“We have seen that the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on. Railroad construction in its earlier stages, electrical power production before the First World War, steam and steel, the motorcar, colonial ventures afford spectacular instances of a large genus which comprises innumerable humbler ones —down to such things as making a success of a particular kind of sausage or toothbrush. This kind of activity is primarily responsible for the recurrent "prosperities" that revolutionize the economic organism and the recurrent "recessions" that are due to the disequilibrating impact of the new products or methods. To undertake such new things is difficult and constitutes a distinct economic function, first, because they lie outside of the routine tasks which everybody understands and, secondly, because the environment resists in many ways that vary, according to social conditions, from simple refusal either to finance or to buy a new thing, to physical attack on the man who tries to produce it. To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type as well as the entrepreneurial function. This function does not essentially consist in either inventing anything or otherwise creating the conditions which the enterprise exploits. It consists in getting things done.”
Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper and Row Publishers, 1942 [3rd edition: 1950]), pp. 132.
Joseph Alois Schumpeter (1883 – 1950) was one of the world’s greatest economists and political scientists. He was born in Moravia in present-day Czech Republic, raised and educated in Austria, and later migrated to the United States. He taught at Harvard University, where he dominated the Department of Economics from his arrival in the early 1930s until his death in 1950. He was teacher of a long line of great economists and his influence spread widely in the profession through his writings. Two of his many books stand out as among the most important of the 20th Century: Capitalism, Socialism and Democracy, from which the above is taken, and History of Economic Analysis, which is regarded as a masterful survey of economics from ancient times to his passing.
Schumpeter understood, and celebrated, Capitalism. In his view, the Homo economicus of traditional neo-classical economics we use to study a market economy (and which we teach at Regent, like all other universities) is a make-believe fantasy world of unreal people in an unreal world. Real people to Schumpeter are influenced by culture, prejudices and traditions that cannot be explained by the mathematical equations of economic theory, and they are motivated by an intense desire to succeed that gives them a purpose beyond the pecuniary. The Capitalist economy that we live in and that we benefit from, therefore, cannot be explained by the modus operandi of competition in the marketplace, with prices rising and falling and in doing so guiding “the allocation of resources among alternative uses”, to use a common definition of economics. “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans,” as he put it.
No. Capitalism to Schumpeter is much more than a market economy: It is a civilization focused not on just plain, ordinary, steady economic growth and regular habits and modes of production, but a culture driven by a dynamic world-changing desire for progress that sweeps away all in its path and utterly transforms the existing economy and its polity. "Modern democracy rose along with capitalism,” he wrote, “and in causal connection with it." In the economy it is the "creative destruction" brought about by the entrepreneur that "incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." The cause of the transforming growth under Capitalism, in Schumpeter’s mind, is the freedom given the entrepreneur to innovate, that is, the freedom of individual initiative in production enjoyed by those who risk all in pursuit of great gain -- not simply monetary reward but more importantly the satisfaction of building an empire and leaving a legacy to the future. As they innovate, they build a new and better world.
To Schumpeter, without the entrepreneur there would be no economic growth and mankind would be left in the poverty of subsistence. And without freedom to innovate, there would be no entrepreneur. Hence, to Schumpeter, the importance of the political environment within which the entrepreneur must operate.
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