Schumpeter, Innovation and Creative Destruction

The following is clipped directly from Wikipedia:

Schumpeter, The Man

Born in Triesch, Moravia (then part of Austria-Hungary, now Třešť in the Czech Republic), Schumpeter was always a brilliant student and praised by his teachers. He began his career studying Law at the University of Vienna under the great Austrian capital theorist Eugen von Böhm-Bawerk, taking his PhD in 1906. In 1909, after some study trips, he became a professor of economics and government at the University of Czernowitz (a German-language university in Austria, now in Ukraine), in 1911, at the University of Graz, where he remained until World War I. In 1919-1920, he served as the Austrian Minister of Finance, with some success, and in 1920-1924, as President of the private Biederman Bank. That bank collapsed in 1924 and left Schumpeter in bankruptcy. From 1925-1932, he held a chair at the University of Bonn, Germany. Having to leave central Europe because of the rise of the Nazis, he moved to Harvard (where he had already lectured in 1927-1928 and 1930), where he taught from 1932 to 1950.

Schumpter and Creative Destruction

Creative destruction, introduced in 1942 by the economist Joseph Schumpeter, describes the process of transformation that accompanies radical innovation. In Schumpeter’s vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.

Schumpter and the Types of Innovation

There are numerous types of innovation-generating creative destruction in an industry:
-New markets or products
-New equipment
-New sources of labor and raw materials
-New methods of organization or management
-New methods of inventory management
-New methods of transportation
-New methods of communication (e.g., the Internet)
-New methods of advertising and marketing
-New financial instruments
-New ways to lobby politicians or new legal strategies (though many economists would argue that this last is not a genuine example of creative destruction, so much as an example of using force of government to prevent more innovative or lower cost competitors from selling to one’s customers)

Innovation and Economics: A quick look at Europe

Innovation occurs on a global scale and has become increasingly important to the global economy. Economic globalization has reshaped the world economic order. (Commission of European Communities 2006) To stay competitive within this new world economic order, Europe must be more innovative. “These legitimate concerns must be turned into an opportunity to enhance Europe’s global economic competitiveness. The quicker it can react, the higher the chance of success and the greater prospect that its approach will serve as a global model. [...] the Commission is convinced that innovation in a broad sense is one of the main answers to citizens’ material concerns about their future.” (Commission of the European Communities 2006)

The Organization for European Economic Co-ordination (OECD) has acknowledged the importance innovation plays in growth of output and productivity. The understanding of innovation activities has increased but is still lacking. “For example, as the world economy evolves, so does the process of innovation. Globalization has led to dramatic increases in access to information and new markets for firms. It has also resulted in greater international competition and in new organizational forms in order to manage global supply chains. Owing to advances in technologies and greater flows of information, knowledge is more and more viewed as a central driver of economic growth and innovation. Yet, we do not fully understand how these factors affect innovation… (OECD)