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Joseph Schumpeter oscillated in his view about the type of economic system that was most conducive to growth. In his 1911 treatise, Schumpeter argued that a more decentralized and turbulent industry structure where the pro­ cess of creative destruction was triggered by vigorous entrepreneurial ac­ tivity was the engine of economic growth. But by 1942 Schumpeter had modified his theory, arguing instead that a more centralized and stable industry structure was more conducive to growth. According to Schum­ peter (1942, p. 132), under the managed economy there was little room for entrepreneurship because, "Innovation itself is being reduced to routine. Technological progress is increasingly becoming the business of teams of trained specialists who turn out what is required to make it work in pre­ dictable ways" (p. 132). Schumpeter (1942) reversed his earlier view by arguing that the integration of knowledge creation and appropriation be­ stowed an inherent innovative advantage upon giant corporations, "Since capitalist enterprise, by its very achievements, tends to automize progress, we conclude that it tends to make itself superfluous - to break to pieces under the pressure of its own success.





Democracy and capitalism: Are they compatible in the long-run?

Starting from a discussion of Schumpeter’s analysis of the relationships of capitalism, socialism and democracy, it is shown that, in a complex society, democracy is only compatible with a decentralized market economy with safe property rights. But in time democracy shows a tendency to weaken the capitalist system by more and more regulations and an ever-increasing share of government (including the social security system) in GDP. This tendency is a consequence of political competition because of the development of interest groups and the presence of rationally uninformed voters. It leads to a weakening of efficiency, investment, innovation and thus to lower growth rates of GDP. But in time forces opposing this development arise. First, because of the negative consequences of growing government the welfare and regulatory state is bound to move into a crisis in the long run. Thus innovative politicians have a chance to win the support of a majority of voters for reform projects, who perceive finally the ever-increasing burden of higher taxes and regulations and realize that these burdens are not worth the benefits bestowed on them. In doing so, they may face, however, the competition of ideologies. Second, there are other states with lower taxes and less unnecessary regulations which show higher growth rates of GDP, and gain thus relative advantages in international political and military competition since they can command greater resources with the passage of time. To maintain their relative international power position, reforms are thus considered as necessary by rulers. This may be helped by pressure resulting from comparisons of the standards of living done by their citizens.
Peter Bernholz

Capitalism and democracy in the 21st Century: from the managed to the entrepreneurial economy

This paper explains how and why the developed countries are undergoing a fundamental shift away from a managed economy and towards an entrepreneurial economy. This shift is shaping the development of western capitalism and has triggered a shift in government policies away from constraining the freedom of business to contract through regulation, public ownership and antitrust towards a new set of enabling policies which foster the creation and commercialization of new knowledge. The empirical evidence from a cross-section of countries over time suggests that those countries that have experienced a greater shift from the managed to the entrepreneurial economy have had lower levels of unemployment.
David B. Audretsch, A. Roy Thurik

Capitalism and democracy in the 21st century: a Kaleckian interpretation of a Schumpeterian problem

The paper reinterprets Schumpeter’s views on the dynamic effects of taxation, as originally expressed in Crisis of the Tax State, from a Kaleckian perspective. In light of Schumpeter’s rejection of Keynesian and Marshallian approaches to taxation, the paper argues that a recently developed Kaleckian approach provides an appropriate basis from which to analyse the effects on the business cycle of balanced changes in the structure of taxation. It is shown that, under certain shifting assumptions, increases in the taxation of wages or profits will stimulate investment and attenuate the amplitude of the business cycle. Ultimately, the shifting of taxes reduces to a conflict over income shares. The changing distribution of income in the United Kingdom in recent years suggests that investment is likely to remain sluggish unless there is a significant reversal of income shares. This may give rise to increasing economic and political tensions into the 21st century.
Douglas Mair, Anthony J. Laramie

Capitalism and democracy at a crossroads: the civilizational dimension

This paper evaluates Schumpeter’s grand vision as reflected in his Capitalism, Socialism and Democracy, and elaborates it in conjunction with the so-called “globalization” trends characteristic of the wake of the twenty-first century. In addition to the evolutionary nature of his methodology, the institutionalist dimension of Schumpeter’s definitions are brought to light. A case is made for a fundamental process of “uncreative destruction” as far as the institutional setup of the economy is concerned. The contention of this paper is that there is ample support in Schumpeterian analysis for a counterpoint to the liberal thesis that envisages the worldwide spread of individualism, market economies, and democratic forms of government.
Eyüp Özveren

Presidential address

Capitalism, democracy and rational individual behavior

The collapse of communism in Eastern Europe and the Soviet Union beginning in 1989 to many observers seemed to signal the triumph of the capitalistic and democratic institutions of the West over the socialist and totalitarian institutions that had been the hallmark of communism.
Dennis C. Mueller

