Innovations as the impulse of growth and business cycles
No problem in economics is more difficult than the one posed by the almost universal evidence that while capitalist economies grow, they do not expand steadily....There is no obvious solution to this question, and I know of only one economist, Schumpeter, who has ever really constructed a unified theory of growth and cycle.
(Goodwin 1953: 89)From the start, Schumpeter emphasized the wave-like movement of capitalist development, and the important role of innovation (Hagemann 2003). Like Werner Sombart, he was strongly influenced by Karl Marx’s analysis of the long-run development of capitalist economies and his emphasis on capital accumulation and technical progress. In Marx’s view, crises and cycles were the very essence of the evolution of capitalist economies. For Schumpeter, studying business cycles “means neither more nor less than analyzing the economic process of the capitalist era” (Schumpeter 1939, vol. 1: v). Schumpeter considered capitalist development as a succession of prosperity and depression. Economic development in the sense of Schumpeter is endogenous and discontinuous, and it is the task of dynamic theory to explain the origin and effects of these processes which essentially are disturbances of the static equilibrium of the economy.
It is well known that innovations, pioneering entrepreneurs, and bank credit are the three main elements of Schumpeter’s Theory of Economic Development in which, as Schumpeter (1911 [1934]: xiii) pointed out in his foreword to the fourth German edition, “any single page is dedicated to the problem of the business cycle”. The pioneering entrepreneur is the agent of creative destruction in carrying out new combinations that include the five cases of introduction of new methods of production, new products, the opening of new markets, new sources of supply, and new forms of organization. The interaction between long-run growth and cyclical fluctuations, and particularly the role played by innovations, were the focus of Schumpeter’s attention.
However, in 1911 only the classical or Juglar cycle was known to him, the Kitchin, Kondratieff and Kuznets cycles not being discovered until the 1920s. This stimulated Schumpeter to elaborate his basic idea of the superposition of different waves. Thus, in Business Cycles he develops a three-cycle scheme in which Kondratieff long waves are combined with the classical Juglar and the shorter Kitchin cycles (see the famous diagram in Schumpeter 1939, vol. 1: 213). Schumpeter based his approach on a mono-causality argument in which both growth and business cycles result from innovation. Not only do innovations constitute the decisive impulse of cyclical fluctuations, the period of their implementation also determines the different lengths of the cycles. Thus, major innovations or fundamental technological breakthroughs cause Kondratieff long waves or growth cycles whereas medium and minor innovations lead respectively to Juglar and Kitchin cycles. According to Schumpeter (1939, vol. 1: 168), the Industrial Revolution “consisted of a cluster of cycles of various span that were superimposed on each other”. Innovations tend not only to cluster but also lead frequently to a sequence of cycles which are not fully independent of each other. Railroadization, electrification, motorization (and we could add computerization) occur in steps and sequences. Thus for Schumpeter, business cycles and growth are inseparably linked. It can be excluded that Schumpeter would have become an adherent of the later neoclassical steady-state growth model in which the businesscycle problem was assumed away.