Management Decision

Keynesian, post-Keynesian versus Schumpeterian, neo-Schumpeterian: An integrated

approach to the innovation theory
Marina Dabic Vladimir Cvijanovi# Miguel Gonzlez-Loureiro

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Marina Dabic Vladimir Cvijanovi# Miguel Gonzlez-Loureiro, (2011),"Keynesian, post-Keynesian versus
Schumpeterian, neo-Schumpeterian", Management Decision, Vol. 49 Iss 2 pp. 195 - 207
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Keynesian, post-Keynesian
versus Schumpeterian,
neo-Schumpeterian
An integrated approach to the innovation theory

Approach to
innovation
theory
195

Marina Dabic and Vladimir Cvijanovic

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Faculty of Economics & Business, University of Zagreb, Zagreb, Croatia, and

Miguel Gonzalez-Loureiro
Faculty of Social Sciences and Communication, University of Vigo, Vigo, Spain
Abstract
Purpose In order to explain change and growth at the aggregate levels, three levels: macro, meso and
micro must be taken into account. Applying the theories from Keynesian and post-Keynesian economics
(PKE) best explains the macro level and applying those from Schumpeterian and neo-Schumpeterian
economics (NSE) best explains the micro level. Besides this, the meso level can be further explained by
merging both post-Keynesian and neo-Schumpeterian theories. Such a unifying approach has been
missing from the literature so far. Bringing these schools of thought together is important for mutual
learning and further development of innovation theory. This paper aims to effect this.
Design/methodology/approach The paper presents a survey of the relevant secondary literature
of the aforementioned schools of thought, identifying their methodological practice and key
contributions to innovation theory.
Findings A combination of these schools of thought offers a richer approach to studying
innovation. It is found to exist in particular in the evolutionary, institutional and long-run perspectives,
in combination with emphasis on the role of finance in production.
Research limitations/implications One is invited to develop ones own theoretical and empirical
approach that combines the advantages of all the schools of thought presented.
Originality/value The paper is exploratory, as it reconsiders how a comprehensive approach to
studying innovations can be built. It examines the existing literature. It will be of value to researchers
in innovation.
Keywords Keynesian economics, Innovation
Paper type Conceptual paper

1. Introduction
The rate of innovation is considered a major driver of competitiveness (Porter, 1985,
1987; Porter and Stern, 1999) and economic dynamics (Hanusch and Pyka, 2007b).
Although innovations have been the traditional research topic of institutionalists
(cf. Foster, 1991), it was Joseph Schumpeter in 1934 who was credited to have
recognized the impact of technological innovation on an economy. Subsequently,
neo-Schumpeterian economics (NSE) has developed an impressive body of literature
focusing on innovations and spanning micro, meso, and the macro level of economic
system dynamics (Hanusch and Pyka, 2007b). It nevertheless largely left out studies on
financial sector, public sector as well as their linkages with the real sector,
interdependent spheres influencing economic development (Hanusch and Pyka, 2007a).
Schumpeter believed innovation lay at the centre of economic change causing gales of

Management Decision
Vol. 49 No. 2, 2011
pp. 195-207
q Emerald Group Publishing Limited
0025-1747
DOI 10.1108/00251741111109115

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creative destruction. He proposed a taxonomy of technological change based on three

