Schumpeter on the Economics of Innovation and the Development of Capitalism

Published by EH.NET (August 2006)

Arnold Heertje, Schumpeter on the Economics of Innovation and the Development of Capitalism. Cheltenham, UK: Edward Elgar, 2006. vii + 142 pp. $90 (cloth), ISBN: 1-84542-445-X.

Reviewed for EH.NET by Mark W. Frank, Department of Economics and International Business, Sam Houston State University.

This book presents a collection of eleven reprinted essays written by Arnold Heertje (Professor Emeritus, University of Amsterdam), the outcome of twenty-five years of research on the work of Joseph Schumpeter. The book offers a solid introduction into the insights of Schumpeter’s vision, as well as an interesting first-hand account on the evolution of Schumpeter’s influence within economics over the past several decades.

The book’s eleven essays are organized into three thematic parts. The first part contains three essays which present a broad picture of Schumpeter’s life and thoughts. The first essay is, in fact, a reprint of Heertje’s wonderfully concise and informative biographical sketch of Schumpeter, originally published in The New Palgrave (1987). The second essay comments on Schumpeter’s understanding of technical change in a dynamic economic system. The third offers insights into Schumpeter’s role in the development of methodological individualism, a concept fundamental to the public-choice theory of James Buchanan and Gordon Tullock.

The second part of the book consists of two essays which concern Schumpeter’s view on the sustainability of capitalism, and a third essay, that deals almost exclusively with the work of Joseph Stiglitz. While the third essay (chapter 6, “From Schumpeter to Stiglitz”) is largely out of place in a book on Schumpeter, the first two essays constitute the most provocative and insightful parts of the entire book. These essays concern Schumpeter’s famous contention in Capitalism, Socialism and Democracy (1942) that capitalism would fail, despite its successes, and be replaced by a socialist society. With the advantage of hindsight, Heertje argues Schumpeter largely missed the mark on this prediction, and considers inconsistencies in Schumpeter’s thought to be the primary cause. In Heertje’s view, the importance of small firms and new entrepreneurs, so prominent in Schumpeter’s earlier work, is missing in his later work, replaced with the routine mechanization of large monopolistic firms. Had Schumpeter remained faithful to his original connotation of entrepreneurs, according to Heertje, he would not have lost faith in the creative destruction of capitalism. But such are the inherent contradictions of Schumpeter, in his writings as well as in his life.

The third and final part consists of two essays concerning the role of technical change and economic growth in the writings of Schumpeter, one essay comparing Schumpeter’s work with that of Keynes, and two essays reviewing more recent works by neo-Schumpeterians. Though the thematic connection of these five essays is less obvious, the attempt to place Schumpeter in a larger historical context is well valued. Heertje also shows us in these essays that he is no blind disciple of Schumpeter, despite devoting several decades to the study of his work. Heertje’s repeated criticisms of Schumpeter’s lack of mathematical rigor, for example, are quite striking (though justified). According to Heertje, Schumpeter’s work should be seen as ramified analysis and description, not true economic theory. While Schumpeter’s counterpart Keynes was able to successfully use the mathematical apparatus of this time, Schumpeter’s visions of economic discontinuity lacked such rigor. Heertje views this as a clear limiting factor in the early acceptance of Schumpeter’s work, though recent advances in endogenous growth theory, non-linear dynamics, and chaos theory have given rise to a new and promising generation of neo-Schumpeterians.

On the whole, this book offers a nice presentation of Schumpeter’s views on technical change, innovation, and entrepreneurs from one of the leading scholars on Schumpeter’s life and work. The book will certainly be of value to scholars of Schumpeter, but will also be of interest to novice-Schumpeterians interested in a concise and accessible critique on Schumpeter’s work.

Mark W. Frank is Associate Professor of Economics at Sam Houston State University, and author of “Schumpeter on Entrepreneurs and Innovation: A Reappraisal” Journal of the History of Economic Thought (1998): 505-16.