Schumpeter and entrepreneurship: A destructive or disruptive force?

Joseph SchumpeterJoseph Schumpeter (1883 -1950) came from the Austrian School of economics and was thus a strong proponent of the free-market. In his book, ‘Capitalism, Socialism and Democracy’, he sought to defend capitalism based primarily on the grounds that capitalism sparks entrepreneurship. He is widely considered to be one of the forefathers of entrepreneurship within academia.

Schumpeterian economics placed great emphasis on entrepreneurs being agents of change and drivers of innovation. Introducing new products/services into the economy brings about this change and innovation. Moreover, Schumpeter believed that entrepreneurs were a destructive force (forming part of his ‘Creative Destruction’ theory) because their new products/services that entered the market resulted in the demise and obsolescence of other products/services.

If we look back to the most of the 20th century, there is much evidence of this – cars, electricity, television, airplanes, mobile phones, digital cameras, CD’s etc. Now, in the 21st century we find ourselves in a different era, where products of the 20th century have proven their viability.  Today, entrepreneurs are either opening up completely new markets or carving out niches within existing markets, and therefore creating complementary products/services to something that already exists. Either way, we are not witnessing nearly as much of Schumpeter’s  ‘creative destruction’ as perhaps we may have 50 years ago, but rather what I would prefer to call “creative disruption”. The trend we are now becoming accustomed to falls within exactly what economist Israel Kirzner called the ‘process of discovery’ in entrepreneurship. Unlike Schumpeter’s disruptive force, Kirzner’s theory is one of equilibrium. Instead of pushing another product/service out of the market, the ‘process of discovery’ advocates finding profit opportunities that previously went unnoticed. Equilibrium is restored via new entrants to the ‘niche’ market, who eventually eliminate the profit opportunity.

Kirzner’s ‘process of discovery’ theory very much embodies the tech start-up scene at present. We just have to look at a list of London start-ups to validate this: ubiCabs, Adzuna, Bandeka, apsmart, brightlemon, datasift, everlution, housetrip, ideo, etc. None of these start-ups are shaking up established markets with their ideas. Rather, they are seeking to complement existing markets, or creating niches or micro-niches that offer something new to the consumer. Overall the premise of these start-ups is to make our lives easier. If you speak to the founders of these companies, many of them will tell you, that their idea creation spurned from an existing issue/problem/void that they found in day-to-day life. Its not so much about ‘raffling feathers’ and ‘throwing punches’ anymore, but more about simple augmentation in positive sum terms. Schumpeter’s ‘creative destruction’ theory is waning in this modern era. Yes, Facebook and Google are modern examples of tech behemoths, but their success hasn’t resulted in the complete obsolescence of services that stood before them. Granted, the same cannot be said about Amazon. Amazon is ostensibly responsible for the demise of the bricks-and-mortar bookstore. But, this is just one example, and in actual fact, over the last decade there are not many examples that come to mind. Is this because the opportunities that lie within niche markets are greater and contain less risk? Or, is it that ingenuity within an established market only comes round once a decade? Regardless of the answer, the Kirznerian economic approach to entrepreneurship certainly wins more plaudits in 2012 than the Schumpeterian one.

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