Must Monopoly Power Accompany Innovation?

Abstract

This is the second in the series of my three lectures on “Schumpeterian Themes in the Modem Welfare Economics of Production”. In the first, “Is Entrepreneurship Obsolescent?”, I suggested that we still lacked an adequate theory of the production side of the economy - in particular, a synthesis of much of the recent work on the economics of organization, so that we could understand better the rôle of incentives and discuss the ownership and control of productive enterprises. In that lecture, however, the incentive for a firm to be innovative, or for an individual to be creative and set up his own firm, rather like Schumpeter’s vision of entrepreneurship, was rather left to one side. Yet innovation was the key to capitalist development, in Schumpeter’s view, and his first major work, The Theory of Economic Development, was built entirely upon such innovation. In the theory, not only did innovation promote development; it also led to monopolies as innovative entrepreneurs protected new products or industrial processes through the patent system; and Schumpeter’s theory of business cycles was based on the view that innovations occurred in sudden swarms which led to boom conditions that could not last, and were inevitably succeeded by a slump. Business cycles, however, are the topic of my last lecture.