Schumpeter’s Theory of Innovation Empowers the New Economy of the 21st Century.

Please cite the paper as:
Constantine Passaris, (2024), Schumpeter’s Theory of Innovation Empowers the New Economy of the 21st Century., World Economics Association (WEA) Conferences, No. 1 2024, Capitalism, Socialism and Democracy 80 years later, Looking at capitalism today in light of its past and possible future


This paper will analyze Schumpeter’s theory of innovation from an economic pluralist perspective. The hypothesis that will be examined is that Schumpeter’s theory of innovation is his most enduring academic legacy. Furthermore, this paper will examine Schumpeter’s theory of innovation in the context of its microeconomic foundations and macroeconomic contributions. In addition, we will explore the role of economic history in informing Schumpeter’s theory of innovation.

In effect, Schumpeter’s theory of innovation has informed and shaped the contemporary economic landscape and is the modern driver of the new global economy of the 21st century. Innovation is the singularly most impactful catalyst for economic empowerment in the 21st century. There is no denying that innovation has become an essential prerequisite and a core catalyst for economic success and collective prosperity in the modern economy.

This paper will explore the role of economic governance and the mission of the private sector regarding innovation. Economic governance has the capacity to support and nurture the process of innovation in all aspects of human endeavour. The private sector also has a role in advancing the impact of innovation by implementing innovative solutions and empowering innovative projects. All of this for the purpose of underlining the foundational and essential role of innovation in creating a more prosperous economy in the 21st century.

Innovation has the capacity to build bridges and create synergies between the private sector and the public sector. It can also facilitate a modern pathway for a more integrated and efficient mixed economy. More specifically, innovation can serve as a catalyst for connecting the private sector and the public sector. This takes the form of the public sector recognizing its role in supporting innovation projects in the private sector. In addition, innovation can trigger an exercise of introspection in the public sector for the purpose of strategically realigning its mission for the efficient delivery of public goods and economic policy during the contemporary period of fiscal constraints. All this creates a reciprocity for innovation in the modern mixed economy consisting of a collaborative engagement between the private sector and the public sector. In consequence, culminating in the desired macroeconomic outcomes such as a high rate of employment creation, sustainable development, and economic prosperity.

The Great Recession that followed the global financial crisis of 2008, the medical exigency of COVID-19 with its catastrophic economic consequences, and the supply chain disruptions associated with the war in Ukraine require a reimagining of economic governance with the purpose of renovating its organizational structure and embracing a more cost-effective method for delivering its mission. In effect, process or organizational innovation can serve to streamline the scope and substance of economic governance in the modern context.

Innovation takes the form of a new product, an improved product, a new combination of the production function, a new raw material, a more streamlined process, an improved distribution system, a new organizational structure, or a more cost-effective process for delivering a public service. In some cases, innovation is the by-product of scientific advances in science and technology. In other cases, it is a more efficient realignment of an administrative function. In essence, innovation contributes to a more cost-effective and improved product, process, or system.

Innovation can be either an abrupt or an evolutionary structural change that serves as a catalyst for the transformation of the economic landscape. According to Schumpeter, the process of technological change in a free market consists of three parts: invention (conceiving a new product, idea or process), innovation (arranging the economic requirements for implementing an invention), and diffusion (whereby entrepreneurs adopt the new discovery or imitate it).

At the present time, we are on the cusp of a new wave of innovations related to Artificial Intelligence (AI). It is anticipated that AI will trigger monumental structural changes on the economic landscape. It will also have impactful consequences on production, employment, public services, education, and workplace skills. The overarching advantage of AI is that it has the capacity to merge economies of scale and scope. In short, AI will impact in a profound and indelible manner on the national economy, businesses, the private sector, the public sector, and civil society. There is no denying that AI will create significant benefits but will also create new challenges, risks, and malfeasance on many fronts.

Schumpeter underlined the economic synergies between innovation and entrepreneurship. In essence, innovation is the leading economic tool for successful entrepreneurship. Indeed, innovation and entrepreneurship are inseparable and complement one another. Innovation relies on entrepreneurship to impact the economic landscape and entrepreneurship feeds on innovation through the creation of business profits. Schumpeter considered both as pivotal forces that propel economic success at the microeconomic level. Together they provide the machinery and the fuel for empowering and sustaining the new global economy of the 21st century.

Schumpeter’s seminal publication was Capitalism, Socialism, and Democracy. In that book he introduced his theory of creative destruction. Creative destruction describes the process that sees new innovations replacing existing ones that are rendered obsolete over time. Schumpeter offered a new and unique insight into how economies grow. He sharply deviated from the traditional economic dictums of his day, which held that markets passively tend toward equilibrium until declining profits appear. Instead, Schumpeter argued, economic progress is not gradual and seamless but rather disjointed, abrupt, and sometimes accompanied by disruptions.

The ascent of internetization is a good example of creative destruction. Internetization, which is global outreach combined with electronic connectivity, is revolutionizing our human interactions, redefining governance, empowering businesses, and enhancing the efficacy of community organizations. In effect, internetization has impacted the way we communicate, learn, travel, interact with the economic marketplace, do our banking, enjoy our leisure time, seek entertainment opportunities, and access government services. The advent of internetization has accelerated the operational aspects of innovation and the speed of change.

Economic history demonstrates the cyclical fluctuations of boom and bust that occur over time. Schumpeter proposed a second cyclical fluctuation. More precisely, he demonstrated that a cyclical pattern occurs with each introduction of an innovation on the economic landscape. This paper will explore the connection between the fluctuations of the innovation cycle and the business cycle. Whenever an entrepreneur disrupts an existing industry, it is likely that existing workers, businesses, or even entire sectors can be temporarily disrupted. According to Schumpeter, these cycles are tolerated because they allow resources to be freed up for other, more productive uses. In this regard, there is a cyclical fluctuation with innovations that resonates with the process of the cyclical evolution of boom-and-bust periods.

At the end of the day, innovation is the modern pathway and a foundational building block for creating a better and more prosperous new global economy of the 21st century.


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2 comment

  • Arturo Hermann says:

    it is an interesting contribution. A somewhat curious aspect of Schumpeter’s approach is that it does not consider the role of research and innovation policies – and, more in general, of public action, from the more positive aspects related to, for instance, healthcare, to the more negative ones related to, for instance, the war industry – in orienting the characteristics of research in specific contexts. So, it could be interesting to analyse the role of public policies in making research and innovation instrumental not to big interests but to the society at large.

    • Constantine Passaris says:

      At the outset thank you Arturo for organizing this conference and thank you for taking the time to read and comment on my paper. Your question is very incisive and requires a response on multiple levels. First of all Schumpeter was the antithesis of Keynes in regard to the role of government. Schumpeter’s publications reveal that he had very little credence in a pronounced economic role for government. In consequence, I am not surprised that he does not identify government as a positive force in moving the innovation needle. In effect, he relied fundamentally on the private sector and more precisely the role of the entrepreneur to serve as a catalyst for innovation. Fast forward to the contemporary economic landscape where globalization has morphed into internetization and innovation has become a powerful force for the structural and technological changes taking place all around us. The contemporary reality is that governments have a role to play through their economic policies and public funding to support and initiate innovation which otherwise is prohibitively expensive for most businesses to finance in the present circumstances. A case in point is where the Canadian federal government is financing incubator laboratories that create innovative electronic software which is subsequently shared with small and medium sized businesses at no cost to them for the purpose of enhancing their business efficacy and cost effectiveness. Needless to say that small and medium sized businesses would not be able to afford the financial cost of undertaking this type of research and development on their own.

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