stages: invention, innovation and diffusion (Burton-Jones, 1999, p. 169). Schumpeter
(1934, p. 68) concludes that anyone seeking profits must innovate, that is, bring about
the different employment of the economic systems existing supplies of productive
means. Innovation has been defined as consisting of five types (Schumpeter, 1934,
p. 66). Two types include new methods of production and new sources of supply of raw
material or semi-finished goods and they are identified as process innovations. The
three other types can be classified as product innovations: a new good or a new quality
of a good, opening of a new market, and a new industry structure such as the creation
or destruction of a monopoly position (Dabic, 2005).
In this paper it is considered Keynesianism and post-Keynesian economics (PKE)
and it is discussed their link with innovation theory, which has been developed under
the umbrella of NSE. Main topics of interest for PKE have mainly been of a
macroeconomic nature, like aggregate supply and demand, unemployment, relation
between real and monetary sectors of the economy, financial sector, issues of income
distribution, economic growth, investments, uncertainty and risk, and business
expectations (cf. Mair and Miller, 1991). Although Keynes recognised the importance of
innovations by quoting Schumpeter (Keynes, 1971, pp. 85-6) neither he nor the PKE
had dealt extensively with innovations and technical change (Santos and Crocco, 2002;
Courvisanos and Verspagen, 2002). Despite the fact that PKE has indeed incorporated
innovations and technical change in its models (Santos and Crocco, 2002) it has largely
failed to explain them with the notable exceptions of Kalecki (1991a, b), Courvisanos
and Verspagen (2002) and Courvisanos (2009). Since PKEs theoretical system strives
to reflect the reality, authors have considered that PKEs models should encompass
innovations, at both the micro and macro levels. Their cognitive validity will thereby
be enhanced. On the one hand, in this research it is showed how PKE approaches could
be useful in rethinking innovation theory and policy. On the other hand, it is suggested
that they would need some upgrading in order to further develop their research lines.
The linkages with the NSE are the approaches or concepts from the resource-based
theory of the firm, national system of innovation (NSI) concept, as well as long waves
of economic development. Following Hanusch and Pyka (2007b), in this paper NSE are
considered quite broadly, to encompass all those concepts and theories that put
innovation at the centre of their analyses, pertaining to explain the evolution of
economic systems.
In the second part of the paper, Keynesianism and PKE are discussed with respect
to innovation theory. In the third part, significance of NSE for innovation theory shall
be presented. Outlook and conclusion follow in the end.
2. Keynesianism and post-Keynesianism: what do they tell us about
innovations?
Keynes revolutionised economics as he refuted Says law and other foundations of
the classical system (cf. Love, 1991), establishing the field of macroeconomics as it is
known today. His macroeconomic concepts had microeconomic foundations with
support of some psychological categories (e.g. propensity to consume, expectations,
incentives, etc.). Unlike institutionalists and NSE, Keynes did not concentrate his
research efforts on the interplay of institutions and technology as the factor inducing
change in a socio-economic system. Due to the neoclassical foundation of his

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economics, Keynes applied closed-system and equilibrium suppositions to his models.

However, that by no means implies that he and his followers neglect innovations.
Keynes had important contributions to current understanding of innovations. They
are grounded in his understanding that aggregate demand determines the total level of
output in an economy. However, firms offer their goods and services based on the
expectations of their proceeds in the goods and services markets and the employment
level dependent on those proceeds. A point of effective demand is the point when
aggregate supply and aggregate demand equalise. This is called principle of effective
demand (Setterfield, 2003). This way the uncertainty Keynes stressed came into play.
Fundamental uncertainty (a situation in which knowledge about future events simply
does not exist at the time of decision-making), ambiguity[1] and risk (a situation in
which probabilities of future events can be exactly calculated) influence the production
(and therefore innovation process as well) in a negative way. Unlike producing some
standardised product, where risk (but never fundamental uncertainty!) and return
could be fairly well estimated, innovations have only just come out to the market.
Being a process rather than the outcome happening at particular point in time, the
algorithm of their coming out to the market is inherently uncertain. And when they do
come to the market, demand for them is unknown.
The need for social consensus that ensures a stable level of aggregate demand and
provides space for manoeuvre for public policy, is one of the prerequisites for the
overall goal Keynes aims for that of full employment and GDP growth. Since Keynes
regarded investment (the variable most liable to uncertainty and effectuating in a long
time frame) as the causa causans of his model of economy he believed entrepreneurial
decisions were crucial to determining the overall level of output, although they are
socially contingent (Sardoni, 2002, p. 8).
Those Keynesian concepts are broadly in line with innovation theories (at the micro
level). The principle of effective demand is in line with hypothesis that innovation is
determined by demand for a firms products and/or services. This is known as
demand-pull approach. Although there is support for it in the literature (e.g. Brouwer
and Kleinknecht, 1999) it fails to explain all innovations since they may be caused by
different factors (Andersen, 2007). Even though there have been not enough studies
focusing on the direct impact of social consensus on innovation, it can be approximated
most closely with the concept of social capital, very used in the economics, sociology
and political science. According to one of the fathers of the concept, Robert Putnam,
social capital includes features of social organization, such as trust, norms, and
networks that can improve the efficiency of society by facilitating coordinated actions
(Putnam, 1993, p. 167, as quoted in Mihaylova, 2004: 17). It is usually divided into three
different parts i.e. bonding, bridging and linking social capital (cf. Grootaert et al.,
2004). Bonding social capital stands for the totality of social ties between people who
share some demographic characteristics. Bridging social capital could be understood
as glue that spans one individual (or social group) with another individual (or social
group) that has (have) different social characteristics from the first individual (or social
group):
Where bridging social capital, as the metaphor suggests, is essentially horizontal (that is,
connecting people with more or less equal social standing), linking social capital is more
vertical, connecting people to key political (and other) resources and economic institutions
that is, across power differentials (Grootaert et al., 2004, p. 4).

