How Rapid Growth, and Secular Decline, Really Happen: A Schumpeterian-Penrosian Journey

Whereas Adam Smith is the theorist of the free market and John Maynard Keynes the theorist of demand management, Joseph Schumpeter is the theorist of entrepreneurship. What distinguishes Schumpeter from Smith, Keynes, and their disciples is attention to business organization and innovation dynamics in industrial growth and decline. Without a theory of the entrepreneurial firm, the free market and demand management perspectives cannot explain economic development, growth, and decline. Joseph Schumpeter and Edith Penrose take us inside the firm to an economics in which innovation dynamics drive progress. Left to themselves, business leaders can undermine innovation and productivity dynamics as well as advance them. To know the difference we can go inside the enterprise to examine their strategies and productive structures in a comparative international context. One way is direct observation. I illustrate with personal ‘inside the firm’ experience. A second way is to examine historical experiences of the rise and fall in regional and national business competitiveness. I illustrate with President Franklin Roosevelt’s New Deal and Deng Xiaoping’s post 1980 China. While the experiences have differences as well as similarities, I interpret both in terms of policymakers undertaking a ‘Schumpeterian Turn’ to purposefully create new and transform existing enterprises through incorporating advanced principles of production and organization. I describe the US pioneering case of transformative economic policymaking as economists’ finest hour.