Capitalism and globalization

A spectre is haunting the world — the spectre of global capitalism

Individual property rights are fruitful for economic development because they civilise self-interest by forcing it to serve the common good. The history of previous property rights “cycles,” however, shows that their ability to do this deterioriates over time because the laws of property fall under the control of those whom property is meant to discipline. Irresponsible ownership then intensifies inequality until a breaking point is reached. The present cycle is no exception, but its breaking point has been postponed by the growth of the democratically-inspired welfare state.
Globalisation is now eroding the financial basis of this, because mobile capital can escape taxation, leaving labour to carry the burden. The main thrust of this movement is now found in the World Trade Organisation, whose control of intellectual property and commitment to free trade in money as well as goods, can only increase inequality between countries as well as within them. It represents individual property rights which are out of any form of social control, since there is no global mechanism for civilising self-interest. Schumpeter’s sense of the impending demise of capitalism, if not of its replacement by socialism, may yet be vindicated.
William Kingston

Reflections on the perspectives of the global economy from the point of view of emerging economies

Recently a number of emerging economies, with high inflation and various kinds of imbalances have experienced what has come to be referred to as dollarization — the phenomenon of currency substitution where the dollar gradually replaces the national currency in the performance of its fundamental functions. The phenomenon is most commonly encountered as a component of the exchange-rate-based stabilization programs implemented in a number of emerging economies in Latin America, Asia and the Middle East. The fundamental issue we want to explore is whether this process forces the monetary authorities of emerging economies to act with their hands tied, as if caught in a trap. It is argued that when the expansion of liquidity and domestic credit is determined by the quantity of foreign-exchange reserves, an independent monetary policy vanishes and national sovereignty itself is shackled. Since this scenario typically occurs in a world of increasing globalization of finance, this paper also discusses (with reference to emerging economies) the risks and implications of capital inflows for macroeconomic policy autonomy, economic instability, and vulnerability to external shocks.
Maria Luiza Falcão Silva, Joaquim Pinto de Andrade, Thomas S. Torrance

Capitalism, profits and innovation in the new techno-economic paradigm

Innovative profits (of the kind conceptualized by Schumpeter) are today being increasingly created through international corporate networks for technological development. Such profits through innovation are encouraged by newer more flexible organizational forms, and further encouraged (unlike in the conventional perspective on profits and on the incentive to innovate) by knowledge flows between firms. Our empirical evidence, based on US patent data, shows that multinational companies are currently more likely to develop abroad technologies which are less science-based, and less dependent upon tacit knowledge. However, within the science-based industries firms may generate abroad some technologies which are heavily dependent on tacit knowledge, but normally in fields that lie outside their own core technological competencies. We find some evidence of a convergence in corporate technological diversification across large firms, facilitated by the now common spread in the use of information and communication technologies (ICT) as an integrator of formerly separate technological systems. This has led smaller firms to diversify, but giant firms to consolidate activity around those technologies that have become most interrelated.
John Cantwell, Grazia D. Santangelo

Debt, growth and inflation in large European economies: a vector auto-regression analysis

This paper attempts to empirically test the hypothesis that whether debt matters in the EU. This has been performed by examining the potential adverse effects of debt in large European economies on investment, inflation and growth. Using the hybrid cointegration and vector autoregressive models, the findings, based on the period 1970–97, suggest that debt causes significant adverse effects on investment, but its impact on growth is not clear-cut. Moreover, debt appears to be inflationary in most cases in the long run, though produces no clear short run pattern on inflation.
Majid Taghavi

The innovation process

Uncertainty and the size distribution of rewards from innovation

Previous research has shown that the distribution of profit outcomes from technological innovations is highly skew. This paper builds upon those detailed findings to ask: what stochastic processes can plausibly be inferred to have generated the observed distributions? After reviewing the evidence, this paper reports on several stochastic model simulations, including a pure Gibrat random walk with monthly changes approximating those observed for high-technology startup company stocks and a more richly specified model blending internal and external market uncertainties. The most highly specified simulations suggest that the set of profit potentials tapped by innovators is itself skew-distributed and that the number of entrants into innovation races is more likely to be independent of market size than stochastically dependent upon it.
F. M. Scherer, Dietmar Harhoff, Jörg Kukies

The determinants of pharmaceutical research and development expenditures

Since the late 1970s, pharmaceutical R&D has grown at a rapid rate relative to sales and other variables. In this paper, we examine the determinants of pharmaceutical R&D using a pooled data sample of 11 major drug firms over the period 1974 to 1994. We find that expected returns and cash flows are important explanatory variables of firm research intensities during this period. This is consistent with our results for an earlier sample period characterized by very different growth patterns on R&D.
Henry Grabowski, John Vernon

Industrial policy, competence blocs and the role of science in economic development

Government is studied as supporter of science and of the transformation of scientific discoveries into new technology and firm formation. The importance of scientific discovery outside academe is recognized as is the experimental nature of the transformation process entailing frequent business failure. Competence bloc theory is used to understand the minimum set of actors with competence needed for the incentive structure to be complete and the risk of losing the winners minimized Competence bloc analysis also helps clarify the theoretical foundations of industrial policy and useful roles for science parks. I find that to succeed as a catalyst for industrial competitiveness park management should be less concerned with science and technology and more with the economics of the transformation process.
Gunnar Eliasson

