Beyond Schumpeter: nonlinear economics and the evolution of the U.S. innovation system. (economist Joseph Schumpeter)

INTRODUCTION

Recent years have witnessed an extremely subtle, yet appreciable, shift in

U.S. government policy toward industrial innovation. This shift is most

evident in reduced reliance on military spending and in the funding of

various civilian technology initiatives. While, generally speaking, these

policy changes may be bringing national policy into closer alignment with

those of their major global competitors (e.g., Europe and Japan), they may

not be especially well-suited to the unique character of the U.S. industrial

system (or systems). Over 50 years ago, Joseph Schumpeter characterized that

system as primarily entrepreneurial in character. Moreover, he identified a

number of highly dynamic features, which have been virtually ignored in the

major economic theories which guide corporate and governmental strategizing.

Recently, however, interest in these critical dynamics has been rekindled.

In particular, approaches that draw upon recent advances in the study of

nonlinear systems (e.g., chaos and complexity theories), may explain the

seemingly incoherent confluence of forces shaping U.S. industrial strategy

(both at the level of the firm and the nation-state).

The significant contribution to economic theory of Joseph Schumpeter

(1883-1950) has gone virtually unnoticed for nearly a half century. One

might presuppose that this oversight stems from his links to the antiquated

Austrian School, and his lack of mathematical rigor (Richard Gooding once

explained that "he could never get Joe to learn calculus"). Or, perhaps it

is the fact that macroeconomic theory has been preoccupied primarily with

capital accumulation and only tangentially concerned with innovation.

However, it was probably more his unpardonable prognostications regarding

the evolution of the government arrangements (i.e., from capitalism to

socialism) that caused his various babies to be "cast out with their bath

water." Being Austrian, Schumpeter is said to have had three goals in life -

"to be the world's greatest horseman, lover, and economist," and he claimed

to have already achieved two of the three. Apparently, the third, and only

one that could be achieved posthumously, is finally being realized. Of late,

there is a major resurgence of interest in his ideas, even among mainstream

(i.e., neoclassical economists). Essentially Schumpeter's thesis can be

summarized as follows:

* The market system is "not static," rather it is inherently complex

evolutionary processes (1942, p 82).

* The driving force of capitalism is not accumulation, per-se, but rather

the behavior of "heroic entrepreneurs" who by technological and

organizational innovations, continuously introduce the dynamism of "creative

destruction" (1942, pp. 83-84).

* These processes of renewal can achieve "gale" force through a "swarming"

of innovations to transform entire industrial sectors (1934, p. 66).

* These transformational patterns accumulate, in turn, moving from

conventional "business cycles" to waves, some of longer duration (1939, p.

139).

When combined with recent explorations of the curious nonlinear dynamics

associated with technological innovations (via chaos and complexity

theories), a dramatically different picture of the political economy

emerges. For lack of a better term, this picture might be labeled the

institutional ecology of innovation. When viewed from ecological

perspectives, systems that appear quite mercurial, exhibit their own

internal ordering processes. These various nonlinear dynamics may go a long

way toward explaining the apparent perpetuation of conflicting programs and

the proliferation of unintended consequences, in the face of calls for

coherent strategies (at the level of the firm as well as the state). At the

very least, the resulting conceptual alternatives would be free from the

current generation of ideologically bound methods and metaphors (e.g.,

markets vs. industrial policies). More important, they would recognize the

pivotal role of institutions in shaping evolutionary dynamics.

THE EVOLVING POLICY PERSPECTIVE

While scholars and practitioners debated, often from ideologically bound

positions, the merits of U.S. innovation policy (see Averch, 1985, 1991;

Ayres, 1984; Businessweek, 1990; Daneke, 1986; Gilder, 1988; Kuttner, 1991;

Lodge, 1991; OTA, 1988; Reich, 1991; and, Rogers & Noyce, 1990), actual

initiatives had already gradually shifted in the direction of more direct

(e.g., targeting civilian technologies) governmental involvement (see

Mowery, 1992; and, Teske & Johnson, 1994). Recently, the largely clandestine

webs of industrial policies have evolved yet again into Post-Schumpeterian

hybrid. In this current era, the unintended consequences of uncoordinated

defense, trade, and antitrust policies collide with the institutional

remnants of bygone eras. Moreover, they also interact with the powerful

forces of global mercantilism. The result of these complex nonlinear

interactions may well serve to dampen the very innovative dynamics that

various policy initiatives were designed to enhance.

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To begin to unravel this "Gordian Knot" of institutional incongruities

requires a thorough analysis of the evolving historical context. What

follows is merely a sketch. Prior to this current transformation, the last

great shift occurred along with so many other modern phenomena in the years

following World War II. If "necessity is the mother of invention," then war

is certainly the father; and, the "cold war" did not necessarily prove to be

any less prolific, albeit far less cost-effective (see Dumas, 1986). In

fact, released from the heat of battle, a variety of long-term projects

could be funded, some of which had only marginal military applications

(e.g., the computer chip). Defense-related research became de facto

industrial policy. What is particularly curious is that this form of

heavy-handed government involvement flourished during administrations whose

public pronouncements were clearly anti-industrial policy. Moreover, it is

interesting to hear companies such as Boeing claiming foul regarding

European subsidies such as the "Air Bus" program, while ignoring the

billions of defense dollars provided over the years for them to perfect

their craft.

Along with the end of the Cold War, another epoch appears to be in the

making. Yet, it is well to note that subtle harbingers of civilian

technologies were emerging well before the ultimate decline of the Soviet

Union. Beyond funding for generic applications (such as the Fifth Generation

Computer and High Definition Television), changes in antitrust enforcement

and various applied technology programs signaled a new era (see OSTP, 1990).

In the shadow of SDI (the Strategic Defense Initiative, or "Star Wars") and

under the cloak of "free market" rhetoric, U.S. Presidents Reagan and Bush

began to reorganize the innovation system. While hardly replacements for

big-ticket defense, space and "big science" projects (e.g., the

super-collider), the small-scale initiatives represented a significant shift

in emphasis. This is an emphasis that Schumpeter would probably have viewed

as evidence for his thesis regarding the demise of the entrepreneur and the

rise of socialism. (See Schumpeter, 1942). It is critical to note, however,

that this unfolding era of "cooperative capitalism" maintains private

ownership and is more mercantilistic than it is socialistic. The ultimate

fate of the entrepreneurial system, amid these new government-sanctioned

industrial networks, also remains problematic. Furthermore, the ultimate

configuration of this ongoing transformation is highly uncertain, especially

in the light of declining government resources. The Pyrrhic victory in the

Cold War coupled with other deficit spending has left the U.S. economy in a

rather tenuous position regarding large-scale public …