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Some aspects of social capital seem to be important drivers of innovation (Ruuskanen,

2004; Greve and Salaff, 2001; Landry et al., 2001; Patton and Kenney, 2003). However,
too much social capital can have adverse effects (de Clercq and Dakhli, 2003). Both
social capital and institutions mitigate the influence on uncertainty in that they provide
a somewhat stable environment in which economic agents (entrepreneurs) can act.
PKE theoreticians have continued with Keynesian tradition in economics and have
expanded it with open-system thinking, evolutionary approach to economics and
stronger microeconomic foundations. They have broadened and deepened the analysis
of economics by introducing stronger research into financial markets, dynamics of
economic growth over longer time periods as well as industrial economics. However,
post-Keynesians have not written extensively about innovation (Courvisanos, 2005),
although there are tendencies to promote topics on innovation, theory of the firm,
knowledge and similar (cf. Dow and Hillard, 2002). Although Keynes did not deny that
money is created endogenously (Harcourt, 2007) the theory of endogenous money
supply was to be developed by post-Keynesians. It posits money supply depends on
entrepreneurs demand for credit, which gets partially or fully accommodated. The
theory could potentially be extended to the whole financial sector, in which case it
would be called endogenous finance theory (Palley, 1996). Since the literature on
theories of the firm does not satisfactorily encompass money (Dunn, 2002, p. 79) this
endogenous finance approach is a valuable post-Keynesian contribution that can be
used to explain (financing) innovations. But current post-Keynesian theories of the firm
represent nothing more than theories of pricing (Santos and Crocco, 2002), with an
exception by Dunn (2002). The latter author emphasizes the need for inclusion of
fundamental uncertainty in a post-Keynesian theory of the firm, which makes it more
susceptible of the role of money.
There are several important post-Keynesian contributions to explaining
innovations. Kalecki had a concept of endogenous innovations, as he believed that
investment cycle causes innovations (Courvisanos and Verspagen, 2004). Courvisanos
(2009) asserts that Kaldor (1966) recognised the importance of demand-driven
innovation. Courvisanos and Verspagen (2004) connects Schumpeterian and Kaleckian
framework for analysing innovations. While in the former basic innovations stimulate
investment, the latter explains how business investment drives incremental
innovations. The framework that these authors develop is then applied to studying
the relationship between innovation and investment in Japan, USA, UK, Germany, and
France, whereby there are found reinforcing processes of clustering of innovations on
the one hand and bunching of investment on the other hand. In Courvisanoss (2009)
political economy framework radical innovations are postponed since production of
incremental innovations leads to strengthening of incumbent sectors that produce
them, which may additionally be protected by public policies.
However, the rift in PKE, between its macroeconomic models that recognise
innovation and microeconomic ones that fail to explain it, is still visible. Due to validity
of PKE models in the long run and their systemic nature, it seems plausible to ask what
can learn PKE and NSE one from each other. Besides this, PKE organic and
open-system analysis coupled with an interdisciplinary approach that recognizes the
importance of not only functional, but also historical and structural analysis (Dow,
1991) is opened for collaboration with similar approaches. This finding is particularly
significant regarding resource-based theory of the firm, the concept of national system

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of innovation as well as long waves of economic development. Being as compatible as

