one author in whose theory we have an entrepreneur, Jean Baptiste Say, also the characterisation of an entrepreneur given by Jean Baptiste Say is much less "romantic", what is due to the fact, that Jean Baptiste Say was an entrepreneur himself, he knew what he was talking about. For Jean Baptiste Say an entrepreneur is a mixture of certain capabilities, organisational skills, good knowledge of the output and supply market, ability to interact with people, capacity to overcome unforeseen problems. This is a lets say "pragmatic" vision, the exact opposite of the schumpeterian approach. The truth is not in the middle, but somewhere else.

There are of course thousands of articles on the web about the role of entrenpreneurs in the economy, see for instance this one The Role of Entrepreneurship in US Job Creation and Economic Dynamism, but in the study of economics it is an issue silently ignored, although it is much important to have people who strive to achieve the general equilibrium than people who simply states that is exists.

Under the present circumstances and conditions it will only possible to talk about relevant economic issues if the academic personal is completely substituted and that is unlikely to happen, because the academic stuff reproduces itself by electing people who will not menace their position. If nothing dramatic will happen, they will analyse equilibriums for the next 300 years, with their mathematical models or game theory. That's why people like Schumpeter or the austrian school are completely ignored.

A phenomenon like the entrepreneur is something spontaneous, unpredictible, incidental and can therefore not be modelled mathematically and what cannot be modelled mathematically will be ignored. That's something we have seen already very often. An illustration of this is for instance the theory of Alfred Marshall. Actually microeconomics is Alfred Marshall, however only the concepts that could be mathematically modelled were canonized.

It is therefore commendable that Schumpeter puts a crucial but completely ignored aspect in the center of his theory. The characterisation of his entrepreneur can be cuestioned and the conclusions he drew related to the business cycle can be questioned even more.

Maybe a more psychological study formulated in a way that it can be tested against reality would be helpful. Of course thousands of studies of this type exists as well, see for instance What do we actually know about effective leadership?. However these kind of studies tend to abstract from the social environment. If the capacity of leadership should be actively improved, both side has to be taken into account.

A short answer why we need more entrepreneurship. There are a lot of people, especially in art and programming, who are very strong in some areas, however most projects require a complex mix of qualifications and people are normaly not able to organise themselves alone. That leads to the situation that normaly someone organises the money, from a bank, from venture capital, crowdsourcing or from his own pocket and buys the qualifications needed. If that doesn't happen, all these people will remain in the waiting room, waiting for the one who takes all the risks. That happens, but not often enough. People would be better off, if they start themselves, because it is less risky to lose time than to lose money and normaly, if the lose consists only in time, something can be learned. The amount of money venture capitalists spend in bringing together people that actually can organise their cooperation themselves is really astonishing.

What is strange in this story is the fact, that IN NON PROFIT organisation free collaboration very often works. The linux community, the Apache developpers, the people behind Firefox and Thunderbird are an example for that or the developers of Perl or Wikipedia.

People very seldom thinks and behave like entrepreneurs and this is a real problem.

It is to assume that an entrepreneur like the one imagined by Schumpeter, a lone wolf, doesn't exist or that he is any case seldom successful. Most companies, at least nowadays, are founded by more complex teams with special skills. A meticulous bookkeeper is not a visionary and a visionary is not a good bookkeeper. Some people are more interested in details, others get quickly bored, but are more creative in finding new solutions. What is needed are teams with different skills and qualifications.

The characteristics that Schumpeter assign to his entrepreneur are very specific. It is to assume that he had a concrete person in mind and that he is describing this person. He makes the same mistake as the public. The public image of company or a music band and of any kind of groups is very often determined by a charismatic figure, that doesn't mean that this charismatic figure is actually the determinant figure for the success of the organisation.

