Assignment No. 2 – April 14, 2011
Session 2 - April 7

Find at least one modern example for each of the five types of Schumpeterian innovation (500-word essay). Please cite your sources: books, journals, newspapers, company website, website, etc. Please cite (only if available) statistics of market size. Be sure to mention innovations, not just inventions. If you think that an invention does have the potential to become an innovation, briefly state the business case!

[REQUIRED READING!] Excerpt from Joseph A. Schumpeter. The Theory of Economic Development, as quoted by Thomas McCraw in Prophet of Innovation. Joseph Schumpeter and Creative Destruction (Cambridge, Massachusetts: Harvard University Press, 2007):

Schumpeter specifies five types of innovation that define the entrepreneurial act. To quote his list directly:

(1) The introduction of a new good –that is one with which consumer are not yet familiar- or of a new quality of a good. 

(2) The introduction of a new method of production [or commercialization], that is one not yet tested by experience in the branch of manufacture [or retail trade] concerned.

(3) The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before.

(4) The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created.

(5) The carrying out of the organization of any industry, like the creation of a monopoly position, or the breaking up of [an existing] monopoly position.
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Innovation & credit markets

Session 2, April 7 2011

Now this is an exciting topic! Joseph A. Schumpeter (1883-1950) is the key pioneer in the field of economics and innovation. Schumpeter wrote the Theory of Economic Development in 1911, almost 100 years ago! Schumpeter on the credit market: “He can only become an entrepreneur by previously becoming a debtor … what he first wants is credit. The core ethos of capitalism looks constantly ahead and relies on credit in launching new ventures. From the Latin root credo —'I believe'— credit represents a wager on a better future ... In the absence of credit, both consumers and entrepreneurs would suffer endless frustrations”.

Initially, the emergence of innovative entrepreneurs pushes interest rates higher, as demand for credit shifts upward.

[DIAGRAM. Demand for credit increases at each level of the interest rate!]. The result is a higher level of interest rates…

Now, Schumpeter also praised financial innovation — up to a point. In the case of railroads in the second half of the XIXth century, or the automobile industry, he states that “credit creation” in the form of overdrafts and car loans [i.e credit creation on a large scale] made it possible to finance these innovations.

[DIAGRAM. The supply of loanable resources increase]. Note that the net result is a stable interest rate + more credit!!! This is the kind of result you want to have!

But then he adds: “Some of that lending was granted with almost unbelievable freedom and carelessness”. Does that ring a bell? Sounds familiar? BOOM-AND-BUST IS INDEED PART OF THE PACKAGE!!!!. Schumpeter made a distinction between productive & non-productive financial instruments. When bankers create financial instruments to “play amongst themselves”, then the risk of a bubble increases dramatically. But is it possible to really make that distinction? On this topic, see [NOT required reading!] the paper by Charles G. Leathers & J. Patrick Raines: “The Schumpeterian role of financial innovations in the New Economy's business cycle” Cambridge Journal of Economics, 2004, No. 28, Vol. 5, pp. 667-681.
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Innovation vs. invention

An innovation is an invention with a proven track record in the market place! Please remember this point when writing Assignment No. 2!
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