The Schumpeterion Hypothesis

It was just this dilemma that led Joseph Schumpeter to advance his bold hypothesis in support of nonopolies The modern standard of life of the masses evolved during the period of relatively unfettered big business: If the items than enter the modern workman’s budget , from 1899 on. observe the course of their prices  we’ cannot fail to be struck by the rate of the advance which, considering the spectacular Improvement inqualiries. seems to have been greater and not smaller than it ever was before. , .. Nor is this all. As soon as  , ,inquire into the individual in which was most conspicuous, the trail I (not to doors those firms that work under conditions  hut 10 the doors of the large concerns-which. as in the machinery , also account for progress in the competitive sector-s-and i I shocking suspicion dawns upon us that big business may have had more  to do with creating that standard of life than keeping it down.2 How well has the bold Schum peterian hypothesis survived a half-century of scrutiny? The facts are much more complex than this simple: hypothesis would suggest.

To begin with, this view might have had greater validity a century ago. when large firms were tiny by today’s standards and most firms had great difficulty raising capital to promote their innovations. Moreover, it is surely true that our corner grocery store today does little R&D. But careful studies indicate that individuals and small firms playa vital role in the inventive process. Table 10-1 on page 196 shows the amount of R&D performed by different firm classes as well as the ratio of R&D to sales for each. In earlier years, most R&D was indeed undertaken by large firms. But in the last decade, particularly with the cottage-industry approach of the computer industry. research by small firms has grown rapidly, with such firms now financing one-quarter of all R&D. Moreover, studies indicate that small firms are responsible for a disproportionate share of major inventions and innovations. When John Jewkes and his colleagues traced the history of the most important .. inventions of this centurv, they found that less than half came from the laboratories of large corporations.

The importance of small inventors has been confirmed in recent years as major new products seem to arise from nowhere-every day we seem to receive an advertisement for a new software package developed by some, unheard-of start-up firm. One business investor put this in a striking saying, “If I “ant really great ideas, I look for a firm with three people under 25 in sandals,” The relationship between innovation and market power is complex. Because large firms have n tad a major contribution to research and innovation. t’ should be cautious about claims that bigness is unmitigated badness, At the same time, we must recognize that small businesses and individuals have made some of the most revolutionary technological breakthroughs and arc, performing an ever-laruc-r share of industry-financed R&D, To promote rapid innovation, a nation must preserver’ a varictv of’ approaches and organizations, t J, A. Schumpeter, Capital.

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