Introduction to Schumptoberfest

This is a first in a series of short posts to guide the Schumptoberfest readings.  I included these readings literally to give you an introduction to Schumpeter and the “Schumpeterian Hypotheses.”

These introductory readings shouldn’t take terribly long to read — perhaps an hour.  I will carefully go through Chapter VII of Capitalism, Socialism, and Democracy in my next post.

Paul J. McNulty “Austrian Competition,” From The New Palgrave Dictionary of Economics, 2nd edition

The first reading from Paul McNulty on how Austrian economists view competition immediately invokes Schumpeter as a critic of the model of perfect competition.  As many of you know, the model of perfect competition that I love and teach in price theory, is essentially an equilibrium construct.  That is, we expect to be moving toward a long run competitive equilibrium, where price = average costs for the marginal firm in the industry.  (Incidentally, the way that firms compete in the fourth paragraph is largely what Industrial Organization is all about).  Schumpeter, in contrast, espouses a “disequilibrium” theory, and argues that competition isn’t about allocative efficiency as much as it’s about, that’s right, creative destruction.

The article doesn’t really get to the full-blown “Schumpeterian Hypotheses,” but it is hinted at in talking about “the ground under even large-scale enterprise is constantly shaking as a result of competitive threat…”

The contrast to Kirzner is somewhat interesting, but also tangential for our purposes.  Those interested in entrepreneurship scholarship – and perhaps those interested in “unawareness” – should consider picking up Kirzner’s Competition and Entrepreneurship.

I should note that while the title of the article is Austrian competition, Schumpeter is not part of the Austrian School (see here for some background).

F. M. Scherer (1993) “Schumpeter and Plausible Capitalism,” Journal of Economic Literature Vol. XXX (September 1992) 1416-1433 (excerpted)

Scherer – a pioneer in the field of industrial organization – takes a look back at Capitalism, Socialism, and Democracy and discusses “plausible capitalism.”  As you read this, try to figure out exactly where he’s going with this idea. Scherer has done some seminal work related to the “Schumpeter Hypothesis,” which he invokes in the opening paragraph: “it brought into the main stream of economic discourse the question of what market structures were most favorable to technological change and hence economic growth” (1416).

There are a couple of things to note here.  The first is that we are concerned with the “second thrust” mentioned in the second paragraph; indeed, we will take a closer look at a couple of those chapters.  Scherer goes through Schumpeter’s notion of innovation, and my read of the quotation is that to Schumpeter, capitalism is innovation.

The second thing for you to notice is this quotation: “A modern economist accustomed to analyzing appropriability conditions, spillovers, scale economies, and innovation races will find Schumpeter’s description of large firms’ advantages primitive” (1417).  I think this quotation is spot on, and the article by David Teece will give us some working definitions of these various concepts.

The final two Schumpeter quotes are very provocative.  For the first quotation, consider this question:  What exactly is it that Schumpter finds wrong with the notion of perfect competition?  Why is it inferior?   For the second quotation, just enjoy it.  This is Schumpeter’s seminal characterization of innovation that we will see when we take a look at Chapter VII of Capitalism, Socialism, and Democracy.

The gauntlet was thrown down, indeed.

Bronwyn H. Hall and Nathan Rosenberg “Introduction,” to Handbook of the Economics of Innovation (excerpted)

If it is not obvious from the context, let me say that Hall and Rosenberg are both central figures in the economics of innovation.  I include this piece to demonstrate that economists interested in innovation are turning to Schumpeter for some framing of the problem and inspiration.  You can skim the first couple paragraphs here before you get to their discussion of Schumpeter beginning in the third paragraph. What does it mean for the “economic system to [generate the force that incessantly transforms it”?  What does Schumpeter think of the Walrasian equilibrium, do you suppose?