Schumpeter's prophecy and individual incentives as a driver of innovation
Over sixty years ago, in his Capitalism, Socialism and Democracy[CSD], Joseph Schumpeter (1962) predicted the demise of capitalism. He argued that the growth of the large business enterprise was frustrating the entrepreneurial incentives vital to capitalism's vitality and growth. Accordingly, the very success of capitalism's flagship institution – the large modern business enterprise – was to be its undoing. In CSD, Schumpeter argues that the locus of innovation and technological progress had shifted to the large modern firm. That shift would, however, undermine capitalism by embedding innovation within large corporate bureaucracies, leading to its routinization, with a consequent replacement of entrepreneurial incentives – attendant upon the prospect of individual gains and losses from entrepreneurial initiative with those associated with either the salaried employee or the shareholder. Neither status, in his view, confers the “substance of property,” which entails a “sense of personal responsibility for success” (1962, p. 133) – that is, a strong personal stake in the creation and subsequent performance of the enterprise. In his view, neither top management, salaried personnel nor shareholders, nor, in turn, the modern business enterprise itself, can sustain what he believed to be the economically critical function of the entrepreneur in “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 and so on.” (1962, p. 132). Thus, in achieving its very dominance, the large modern enterprise was sowing the seeds of the decline of the system for which it had become the bedrock institution.
- Perspectives on Innovation
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International Standard Book Number 13 (ISBN-13)
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