[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

SCHUMPETERIAN COMPETITION
Although competition in markets in which innovation is important may not live up
to the ideal of perfect competition discussed in Chapter 2, it still can be intense.
Competition focuses on producing new products as much as on selling old products
at lower prices. This kind of competition is often referred to as Schumpeterian competition,
after a great economist of the early twentieth century, Joseph Schumpeter.
Schumpeter began his career in Austria (serving from spring to October 1919 as
minister of finance to the emperor of the Austro-Hungarian Empire), and ended it
as a distinguished professor of economics at Harvard. His vision of the economy
was markedly different from that of the competitive equilibrium model. That model
focuses on equilibrium, a changeless condition. He questioned the very concept of
equilibrium: to him the economy was always in flux, and the economist’s role was
to understand the forces driving its changes.
Schumpeter argued that the economy was characterized by a process of creative
destruction. An innovator could, through a new product or lower costs of production,
establish a dominant position in a market. But eventually, that dominant
position would be destroyed, as another new product or process was invented.
He worried that the giant corporations he saw being formed during his lifetime
would stifle innovation and end this process of creative destruction. His fears, so
far, have been unfounded; indeed, many of the largest firms, like IBM, have not been
able to manage the innovative process in a way that keeps up with upstart rivals.
Modern-day Schumpeterians often turn to biology to help them understand the
process of change, describing changes as evolutionary. They see a slow process of
change, with many random elements; firms that are the fittest—that, by luck or
skill, manage to discover new products or new ways of doing business that are better,
in a particular environment, than their rivals—survive, and their practices spread
to other firms.
As respect for and understanding of the importance of innovation have grown,
so too have the number of economists who think of themselves as Schumpeterians.
Wrap-Up
COMPETITION AND TECHNOLOGICAL CHANGE
HOW COMPETITION AFFECTS TECHNOLOGICAL CHANGE
Competition spurs R & D: Competition impedes R & D:
A new innovation enables firms to Competitors may imitate, thus eroding
enjoy profits (profits are driven to returns from innovation.
zero in standard markets).
Unless firms innovate, they will not Competition erodes the profits
survive. required to finance R & D.
LINKS BETWEEN TECHNOLOGICAL CHANGE AND IMPERFECT COMPETITION ∂ 463