Schumpeter's Entrepreneurs and Commons's Sovereign Authority

McFarling, Bruce, Journal of Economic Issues

In 1934, Joseph Schumpeter argued the following:

If someone who has never seen or heard of such a state were to observe that a farmer produces corn to be consumed as bread in a distant city, he would be impelled to ask how the farmer knew that this consumer wanted bread and just so much. He would assuredly be astonished to learn that the farmer did not know at all where or by whom it would be consumed. Furthermore, he could observe that all the people through whose hands the corn must go on its way to the final consumer knew nothing of the latter, with the possible exception of the ultimate sellers of the bread; and even they must in general produce or buy before they know that this particular consumer will acquire it. The farmer could easily answer the question put to him: long experience, in part inherited, has taught him how much to produce for his greatest advantage; experience has taught him to know the extent and intensity of demand to be reckoned with. To this quantity he adheres, as well as he can, and only gradually alters it under the pressure of circumstance [Schumpeter 1934, 5-6].

Growing interest in the study of technological change over the last decade has led to a resurgence of interest in Schumpeter's concept of the entrepreneur. In Schumpeter's theory, the entrepreneur is responsible for introducing change into a commercially organized economic system. An innovation in this environment is not an automatic adjustment, but a break with the past. It is making this break that identifies an individual as an entrepreneur. As he claimed,

. . . Past economic periods govern the activity of the individual--in a case like ours--not only because they have taught him sternly what he has to do, but also for another reason. During every period the farmer must live, either directly upon the physical product of the preceding period or upon what he can obtain with the proceeds of this product. All the preceding periods have, furthermore, entangled him in a net of social and economic connections which he cannot easily shake off. They have bequeathed him definite means and methods of production. All these hold him in iron fetters fast in his tracks [Schumpeter 1934, 6].

Schumpeter's treatment only identifies actual entrepreneurs. Empirical study of entrepreneurship calls for an appropriate reference group for purposes of comparison. It is inappropriate to use the members of the population as a whole, as this includes: the entrepreneurs, who evidently had both the opportunity and inclination to innovate; those who had the inclination but not the opportunity; those who had the opportunity but not the inclination; and those who had neither opportunity nor inclination. If we choose to limit the reference group to those with the inclination, then entrepreneurial activity demonstrates the opportunity. If we choose to limit the reference group to those with the opportunity to innovate, then entrepreneurial activity demonstrates the inclination. The former aims to classify individuals on the basis of unobservable characteristics, while the latter aims to classify individuals on the basis of observable, social circumstance. It is therefore preferable on empirical grounds to specify those with the opportunity to innovate as a reference group for the study of entrepreneurs.

A consideration of the authority of different individuals in an organization is required to identify the reference group of those with the opportunity to innovate. Schumpeter's theory does not consider the role of authority in organizational behavior, and therefore as originally conceived it does not provide a sound theoretical basis for empirical study of entrepreneurship. To address this flaw in the concept of the entrepreneur, this paper considers the Schumpeterian entrepreneur from the perspective of John Commons's concept of sovereign authority.

Commons's theory of the artificial selection of institutions under sovereign authority has certain similarities with Schumpeter's theory: each implies that innovation will have disruptive consequences, and each identifies processes that will result in the re-establishment of stability. Since the nature of authority within organizations is explicitly addressed by Commons's theory, adopting this perspective provides a theoretical foundation for empirical identification of the reference group of those with the opportunity to innovate. However, there are substantial differences in the way that the two theories model the process by which stability is established following a disruption. Therefore, adopting the perspective of Commons's theory leads to extensive modification of Schumpeter's theory, including the role of innovations in the business cycle.

One aspect of this modification is the replacement of the Walrasian General Equilibrium mechanism, which Schumpeter considered to be an essential part of his Pure Model.1 This replacement is a consequence of the way that authority is introduced into Schumpeter's Pure Model. In Common's approach, stabilization is due to the deliberate intervention of authority in the resolution of disputes, and not due to a mechanism that serves to restore a system to an equilibrium state.

The body of this paper is divided into four sections. The first is a brief overview of Schumpeter's model of innovation and the role of the Schumpeterian entrepreneur in this model. The second presents Commons's model of institutional change in ongoing concerns and the interaction between participants in these concerns according to Commons's model. The third section introduces aspects of Commons's model into the Schumpeterian framework and considers the impact of this on Schumpeter's model of waves of innovative activity. The fourth and final section considers the implications of this reconstruction of Schumpeter's Pure Model for the study of entrepreneurship and innovation.

The Theory of Economic Development

I take Schumpeter's early work in The Theory of Economic Development [1934] as the representative statement of his theory of entrepreneurial innovation. This is following those, such as Richard Clemence and Francis Doody, who view Schumpeter's later work as an elaboration on, but not a revision of, his early work. Clemence and Doody argue that "[Schumpeter's] youthful vision . . . has since been elaborated and refined, but it has been altered in no essential respect to the present day" [Clemence and Doody 1966, 1] Clemence and Doody term Schumpeter's early model his Pure Model, and they place this model in the context of his more elaborate model, as represented in Schumpeter's Business Cycles [1939], in this way:

Since the Pure Model is designed to demonstrate only the fundamental …

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Publication information: Article title: Schumpeter's Entrepreneurs and Commons's Sovereign Authority. Contributors: McFarling, Bruce - Author. Journal title: Journal of Economic Issues. Volume: 34. Issue: 3 Publication date: September 2000. Page number: 707. © 1999 Association for Evolutionary Economics. COPYRIGHT 2000 Gale Group.

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