Volume 44, Number 174,
July-September 2013
Schumpeter and the Post-Schumpeterians:
Old and New Dimensions of Analysis
Gabriel Yoguel, Florencia Barletta
and Mariano Pereira
The Dynamics of Economic Development ( ...continuation )

This new equilibrium, which intersects the social utility curve at a higher level, describes Schumpeter’s idea of progress in the ted.3

Although this may seem like a conventional analysis of equilibrium-instability-new equilibrium, the ted separates this from the orthodox approach. From the Schumpeterian perspective, development is the result of disturbances in the endogenous circular flow of a system. The causalities are inverted. Everything that would appear to be a cause of growth (discovering new countries, population increases, technical progress) is considered by Schumpeter to be the consequence of endogenous system development. “Innovations did not give rise to capitalism. Rather, capitalism generates the innovations necessary for its existence,” (Schumpeter, C7: 102). Other elements that differ from the assumptions of the general Walrasian equilibrium are: i) the importance of the previous history of agents and some incipient idea of routine in circular economics, ii) the idea that all development processes create the necessary conditions for future development, iii) the presence of economic and social connections that have some influence on agent behavior, iv) the nature of capital as a produced good and v) passive money that separates Schumpeter from the quantitative theory of money.

csd both continues and diverges from the ideas proposed in the ted. Continued threads include the idea of development as a self-transformational endogenous evolutionary process, which, as proposed by Nathan Rosemberg (2011), is similar to Marx, and the idea of creative destruction as the phenomenon that gives rise to this process. In his own words, capitalist dynamics are a “process of industrial mutation incessantly destroying the old one, incessantly creating a new one. This process of creative destruction is the essential fact about capitalism” (Schumpeter, 1942: 121).

Areas that diverge in csd include moving away from the assumptions of circular flow and abandoning the idea that development dynamics lead to equilibrium. He writes:

Once equilibrium has been destroyed by some disturbance, the process of establishing a new one is not so sure and prompt and economical as the old theory of perfect competition made it out to be; and the possibility that the very struggle for adjustment might lead such a system farther away from instead of nearer to a new equilibrium. This will happen in most cases unless the disturbance is small (Schumpeter, 1942: 145).

At the same time, development and creative destruction exist in the framework of historical analysis that includes the emergence of competing concerns in oligopolistic markets. Unlike the ted, new combinations arise from the work generated in the r+ddepartments of large companies in a rational manner. This is very different from the new combinations introduced by an entrepreneur in the ted, where tacit knowledge is key. The new combinations considered in csd may be gradual, and compete with existing products, or radical, and create their own demand curves. The functions of production and the cost curves of concerns are therefore different form those of companies operating in perfect competition.

All companies, both the new and old, are immersed in the “perennial gale of creative destruction” (Schumpeter, 1942: 129). As a result, short-term price rigidity is necessary for the emergence of new combinations. In the long term, prices adapt to technical progress and fall rapidly. This phenomenon is also true in the long waves that reflect the rise and fall of the gales of creative destruction with flexible prices.4 Schumpeter proposed that what appears to be rigidity is actually a regular adaptation to produce new combinations. In this way, he states that progress destroys capital value where competition penetrates, either with new goods or new means of production. Another difference is the idea of progress in the ted as compared to the inherent instability of capitalism and the strong possibility that the “walls collapse” in csd. However, unlike Marx – who assumes that the terminal crisis of capitalism is a consequence of its failure – Schumpeter derives the fall from endogenous issues centered on the bureaucracy of innovation (Langlois, 2007).

The Idea of Creative Destruction

Schumpeter develops different versions of his key idea of “creative destruction,” writing that the creation of new combinations gives rise to increased diversity among competing companies in terms of product supply, production methods and organization.

This dynamic generates strong heterogeneity, both in terms of profit rates and company productivity. When these new combinations emerge, they lead to a selection process that displaces agents from the market – responsible or not – if they are unable to replicate these new combinations.5 The creation of these new combinations precedes the destruction that results from the market selection process. This is a “process of mutation that revolutionizes the economic structure from within” (Schumpeter, 1942: 121). Creative destruction constitutes a policy driven by creative agents that, in the sense of Douglas North, play against the rules under which transactions take place. This occurs in equilibrium in the ted and in the period of instability in csd.

Another difference between these works is the nature and type of agents that lead the process of creative destruction. In the ted, the innovative combinations are generated by new companies that produce conditions the existing ones cannot match.

3 Although Schumpeter brings the notion of development close to economic progress throughout the ted, in C7 he recognizes that technological change could have negative repercussions on employment.

4 This historical point of view, picked up decades later by Pérez (2010), Freeman (1995) and Dosi (1999), brings him close to Marx again (Rosemberg, 2011).

5 In C7, Schumpeter proposes an exception to the process of creative destruction where new products introduced into the market are complementary to those that already exist. In this case, the new product could even increase demand for the old.

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