Multimarket contact and inter-firm cooperation in R&D

Research joint ventures (RJVs) have been widely acclaimed for their alleged ability to restore private incentives to undertake R&D. Economists have, however, also sounded the alarm concerning the opportunities RJVs may create for collusion between partners. The danger of anti-competitive behavior increases significantly when repeated R&D collaboration occurs between firms that also “meet” in many product markets. This phenomenon is shown to be present in a large set of U.S.-based RJVs. The question is about the incentive trade-off: Are the alleged advantages of RJVs in terms of enhancing incentives for R&D sufficient to overcome the potential disadvantages in terms of decreasing incentives for R&D due to simultaneous multiproject and multimarket contact? Significant foreign participation, high technological and market uncertainties, and the set up of “porous” RJVs may operate as a check to anti-competitive behavior.
Nicholas S. Vonortas

The democratic process

Political entrepreneurship and bidding for political monopoly

An analytical framework for dealing with political entrepreneurship and reform is proposed which is based on some new combinations of Schumpeterian political economy, an extended version of Tullock’s model of democracy as franchise-bidding for natural monopoly and some basic elements of New Institutional Economics. It is shown that problems of insufficient award criteria and incomplete contracts which may arise in economic bidding schemes, also — and even more so — characterise political competition. At the same time, these conditions create leeway for Schumpeterian political entrepreneurship. The same is true for various barriers to entry in politics. These barriers affect a trade-off between political stability and political contestability which will be discussed with special emphasis on incentives and opportunities for political entrepreneurship in the sense of risking long-term investments in basic political reforms.
Michael Wohlgemuth

Schumpeter and the history of ideas

Market institutions and economic evolution

Our cognitive limitations cause us to rely on institutions to guide reasonable behaviour; market institutions reduce the costs of search, negotiation, and monitoring entailed in making single transactions. The making of markets requires an investment of immaterial capital, the major share of which typically is provided by those who expect to be very active on one side of the market. This ‘external organisation’ provides producers with information for the development of new products; by simplifying transactions it also allows consumers greater scope for developing consumption capabilities. Thus the evolution of institutions guides the evolution of goods and services.
Brian J. Loasby

Competitive selection, self-organisation and Joseph A. Schumpeter

Post-Schumpeterians have tended to use biological analogies to understand economic evolution, in contrast to Schumpeter himself. In this paper it is argued that the biological analogies used tend to be outdated and that Schumpeter espoused an intuitive understanding of the evolutionary economic process that is closely related to modern conceptions of self-organisation, suitably adapted for application in socioeconomic systems. Using a self-organisation approach, competition can be understood without recourse to biological analogy, in terms of general systemic principles that operate in the presence of variety. Viewing economic evolution in terms of complex adaptation in self-organising systems yields nonequilibrium and nonlinear perspectives that parallel Schumpeter’s own intuitions, reinvigo­rating them as the basis of evolutionary economic thinking in the new Millennium.
John Foster

Convergences with Schumpeter: An essay Hirschman has yet to write

The paper explores the contributions of Joseph Schumpeter and Albert Hirschman to our understanding of the dynamics of modern democratic capitalist economies and suggests that much of their respective work displays intellectual overlap and complementarity. It is primarily focused upon the role of economic and political processes as forces of change and adjustment and the necessary degree of built-in inertia required to permit orderly rather than chaotic responses.
Peter Wynarczyk

Schumpeter and Steindl on the dynamics of competition

This paper compares and contrasts the contributions of Joseph Alois Schumpeter and Josef Steindl to the competitive paradigm. Both reject the static nature of traditional profit maximizing analysis and the analytical device of a representative firm. Instead they both opt for a dynamic framework in which there is a key role for innovation. Differences emerge in terms of the characteristics of individual firms that nurture the competitive struggle and are responsible for technical change.
The maturation process of a capitalist economy, whereby a natural progression will involve an increase in concentration, as prescribed by Schumpeter and Steindl is also explored, as is criticism of their analyses. Finally the holistic approach to competitive modelling, a legacy of these two economists, is expounded and challenges for the future identified.
Harry Bloch

Schumpeter and the ‘Schmollerprogramm’: integrating theory and history in the analysis of economic development

This essay addresses the historical and institutional aspects of Schumpeter’s thought. It suggests that Schumpeter prepared a pluralist research agenda, formulated in accordance with the conceptual perspective of the German Historical School, as presented by major scholars such as Schmoller, Sombart, Spiethoff and Max Weber. Schumpeter’s notion of development, with its emphasis on the correspondence of economic and socio-cultural evolution, is therefore to be viewed in the context of the comprehensive Schmollerian approach. Moreover the ethical-evolutionary components of Schmoller’s ideas point at the vital role of the German Historical School in the elaboration of a modern evolutionary economics in Schumpeterian terms. The essay concludes that the Schmollerprogramm is going to inspire further developments in Schumpeterian economics, as the integration of theory and history continuously marks the research agenda of evolutionary approaches to economic development.
Alexander Ebner
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