An entrepreneur will bother a lot of people. His competitors, his employees, companies he is working with and so on. Therefore he will need a lot of self-confidence and good coping strategies. Coping strategies are a relevant issues in the context of mobbing but is relevant as well in this context. The abilities to overcome difficult situations, something that will happen in the career of an entrepreneur, depends on the former experiences. A person who had already learned that he / she is able to handle a conflict will react differently than someone who had learned that he can't handle it. Live experience allows as well to see more alternatives concerning the psychological approach to be taken as well as alternatives to react to the problem.

It is almost sure that entrenpreunirship has little to do with genetic disposition, as Schumpeter assumes, see below. It is a comlex dynamic between the social circumstances and the individuum. Policies aiming to increase the amount of entrepreneurs have to take into account both sides, the individuals through training and the social, economic, technical circumstances.

It is obvious that Joseph Schumpeter failed completely in his attempt to explain dynamic economies. However we have to admit that he is the only one who actually tried to explain dynamic processess.

There is no doubt that the entrepreneur plays a decisive role in market economies or more generally speaking, human decision making plays a crucial role and human decision making is much more than the adaption of the amount to prices as it is presented in modern textbook about microeconomics.

However Joseph Schumpeter goes much to far. He constructs a whole business cycle theory based on the entrepreneur and the necessary characteristics of entrepreneurship are determined by the genes. There are two problem with this affirmation. First, the characteristics he assigned to the entrepreneur are somehow "romantic", but not very realistic and second these characteristics have little to do with the genes.

What he wants to say is that: The more the charismatic creative - destructive entrepreneur has smoothed the way, the easier it is for less charismatic creative - destructive entrepreneurs to follow. If there are in a certain etnical group more very charismatic creative - destructive entrepreneurs, the others has more chances to succed.

Reality is different. Basic technology with a heavy impact on different sectors of the economy will lead to a lot of changes in the economic structure and we will therefore see show up new companies and new professions.

Da, wie wir sahen, die Unternehmereignung etwas ist, was wie jede Eigenschaft in der ethnisch homogenen Gruppe nach dem Fehlergesetz verteilt ist, so wächst bis zum Punkte der größten Ordinate die Zahl der Individuen, die fortschreitend geringeren Anforderungen in dieser Beziehung genügen. Es können und werden also von Ausnahmen abgesehen mit fortschreitender Erleichterung der Aufgabe jeweils immer mehr Leute Untenehmer werden, weshalb das erfolgreiche Auftreten eines Untenehmers nicht einfach das Auftreten, sondern immer zahlreicherer und weniger qualifizierter nach sich zieht.

Josef Schumpeter, Theorie der wirtschaftlichen Entwicklung, Der Zyklus der Konjunktur

Due to the fact that the characterists of entrepreneurship inside a homogenous group are, as any other characteristics, distributed following the law of error [it is to assume that he means normal gaussian distribution] the amount of individuals who meet the progressively inferior requirements will increase until the maximum is reached. Therefore more and more people will become entrepreneurs, if we put aside some possible exceptions, and the successful entrepreneur will lead to the appearance of more and more numerous and less qualified entrepreneurs.

There is grain of truth in this statement, but that has little to do with the charismatic creative - destructive entrepreneur. After world war II economic growth in Germany was very strong, because the economy just reconstructed following a business modell they already knew, producing things they knew how to produce and from which they knew that there will be a market. Unfortunately the trick didn't work fifty years later, after the fall of the wall of Berlin. In this case the economy competed with a very strong global company and whatever amount of money was transferred to the east, there was no way to trigger sustainable economic growth.

The problem is the term "homogeneous etnical groups". If there are homogeneous etnical groups there have to exist groups which distinguish themselves from others and therefore groups with more or less charismatic creative - destructive entrepreneurs and, given that he assumes that economic growth depends entirely on the entrepreneurs, the economic growth has to do with the etnical group.

The problem with this theory is, that the same etnical group can have very different economic growth in the course of history, for instance China, Taiwan, South Korea, Indonesia, Thailand, Malaysia. At the other side the economic growth slows down in highly industrialised countries. It is hard to believe that "homogeneous etnical groups" change their gene pool every few years.

