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Long waves and innovations
The resurgence of entrepreneurial instincts in former Eastern bloc nations might also have surprised Joseph Schumpeter, whose writings celebrated the creative vigor of capitalism. In 1911, he proposed a long-wave theory of business cycles in which development is fueled when entrepreneurs initiate such innovations as (a) discoveries of raw materials, (b) new goods or new quality in familiar products, (c) technological advances, (d) the opening of new markets, or (e) major reorganizations of industries.
Major innovations generate spinoffs, which are related inventions, mimicries of an original innovation, or the births of new industries. Such advances as microelectronics, Teflon, and laser surgery, for example, were spinoffs of the space program. Economic growth peaks by the time society fully adapts to a major innovation; saturated markets cannot absorb further supply increases or emulation of the new technology. When firms retrench, the economy slumps while awaiting fresh innovations. The next long-wave process is sparked (but only after a delay) by a new wave of innovation. Of course, minor innovations might explain shorter cycles.
Schumpeter identified certain institutional features in a society as essential for innovation and economic vitality. First, entrepreneurs must nave broad discretion about how to operate. Second, well-developed financial markets must channel credit to entrepreneurs, allowing investment in new capital and R&D even before they actually contribute anything to national income.
Schumpeter used railroads to illustrate major innovations. Cars, planes, and advances in agriculture have also driven U.S. economic development. More recently, computers have enabled some firms to grow to sizes that were impossible when information processing was primitive, and microprocessors have thrust an array of new consumer goods (e.g., garage door openers, electronic toys, and microwave ovens) into the realm of necessities for many Americans. Perhaps the most underrated innovation of the past century is the supermarket, which reduces transaction costs for an incredible variety of goods. Supermarkets provide outlets for specialized firms that would have been denied shelf space in old-fashioned general stores.
In the past few decades, economically less developed areas such as Japan, Taiwan, Hong Kong, South Korea, Malaysia, Mexico, and, most recently, China and India, have experienced dramatic growth, largely through the implementation of market incentives. Schumpeter would not have been surprised by the progress made possible by competition among ambitious entrepreneurs. One major prediction extended beyond even Schumpeter's own long-wave theory (30 to 60 years). It seems strange, but Schumpeter, a devotee of capitalism, was almost as convinced as Marx that capitalism might ultimately self-destruct. However, he hypothesized a very different mechanism.
Schumpeter thought that prosperity created by capitalism (and not, as Marx thought, a capitalist depression) would ultimately create irresistible pressure for redistribution of income from the haves to the have-nots. This, in turn, would diminish entrepreneurial incentives, draining capitalism’s creative vigor. Thus, in essence, his most sweeping forecast was that capitalism would fall victim to its own success. Many modern economists who share Schumpeter’s enthusiasm for entrepreneurs as innovative heroes also see governmental growth in developed countries as an omen that Schumpeter’s worst fears are being realized. 3033 digits