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in this video we want to talk about the
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work of Joseph Schumpeter an Austrian
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economist back in the 1930s who
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introduced and focused in on the
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problems associated with innovation but
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also highlighted its importance and its
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role in the economic system
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Schumpeter had quite interesting ideas
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about innovation and it's well worth
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while spending time looking at what his
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idea is where he was a minister in
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government there but also a know hood
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economist and has made a long-term
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contribution to economic theory and is
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well worth looking up sometimes we've
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got some spare time and looking at his
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words so Schumpeter's theory well he was
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an Austrian economist as I said who
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introduced his theory on innovation
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management during the 1930s Jupiter
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Jupiter emphasized the importance of
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innovation in organizations and the
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organizations in this case could be
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industrial or commercial it was simply
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looking at the importance of innovation
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in the organization the type of
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organization was not relevant trumpeters
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publication on capitalism socialism and
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democracy focused on the concept of what
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he called creative destruction now I'll
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spend a little time talking about this
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idea of creative destruction and see
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what is where what it means
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organizations must continue to innovate
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in order to drive profits organizations
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exist in competitive situations let's
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say and the competitors are constantly
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look
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for angles and different ways of
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producing their product and altering
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their product to make it more acceptable
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to customers so thereby they will cut
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their costs and also generate more sales
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so the competitors are doing it
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this forces the company to do it so all
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the companies are trying to in a sense
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out-innovate each other they're trying
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to be more innovative than each other
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and making products which are more
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interesting to the customers and
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therefore giving themselves more
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opportunity to survive in the market so
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the really successful innovators are the
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ones who are going to lead the market
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the companies that are less successful
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in innovation may go out of business
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innovation is the driving force which
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results in economic change causing
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creative destruction so we only get
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economic change if we've got innovation
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now we know the world in which we live
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is typify by economic change we have new
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products coming out every day we have
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different ways of working and different
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ways of living but all of this is the
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outcome from the innovative process the
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innovative process within companies
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their desire to produce something new
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that will be a novelty will be
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interesting to the consumer the
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consumers will purchase it and thereby
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the companies will generate more revenue
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revenue for themselves
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Schumpeter explains economic development
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and assumes a perfectly competitive
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economy which is in stationary
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equilibrium now it's difficult to
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explain this completely without
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reference to economic theory in
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economics in terms of market structure
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there is one particular one which is
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quite real
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which is the theory of perfect
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competition now perfect competition
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whether it exists or not does not
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interest us it is the state in which
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there is maximum competition and
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therefore all the companies who are
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producing identical products all the
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companies have identical cost structures
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they are all fighting for their
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existence and in the long run they will
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all settle to earning very little profit
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just enough profit to keep them in the
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business to keep them producing just
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enough and all of them will make the
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same profit because all of them are
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producing essentially the same good it's
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been sold at the same price so all of
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them will have roughly the same sales
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now you really need to have a look at
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the material on perfect competition that
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we've put on the web for you to consult
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to get an understanding of what's going
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on here but essentially Schumpeter said
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well the economic development and it
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assumes that there is a perfectly
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competitive economy there are no
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monopolies there's no oligopolistic
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firms or monopolistically competitive
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firms this is pure competition so all
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the issues the other issues are sites
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tit
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Schumpeter was looking purely at the
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extreme in competition and if that
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extreme in competition was to come about
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he called it the stationary equilibrium
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this is the point where all the
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companies were produced the same amount
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said that same price generate the same
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profits because the profits the the
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products are identical the consumers
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cannot decide between one or the other
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there's an assumption that there is no
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transport cost or no obstacles to the
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customers understanding the product or
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there's no differentiation of the
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product through advertising psychic
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differentiation or physical
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differentiation of the product because
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companies can't afford to differentiate
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the products so the whole system comes
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into this competitive equilibrium which
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he called the stationary equilibrium so
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stationary economic state is referred to
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as the perfect equilibrium in which
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there is no profit no interest rates no
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savings no investment and no voluntary
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on unemployment involuntary unemployment
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I should say in other words we've got
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rid of the world in which we note the
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the normal commercial world in which we
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live this is an abstraction this is a
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purely theoretical point it's looking at
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a world where there is pure competition
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and looking at the effects of this
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intense competition and the effects of
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this intense competition is to drive the
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prices down and the each producer is
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fighting for its survival each
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organisation is fighting for its
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survival so there's no profit in fact
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there is a profit in in terms of
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economics it's called normal profit in
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other words it's making enough profit to
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just keep it in production we say no
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profit we mean no excess profit no
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supernormal profit it's just making what
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economists called normal profit normal
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profit is just enough to keep the
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business going just enough to keep it in
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the market anything less and the
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business would close down
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Schumpeter explains this stationary
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economic state as the circular flow as
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he called
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a continuous cycle constantly repeating
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itself every year so the system will
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keep moving in perpetuity because
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there's nothing to knock it out there's
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no external force so all the companies
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are in perfect competition they're all
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producing identical products they can't
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differentiate with advertising or
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physically differentiate because that
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haven't got the resources to do so all
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the consumers have good knowledge of the
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market to know of what the prices are
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then over to get it they know the
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attributes of the product so it's like a
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cycle and it just continuously rolls
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round and it's the same all the time
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from one year to the next
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there is nothing knocking it out
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innovation is the force that has
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considered spontaneous and a disturbance
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this perfect equilibrium so Schumpeter
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says creative destruction so what breaks
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this cycle this monotonous cycle of
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competition and with the same products
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the customers get the same products all
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the time what breaks it is innovation
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innovation according to Schumpeter is