A little bit more espectacular is his concept of money. Simplyfing, for more details see balance of payment, we can say that the classical and neoclassical theory assumes that first we have an increase in investments, and then an increase in the amount of money. If we take a look at the quantity theory of money, see above, we realise that this in only plausible under very restrictive assumptions. Normally we have FIRST an increase of money and then an increase of investments and national income.

However he assumed full employment and in a situation of full employment the classical theory is true. An increase in the amount of money will lead to inflation and by several monetary transaction mechanism to a raise of interest rates.

The problem is, although Schumpeter assumes that, that for a pure reallocation of resources more money is not needed. Under the condition that the schumpeterian entrepreneur can convince the banks to grant him a credit, obviously for a higher interest rate, he can get access to the resources needed, although he has to pay more for them, otherwise they will stay where they are. Competing companies will get less money and he will get more money. If the amount of money is increased, we won't have a total trade off, at least in the short run, but inflation will be higher. However in a situation of full employment central banks tend to impede the creation of money through the banking system by increasing the reserve ratio and other means.

The final effect of increasing money in a situation of full employment is difficult to evaluate, because there will be a lot of monetarian transaction mechanism involved.

In a situation of underemployment, that is the situation addressed by Keynes, things are easier. The hindrance for new investments must be lowered until full employment is reached. That doesn't mean that resources already in use are reallocated, that doesn't only mean that resources with a low (monetary) marginal output can be employed because the level of profitability they have to overcome is lower.

The theory of Schumpeter assumes that economic growth is only possible if there is a qualitative change, the already employed workforce is employed in a more efficient way. This is actually true, IF all the resources are employed.

If we have 10 workers who plow the land with the help of a cow we can plow a certain amount of land. If we give each worker a tractor they can each plough 100 times more land. To illustrate that with a simple example.

The situation is different, if there are unemployed resources. In the case of unemployed resources we can get an economic growth by employing simply more people in the same way. If we have 10 workers who are unemployed we can employe them to plow the land, provided interest rates are low, because this business is not very profitable nowadays.

The difference between Keynes and Schumpeter becomes very obvious, if we consider the respective theories in detail. Schumpeter explicitely assumes a change in the production structure, "a new combination" as he calls it. Keynes explicitely assumes that the productive structure will not change and names explicitely everything that is NOT going to change. (A long list in the General Theory of Employment, Interest and Money: No change in the intensity of competition, no technological change, now change in the qualification of the workers, no change in the size of the market, no change in demography, no change in the organisation etc. etc.).

The other difference is the practical relevance: In the schumpeterian logic nothing can be done than sit and wait for the charismatic creative - destructive entrepreneur. That is not a big problem, because Schumpeter assumes that the problem addressed by Keynes, unemployment, simply doesn't exist and if it doesn't exist, there is no neede to resolve it.

From the keynesian theory we can draw some conclusions what the government can do to lead the economy out of recession, although these conclusions are not in the center, in contrary to what is believed everywhere today, see Keynes, not the central statement of his theory.

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the creative destruction


the institutional investors, banks, insurance companies, fonds etc. are the new "capitalists"

Joseph Schumpeter is the only author who takes into consideration a crucial figure in market economies, the entrepreneur. The focus of neoclassical theory is on equilibriums and in an equilibrium there is very little need for entrepreneurs and if the focus is on the equilibrium alone, there is not even a need to think about the process that leads to the equilibrium.

However if in the neoclassical theory the entrepreneur and human decision making in general is missing, we have too much of the entrepreneur in the theory of Joseph Schumpeter. Schumpeter abstracts completely from the social, technical, economic circumstances and from the interaction of this circumstances with the individual.

More important than the creative destruction, the term that made Schumpeter famous although there is little empirical evidence allowing to justify the pathos of this term is his concept of money. Schumpeter is the first to mention explicitely that money is more than a means of payment, that the banking system can generate it and that therefore institutional investors decide how the "capital" is allocated and not the capitalist. Although some basic assumptions are wrong, a full-fledged monetary theory was conceived only 25 years later by Keynes, it was the first to breake with classical theory.

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