The Basic Mechanisms of Economic Evolution

Abstract

After having considered Capitalism and Cycles in the two previous chapters, we now come to the oldest and most fundamental part of Schumpeter's evolutionary trilogy: The Theory of Economic Development . This book is the translation of Entwicklung II , that is, the second edition of Theorie der wirtschaftlichen Entwicklung . Since we have already studied Entwicklung I , the first German edition of the book, in Chapters 4 and 5, it might not be obvious why an extra chapter is needed for treating Development . However, the previous chapters did not include a systematic discussion of the basic evolutionary mechanisms that in all editions of the book are at the centre of Schumpeter's attention. The major reasons for this omittance were that Development is much more focussed on mechanisms than Entwicklung I and that the mechanisms can best be discussed by including the additional treatments of them in Cycles and Capitalism . These additional treatments are very different. Cycles is like Development based on the model of economic evolution that has been called Schumpeter's Mark I model. This model of the capitalist engine depicts the mechanism of innovation as based on the creation of new firms, tion because of the conservatism of established firms. In contrast, some of the core arguments of Capitalism are based on Schumpeter's Mark II model (see Section 7.2). According to this model, established firms innovate and adapt in oligopolistic competition. Thereby, they become core elements of the mechanism of innovation as well as the mechanism of adaptation.