Joseph Schumpeter on innovation and his concept of creative destruction

In the new economy, business families rise and fall so quickly that it becomes difficult to speak of them as social classes at all. In the fast change in the position of families in the upper classes, there is clearly taking place a very democratic and effective selection of brains. The economy has entered the realm of meritocracy, which is inherently hostile to hereditary class. Entrepreneurship had become a function, not a marker of class. the worker today is the biggest stakeholder of the capitalist economy. One should never forget that todays entrepreneurs very often are themselves former workers and sons of workers. He begins by pointing out that most of the wealthy families that led society at the midpoint of the 19th century were no longer on top three generations later. This situation wholly contradicted Marxs insistence that the rich would get richer and the poor poorer. A truer diagnosis lies in the incessant dynamism and competitive innovations that occur within capitalist business. Marx himself saw this dynamism but even he did not begin to grasp its full implications. For it is never enough, as Marx believed, simply to plow back profits into the family business. No company, Schumpeter countered, can ever retain a position at the top of its industry without doing very much more than this without blazing new trails, without being devoted, heart and soul, to the business alone One might think that the sound practices of saving, living frugally, and maintaining the company on a solid foundation would suffice. But Schumpeter argues that any company following these routines however admirable they seem at first glance will soon be overtaken by aggressive, risk-taking, competitive entrepreneurs. He is very emphatic on this point: The introduction of new production methods, the opening of new markets indeed, the successful carrying through of new business combinations in general - all these imply risk, trial and error, the overcoming of

resistance, factors lacking in the treadmill of routine. He concluded by saying, As to the question why this is so, it is answered by the theory of entrepreneurial profit. Newcomers to the industry will bring fresh ideas, earn much higher profits, and drive incumbents out of business through the simple device of fixing on economic growth as their sole objective. This is very hard to do. Most successful people, especially once they become wealthy, do not want to continue obsessing over economic growth. The come to abhor the relentless demands of continuous innovation. They want to enjoy themselves and live a better-rounded life. For these reasons, great enterprises typically outgrow the abilities of founding families to sustain a position at the top of their industries. Mere husbanding of already existing resources, no matter how painstaking, is always characteristic of a declining position Under truly modern forms of capitalism, the task of maintaining a prime position becomes even more difficult. Industrial leaders must shoulder an often unreasonable burden of current work, which takes up the greater part of each day. Entrepreneurs need extraordinary physical and nervous energy. The best of them can sustain their efforts on a high level only if they have that special kind of vision . concentration on business to the exclusion of other interests, cool and hard-headed shrewdness traits by no means irreconcilable with passion. But simply being born into a prominent family confers none of these abilities. In modern industrial society, therefore, the persistence of class position is an illusion class barriers must be surmountable, at the bottom as well as at the top. The key to a higher class position is for an individual to strike out along unconventional paths. This has always been the case, but never so much as in the world of capitalism. Most industrial families have risen from the ranks of workmen and craftsmen because one of their members has done something novel, and this is :virtually the only method by which they can make the great leap out of their class. Overall, industry specific innovation does not follow, but creates expansion

Innovation requires continuous disequilibrium led by entrepreneurs obsessed with what they are doing. Innovation itself is primarily a feat not of intellect, but of will a special case of the social phenomenon of leadership. The barriers to innovation consist of the resistances and uncertainties incident to doing what has not been done before. These difficulties are often immense, and to surmount them is the function characteristic of the entrepreneur. It is not difficult to identify a Schumpeterian program at whatever level one chooses: the individual entrepreneur, the business firm, the industry, or even the country. At all levels, Schumpeters litmus test is whether the players are pursuing innovation and bringing about creative destruction. Schumpeters key point is: it is the insatiable pursuit of success, and of the towering premium it pays, that drives entrepreneurs and their investors to put so much of their time, effort, and money into some new project whose future is completely uncertain. High entrepreneurial returns are essential to generate gains not only for individuals but also for society, through the creation of new jobs. The sons and daughters of successful entrepreneurs maintain the founders position only if the family firm continues to innovate, which it often does not. It must be remembered that without entrepreneurship no growth can occur.