PKE and NSE approaches are, a combination of the two gives us, undoubtedly, a better
insight into the functioning of a socio-economic system, combining micro, meso and
macro approach.
3. Significance of neo-Schumpeterian economics of innovation
According to Schumpeter, innovations are essential to explaining economic change,
and the entrepreneur is the central innovator. The Austrian School of Economics was
strongly opposed to Keynesianism (Kiessling, 2004), and it is well known that the
mutual attitude between Keynes and Schumpeter was far from friendly, with a
reciprocal thoughtlessness between them. There were several confrontations between
Schumpeterians and Keynesians, in spite of the predominance of Keynesian theories
amongst academics for almost 30 years from 1940s to the 1960s. One of the main
opponents was Hayek, who suggested that using Keynesian formulae it was difficult to
know with great clarity the means by which change occurred (Hayek, 1931).
Furthermore, Schumpeter totally disagreed with the policy implications of Keyness
ideas and theories, because they were opposed to what was appearing as the driving
force in the economy, that is, private initiative rather than public policy (Spiegel, 1991,
p. 46). He found that innovations were discontinuous in the time axis, due to the
abilities and qualities required in human resources to manage and develop it
(Schumpeter, 1934, p. 228). He tried to explain how the innovation appeared and the
change happened, through a virtuous spiral of mutual attraction (swarms or clusters),
where a successful entrepreneur attracted new entrepreneurs to a geographical area,
with a multiplier effect but not independently one of another (Schumpeter, 1934, p. 228):
The raison-detre of NSE is the prevailing transformations of economies, which persist at the
macro, the meso and the micro levels. However, although the transformations are very visible
at the macro level, they cannot be analysed or understood on this level (e.g. Carlsson and
Eliasson, 2003). The sources of these qualitative changes instead can be found in the industry
dynamics at the meso level (e.g. Saviotti and Pyka, 2004), yet the dynamic potential of
industries is propelled by the creation of novelties and entrepreneurial decisions at the micro
level of the economy (Hanusch and Pyka, 2007b, p. 2).

This research line has successfully analysed and provided models of innovations at all
systemic levels. In this paper, authors have focused on the three approaches that were
considered hermeneutically most fruitful: resource-based theory of the firm, NSI
concept as well as long waves of economic development.
Resource-based theories of the firm are a major alternative to contractarian
approaches to theories of the firm[2]. Evolutionary theories of the firm, preferred by
proponents of neo-Schumpeterian economics, belong to the class of resource-based
theories. Contractarian approaches use a comparative static method to compare the
efficiency of different organisational structures, neglect production and take
individuals as a given (Hodgson, 1998). That makes them inadequate in studying
the evolutionary features of an economy, which is a task of neo-Schumpeterians.
Resource-based theories of the firm, especially in its dynamic form, try to encompass
knowledge as the prerequisite of the production and innovation process. These
processes are socially dependent and evolutionary, subject to market selection as well
as adaptations of the firm (cf. Rahmeyer, 2007). Resource-based theories focus on the
internal vision of the management as the source of competitive advantages (Penrose,

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1959; Wernerfelt, 1984; Grant, 1991). Maybe the success of the management is based in
the strategic management of knowledge as a resource instead of physical or financial
resources (Bontis, 2002). Competitive advantage based on knowledge is maybe the
most sustainable in the medium term (Sveiby, 2007; Davenport and Prusak, 1998).
Moreover, a competitive advantage that is more sustainable over times offers higher
corporate performance (Peteraf, 1993). The NSE approach to innovation (Dosi, 1982)
states that innovative firms must analyse the different choices they have (thus the NSE
concept of a technological paradigm) to decide which is the path to take (thus the NSE
concept of a technological trajectory). To broaden these concepts, one should talk about
the knowledge paradigm and trajectory in a knowledge-based economy where the
market of innovation must be explained. Besides this, there is an increasing orientation
to link the innovation capacity of an organisation and its knowledge management
(Organization for Economic Co-operation and Development, 2005; Umemoto, 2002). So
a national system of innovation and a regional system of innovation must be
introduced.
Innovation systems are categorised depending on the focus of the researcher, like
sectors, technological systems as well as localised systems: the so-called regional
systems of innovation (Fischer, 2001, p. 210). However, NSI fits best into our
framework, as it connects micro, meso and macro levels of analysis (Lundvall, 2007a).
It comprises the market of innovation: the national or regional system of institutions
and organisations that exchange innovative goods and services oriented to innovative
firms. Lundvall (2007b) mentions Friedrich List as the predecessor of this approach,
and Freeman as the first author who mentioned this specific concept of NSI. The latter
insisted on technological predispositions of competitiveness, relating them to the
institutional framework. The NSI approach claims that firms produce innovations and
build competences, but only interaction with their immediate and macro environment
may facilitate those processes. It can be stated that there are two different but linked
markets:
(1) the industrial market; and
(2) the consumer market.
The first concerns goods and services that support the innovative processes in firms. In
the second, firms develop innovations to acquire competitive advantages in their
business environment.
The third pillar is the long waves of economic development that have been the usual
framework for observing economic development in the long run. They are called
Kondratieff waves and last around 50 years (Sundbo, 1998). Up to five long waves that
have been identified so far represent a combination of typical institutional,
technological and financial structures that influence the creation and diffusion of
new technologies throughout the system (Perez, 2002; Santarelli, 1995). Perez (2002)
develops a particularly useful approach, interpreting technological revolutions as
co-evolving with financial capital that couples and decouples from the real sector. But
nowadays, a new challenge emerges: the knowledge-based economy to explain the
growth through the acquisition of competitive advantages at the individual level of the
firms (micro), to be different from competitors. Besides this lie the reducing cycle of life
of products and the increasingly quick change, so the equilibrium is far from a real
situation.

