Schumpeter, Joseph

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For Joseph Schumpeter, innovations become a central, if not the main component of the dynamics of economic action. Innovations are seen to be more important than is price competition among firms. Pioneering entrepreneurs who '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' are at the centre of the dynamics of the capitalist system ([1942] 1950: 132).

For Schumpeter, innovations refer to the initial introduction of a new product or system (product innovation) and process into the economy (process innovation).

The term innovation is inclusive and refers to the realization of additional knowledge as well the entire process of transforming knowledge into practice. Schumpeter includes the diffusion process of the realized invention throughout the population of potential users. The developmental process moves in a linear fashion from invention to innovation and diffusion.

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Schumpeter (1934) wrote about the transient nature of capitalism, arguing that economic activity rests in a persistent dynamic equilibrium, as new markets with new products and new demand are made at the expense of others. This process of ‘creative destruction’, according to him, results from the continuous application of knowledge.

Economic activity rests in a dynamic equilibrium, or a moving disequilibrium, caused by the process of creative destruction, as new markets with new products and new demand are made at the expense of others.

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