Schumpeter on The Generation of New Technology

Question 1

2 types of costs

Answer 1

The time of the inventors

Capital costs

Question 2

Why may capital markets not necessarily provide an incentive to innovate?

Answer 2

→ Problem is dealing with competitors
→ If an innovation diffuses rapidly the person or firm that generated the innovation may not profit much from the innovation
→ The lack of profit reduces the incentive to innovate
→ The solution to this problem is intellectual property rights (patents, copyright, and trademarks), which serve to protect investments in innovation
This ensures that the returns are large enough to provide an incentive to incur the costs of innovating.

Question 3

If there was a monopoly in the German chemical industry, why were prices falling?

Answer 3

→ The threat of substitutes.
→ The threat of new entries.
→ If the market is profitable there is incentive for new entry
→ This innovation resulted in falling prices and productivity growth.
→ Even though the profit rate was higher than other industries they still cut prices
This shows that we can have productivity advancements even in the absence of a competitive industry

Question 4

Adaptive Change

Answer 4

small consecutive improvements in a particular technology or procedure

Question 5

Qualitive/Discontinuous change

Answer 5

One sudden improvement

Question 6

Schumpeter’s arguments

Answer 6

→ Qualitative and discontinuous change, Schumpeter says, has effects that may reduce the likelihood that firms risk it. It unleashes a “gale of creative destruction” as one new innovations may unleash a chain of better innovations.
→ Specifically, new techniques or products:
→ Forces old firms out of business
→ Disturbs the environment for rational calculation
→ Require a substantial amount of risk-taking on the part of the entrepreneur and substantial resources.
→ Small businesses in competitive markets have neither the resources necessary for this kind of innovation nor the capacity to take a risk.
→ According to Schumpeter, innovation requires:
→ Large firms to provide the resources to support research and to exploit economies of scale in research
Monopoly power to reduce the risk involved in innovating