Economic Development and Innovation

How does Schumpeter view the link between economic development and innovation? Do you think his theory continues to be relevant today?

Joseph Schumpeter was an Austrian economist who was among the first modern economists to regard economic development as a specialized economic analysis field. His economic development thoughts first appeared in his economic development theory, published in 1911 in German. Schumpeter saw a clear link between economic development and innovation. In his theory of economic development (Sledzik, 2013). Schumpeter theorized that all economic activities are essentially repetitive and tend to follow a particular route.

The producers in the system tend to know the aggregate demand for the goods and usually adjust their supply accordingly. It means that the demand and the supply are often in equilibrium at any point in time (Thanawala, 1994). He noted that the economic system has the optimum level of output and its maximum use. These features apply to a circular flow that is in static form. Schumpeter pointed out that to make the system dynamic and consistent with development, some changes must occur in the system. He said that innovations could only bring about such changes.

Schumpeter defined innovation as the change in the existing production system that an entrepreneur introduces to profit and cut costs. Therefore, according to his theory, innovation is closely related to development. Schumpeter described the development as a spontaneous and discontinuous change in the system flow that experiences disturbances of the equilibrium, permanently altering equilibrium (Thanawala, 1994). The disturbances of the system’s equilibrium are caused by innovation. When new knowledge, tools, and technology are innovated, they alter the production norm in most cases, cut costs of production, and increase efficiency (Sledzik, 2013). In such a scenario, the system gains more meaning and grows bigger than before.

According to Schumpeter, innovation is creative destruction that develops the economy as the entrepreneur changes the change creator’s function; without innovation, the economic system will be static. My opinion about Schumpeter’s theory on the link between development and innovation is that the theory is still quite relevant in modern society since many organizations that are focused on growth pursue innovation through research and development (Sledzik, 2013). Thus, there is no way development would be separated from innovation.

References

Sledzik, K. (2013). Schumpeter’s View on Innovation and Entrepreneurship. SSRN Electronic Journal. DOI: 10.2139/ssrn.2257783

Thanawala, K (1994). Schumpeter’s “Theory Of Economic Development” and Development Economics. Review of Social Economy Vol. 52, No. 4,), pp. 353-363

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