Taken together, these NSE approaches contribute to better understanding of

innovation process, due to the abundance of the literature, and to connecting micro, meso
and macro levels of analysis as well as realistic features of their methodology (that
focuses on evolutionary processes and is opened to other approaches). Although finance
has been recognised as important and it has been shown to co-evolve with the real sector
in the long waves framework (Perez, 2002) it has not been successfully tackled at the firm
level. But recent research have shown that in the NSI there are relevant linkages between
the public finance of innovations in firms and their capacity to grow and generate wealth
at the individual level (Gonzalez-Loureiro and Figueroa, 2010).

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4. Outlook of the innovation theory

What underlies the Keynesian machine linking investment, effective demand and income
growth are micro (evolutionary) processes, which in turn are shaped and constrained by the
specific characteristics of technologies and institutions (Dosi and Orsenigo, 1988, p. 29;
emphasis in the original).

When it comes to studying innovations, the aforementioned approaches PKE and

NSE are not so different. However, the latter, as opposed to the first, is devoted to
studying innovations. PKE tends to study phenomena in the long run (therefore
supplementing Keynes). This is similar to NSE, which observes long waves of
economic development. the resource-based theory of the firm is well developed in NSE.
PKE has started to contribute to this theory by focusing on fundamental uncertainty,
hence putting an emphasis on knowledge (which reduces the uncertainty) and the role
that money plays in it. The role of finance in the knowledge economy and in innovation
processes is a feature that is under-developed in the literature. In this regard
particularly a PKE endogenous money (finance) approach that could show the
relevance of the real sector while incorporating its interaction with the financial sector
might be particularly useful. NSE contribute with the systems of innovation
approaches like NSI or the regional system of innovation. On the other hand, PKE
includes not only transformation processes on the side of the real industrial level of the
economy but also the monetary and public sides of economic systems.
Innovation theory to explain growth through change should start from
resource-based theories of the firm in order to stress the importance of knowledge,
which reduces the Keynesian uncertainty. The answer to the how question is by
exploring and exploiting knowledge, and thus the ability to acquire, process and use
information, both internal and external.
PKE theories help to best in understanding the dynamics. Equilibrium is a trend in
the long run; it is where the system goes to. Nevertheless, in the short term individual
decisions (according to NSE theories) introduce distorting inequalities in the
innovation market. So, NSI come onto the scene to help reduce inequalities (offering
supporting services and grants) in this market, trying to achieve equilibrium
although this is an ideal situation rather than the real thing. The knowledge trajectory
(NSE theories) shows the path to individual agents (basically, firms), while the gap
between the ideal situation and the real situation in this market shows the way to the
public sector.
PKEs endogenous finance approach should be utilised in order to encompass both
the production of innovative goods and services and their financing. Firms decisions

