"To accomplish something new is not only objectively more difficult than to do something known and tried many times, but one would not feel like doing it even if there were no objective difficulties....In the mind of those who want to accomplish something new, the power of habit rises and tries to defeat the emerging plan.
When Maurice Dobb gave a Lecture in Prague several years ago, [before 1966] most of us were somewhat surprised that he regarded J. A. Schumpeter to be an economist more important for today than J. M. Keynes.
During the preparation of the new economic system in Czechoslovakia, problems appeared that made Schumpeter's theory quite relevant.
A Concept of Economic Dynamics.
For Schumpeter, dynamics is something completely different. Dynamics is not just 'spoiled static state', it has its own specific problems and regularities that cannot be explained within the static framework. The economy has an inbuilt engine that pushes it forward all the time, and what needs to be explained is the nature of endogenous powers causing that movement. Schumpeter is not interested as much in the process of quantitative growth, as in the qualitative changes that he calls 'innovations'.
But neither static state is for Schumpeter a motionless situation. Even without innovations the economy must be continuously flowing; goods are produced, exchanged, and consumed, money circulate again and again. Schumpeter's static is not a standstill, but continuous flow of economic activities, that however, remain within traditional bounds.
It is worth to note that Schumpeter does not completely reject the leading role of consumer, he rejects only the idea that causes of the economic development are created by consumers. Economic development has its roots in production, not because production is repeated again and again, not even because more and more is produced, but because the way of producing changed. To produce means to combine factors of production, i.e. labor, means of production and natural resources, in a certain way. To change the way of producing means to change the combination of factors of production. "Development in our interpretation means to perform new combinations."
According to Schumpeter there are 5 cases of new combinations: 1.production of new types of goods, or change of properties of the existing goods; 2. introduction of the new method of production, that may be based on the new scientific discovery; 3. opening of a new market; 4. use of the new sources of of raw materials and intermediate goods; 5. new organization of production.
And now we are coming to a very important point: it looks as if Schumpeter participated in our current discussion about 'living beyond our means'. He argues against the view that development requires in the first place accumulation i.e. larger and larger amassing of means of production
This statement of Schumpeter must not be exaggerated as if he completely denied any usefulness of accumulation. What is true is that he rejected the primary importance of accumulation for development. The primary role have innovations, i.e. the new combinations of existing stock of factors of production.
Entrepreneurs represent a special type, but it is primarily the type of behavior; the type of people only if certain type of behavior requires a special type of people.
Economic activity in the circular flow is customary, it requires only habit and routine, but otherwise it can be done by anybody. The circular flow requires endless repetition of the same kind of activity because only that way one gets practice and routine. It also generates conservative tendencies.
Because of these difficulties entrepreneurs must have certain specific predispositions, that are quite rare in population. They must be able to overcome the resistance of the environment and also their own prejudices, they must not be afraid of taking risk, swim against the current, work with unknown variables.
The external obstacles are created by resistance of social environment. "This reaction can appear primarily in obstacles of legal or political nature. But if we abstract from these obstacles, than every time some member of a social group leaves aside the established patterns of behavior, he will meet rejection of various extent depending whether the given social group is accustomed to changes in behavior or not....The opposition is stronger at primitive stage of culture than in more advanced stages, but it exist all the time."
The remaining question is: what are the motives that lead the entrepreneur to innovative activity? Schumpeter thinks that psychology is needed to explain those motives. He thinks that entrepreneurship cannot be explained by economic reasons, and that the psychology of the entrepreneur is non-hedonistic. The satisfaction of wants - according to him - can be considered the main motive only in circular flow. The motives of the entrepreneur are rather breaking old traditions, desire to fight and conquer, to demonstrate own success and superiority over others.
The role of credit and banks
And so we are back at the problem of accumulation. "Conventional theory sees the problem in the existence of means of production needed for new or rather all processes of production and in connection with that accumulation becomes a special function or service. As far as we are concerned, we completely deny that such a problem exists.....Such a problem does not exist in circular flow....but neither it exist when new combinations are realized....Instead of that we see completely different problem: the problem of draining means of production (already in use somewhere) from the circular flow and allocation of them to new combinations."
This function, as we said before, is performed by a bank with the use of credit. Credit, however can be provided from the means obtained by accumulation savings. To stress specifically that development does not depend on accumulation, Schumpeter describes a case of economic development without any accumulation. Even in that case banks can create additional credit, but they make it 'from nothing', by purely nominal creation. According to standard views it seems that such a credit that is not backed by real capital, cannot lead to real economic growth, but only to monetary inflation. Schumpeter does not agree with that. Of course, at first there will be increase of money that will lead to inflation, but what will happen afterwards? The decline of purchasing power of money will cause decline of real purchases of means of production by the agents of circular flow.
By inflation the bank confiscated a part of means of production, which then allocates - using credit- to innovators. Creation of the credit 'from nothing' did not create more means of production but it reallocated existing means of production from somebody's hands to somebody else's hands. If the means go from incompetent hands to hands of entrepreneurs than from 'nothing' is created 'something' - innovation that gives impulse to economic growth is made possible.
"And so the banker is a mediator between those who want to realize new combinations and those who have the means of production. In principle the banker is a factor of development, but only if the social process is not controlled by some central power. He makes possible application of new combinations, he designates some people - as if in lieu of the society - by their realization. He is an arbiter of the market economy."
Entrepreneurs with profit motive and bankers using credit are according to Schumpeter the most important characteristics making the capitalist economy dynamic. They are prerequisites of permanent flow of innovations that leads to economic development.
Schumpeter's theory is certainly somewhat one-sided. But every theory must be more or less one-sided. It is also clear that Schumpeter undervalued the importance of accumulation, but on the other hand he was apparently right in regarding innovations as more important factor of development than accumulation. After all we could say that the 'primary role of innovations' is the Marxian dictum about the role of 'powers of production' for economic development only expressed in different language. It seems that our recent experiences confirmed the validity of Schumpeter's analysis of the role of entrepreneurship, profit motive, banks and credit. The main error of Schumpeter was his denial of the possibility of the existence of these factors under socialism.
Socialist entrepreneurship should be one of the key attributes of the new system of management and the profit motive was not only theoretically rehabilitated but also used in practice, if only in the form of gross income incentives. Perhaps we should pay somewhat larger attention to the role of banks and credit. It appears that neither of these factors is dependent on the specifically capitalist forms of ownership and distribution and therefore there is no reason to assume that impulses of economic development under socialism cannot be as strong or even stronger than under capitalism.