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are socially contingent, as emphasised by the literature on NSI. They have to be seen in
a broader framework of long waves of economic development in order to explain the
market of innovation: the aggregate level of the innovation market and the individual
choice of firms. While PKE can help to explain the former, NSE can help to explain the
latter. Recent research on the European Union shows that the efficient geographical
dimension is the region (think globally, act locally), because the real innovation market
differs from one region to another. Therefore, there are public policies developed at the
regional level that tend to reduce the existing gap in the regional innovation market.
So, this way, as the public sector is inside the model, the funds and supporting public
services for innovative firms imply endogenous money (finance and valuable
knowledge) in an open system.
5. Conclusion
This is an exploratory paper where authors search for new paths to explain change and
growth in the economy. The approach adopted is from innovation as the main driver of
economic growth. This must be explained at three levels of analysis, i.e. micro, meso
and macro. In search of best explanation, authors merged knowledge from the
following schools of economic thought: Keynesian and post-Keynesian economics
(PKE) on the one hand and Schumpeterian and neo-Schumpeterian economics (NSE) on
the other. This approach has been under-developed in the literature so far. It is found
that applying theories from PKE helps to best explain the macro level. Applying
theories from NSE helps to best explain the micro level. The meso level can be best
understood by merging both PKE and NSE theories.
The innovation market at the aggregate level is built by two different but linked
markets. The first the industrial market, where firms exchange goods and services
related to innovation is best explained by introducing NSE theories, especially the
resource-based theory, due to its focus on the micro level. PKE theories help to
understand the market in its totality, the national system of innovation and the
regional system. The second the consumer market of innovative goods and services
is best explained by PKE theories but with the help of the NSE micro level, to fully
understand why firms innovate and why innovative products and services are adopted
when aggregate demand is still low. Individual choices are a key factor but are
influenced by the environment of each person (e.g. family and friends).
Nowadays, economic theories must explain whether innovative firms fare better in
surviving the challenges of this change which are currently manifested in the global
socio-economic crisis and a lack of financial resources. Maybe to explain the current
change and the equilibrium point, an advanced theory must be developed, to help the
decision-making process in firms and in public sector regarding which is the best way
to growth (thus a knowledge trajectory instead of the technological trajectory of NSE)
through the change. It seems plausible to ask what PKE and NSE can teach one
another due to the validity of PKE models in the long term and their systemic nature
and the micro level of NSE regarding innovation theories. Such a systemic approach
accounts for both the need to be generic to explain fully the real economy (thus change
and growth) and to be specific to explain individual choices (thus innovation market at
micro level).
From the academic perspective, this merging path to explain innovation opens the
possibility to contribute to both the general theory of growth and innovation theories.

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Even though this is an exploratory paper, future contributions can be synthesised in

these perspectives:
.
The chance to explain innovation required three levels of analysis namely
micro, meso and macro. This is achieved by using the PKE and NSE theories.
.
The systemic approach adopted allows explaining the real economy (macro) and
the individual choices (micro), as well as the meso level of an innovation system
at the national, regional or sectoral/technological scope.
.
The view of an innovation system as a market allows for the introduction of
the equilibrium point (aggregate supply and demand) as an explanatory factor of
growth. An advanced theory is needed around the trajectory of knowledge, as a
possible way to explain decisions (firms, and public decision-makers).
.
The finance of innovation can be explained by developing the endogenous
finance approach from the PKE theories. Institutional support services to
innovation from the NSI approach help to perceive finance as being endogenous
to the system. Private financial services, public supporting grants and aids, and
the auto-financing capacity of firms can be incorporated as being endogenous to
the system.
There are also relevant findings for practitioners, from the perspective of public and
business decision-makers. Decision-makers regarding political-economy policies and
innovation support policies (including training in universities, science and technology
centres, and so) need to have more complete information on the economic reality to
design their public policies more efficiently. This new approach will provide them with
a more complete picture about how this economic reality functions.
Business decision-makers need to understand their competitive environment to
manage their limited resources, especially their innovation system environment. This
new approach provides forward-looking information about where the innovation
system and their competitive environment (competitors, technology, suppliers, clients,
etc.) are expected to evolve.
Notes
1. Dequech (2000) asserts there is an important distinction between fundamental uncertainty
and ambiguity, arguing that Keynes used the notion of uncertainty to denote both
aforementioned terms. Ambiguity is uncertainty about probability, created by missing
information that is relevant and could be known (Cameron and Weber, 1992, p. 330, as
quoted in Dequech, 2000).
2. The authors shall disregard the neoclassical approach to the firm since it represents a
simplistic view that reduces the firm to no more than a production function, failing to explain
its technology, governance and management.
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Corresponding author
Vladimir Cvijanovic can be contacted at: vcvijanovic@efzg.hr

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