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the desire on the part of some producers
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to try and find the resources to try and
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find a way to improve the product and
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break out of that cycle and if they do
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then they're going to break the whole
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cycle they want to break that whole
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market situation and this is called
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creative destruction
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Schumpeter experienced creative
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destruction is the innovative process of
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industrial mutation
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that incessantly revolutionizes the
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economic structure from within
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incessantly destroying the old
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incessantly creating new ones so it's
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creative destruction is caused by
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innovation it's innovation that breaks
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this endless cycle of competition which
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is the extreme form of the model that we
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would now know as perfect competition
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and it's well worth spending some time
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just looking up our material on perfect
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competition so you you will see what's
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what the underlying assumptions of that
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model are but all of them are really
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ones I've touched on here the producers
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make normal profit in other words to
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just make enough profit to keep
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themselves in business they all produce
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identical products because they can't
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afford to differentiate there's no
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advertising all the the prices are the
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same each firm will produce the same
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amount of output competition will pull
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all of them in that direction and what
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breaks the cycle is some of them will
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make this extreme effort despite the
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lack of resources or make this extreme
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effort to innovate to introduce
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something new and when they introduce
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something new then they've got a
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different product in fact they're the
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only ones with that product so in a
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sense they become monopolists they're
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the only ones producing that product
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they've broken the cycle have broken
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away but now the others say that company
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making abnormal profits as they're
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called or supernormal profits and they
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aren't a copy so they will also try to
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innovate and this is how the this idea
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of the circular flow will break down
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this is the essence of creative
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destruction
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so what is innovation well Schumpeter
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defines innovation as new product
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introduction like I just described
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companies have an incentive to make new
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products and to introduce new products
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to try to generate more sales to become
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at least temporary monopolist the really
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ones selling this particular product it
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has this particular set of attributes so
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it's new product introduction it's also
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new production methods and processes
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trying to put the costs within the
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business and thereby making more profits
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available and those extra profits could
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then be used of course for for
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innovation innovation looking for
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further cost-cutting measures within the
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business or innovating the product
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looking for new market opportunities
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looking for alternatives to try and
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break out of that cycle of competition
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that I just described which is the
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fierce competitive model with emphasis
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totally on competition ignoring
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customers lack of choice or the fact
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that the the product is very
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standardized and ignoring the monotony
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of the whole situation looking for new
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market opportunities trying to introduce
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new products or introduce something new
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into the market to try and break away
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from that endless cycle of competition a
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new approach for sourcing and supplier
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role supplying raw materials or semi
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manufactured goods so trying to get raw
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materials by negotiating discount
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sir trying to do some sort of deal with
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the suppliers and with the shippers
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trying to negotiate terms for semi
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manufactured goods from other producers
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and working in collaboration building
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alliances doing in a sense anything to
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escape that cycle of competition but all
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of this is leading to innovation this is
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why the champion view is that innovation
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is extremely important in the economy in
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the economy I mentioned earlier the
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creation of a monopoly as soon as a
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company is almost in that perfectly
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competitive situation if they if only
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they can modify their product to some
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extent then their product will be
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different from the others and therefore
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by definition they will have a monopoly
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the monopoly will enable them to
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generate abnormal profits and the
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monopoly will enable them to break away
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from that cycle and companies would like
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to make abnormal profits or supernormal
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profits rather than just eating out and
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living eating out an existence trying to
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survive
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Schumpeter believes or believed all
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organizations must innovate to sustain a
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growth market position and
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competitiveness so heavy emphasis on
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innovation as a way of bringing about
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economic growth the growth of businesses
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customers getting new products buying
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more the businesses growing companies
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can sustain themselves in the market
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that they can improve their market
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position their long term viability is
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improved by virtue of more sales and
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their more
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competitive because they're able to
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engage in marketing and product redesign
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so there is an incentive to innovate
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Schumpeter explains the key role
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entrepreneurs play in the development
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and deployment of new inventions they
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are the ones that drive growth creative
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destruction and economic development
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so they are the ones who bring about
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creative destruction economic
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development and economic growth it's the
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entrepreneurs who have the ideas the
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ideas for change and if the ideas for
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change are good and reap the rewards of
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extra profits and that leads to business
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growth it leads to more companies trying
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to follow and innovate so they will try
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to grow as well creative destruction
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moving away from that that cycle of
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competitiveness that we described which
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if it were to continue would mean utter
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monotony for the consumers who will get
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the same product continuously and for
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producers who could not break away and
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have to experience low levels of profit
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just surviving an inability to finance
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anything which is meal so it's the
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entrepreneurs who bring about creative
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destruction but of course all of this
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means we have economic development the
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entrepreneur is motivated to innovate
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due to the need to specialize and
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dominate a new industry so entrepreneurs
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are they've come up with a good idea
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let's say for a product or a service
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but really what they want is rewards
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they want to be rewarded with greater
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profitability for themselves they don't
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want to set up a business that's just
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surviving they want to set up a business
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that's highly successful that will grow
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and will further finance their ambitions
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to bring in even further products
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perhaps so entrepreneurs are motivated
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to develop businesses which that have
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the capacity to grow so also the need to
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showcase their skills and capabilities
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in order to demonstrate their superior
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superiority entrepreneurs like to be
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seen as entrepreneurs they're the ones
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who have changed the market they're the
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ones who have brought about the products
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that the rest of us buy they're the ones
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responsible for the way we live and some
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entrepreneurs like to take credit for
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that and show themselves as the ones who
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have led the changes in society and have
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have changed the way we all live the
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enjoyment of working on activities or
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hobbies which ultimately provide an
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economic growth entrepreneurs like the
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challenge or so the literature would
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suggest they like the challenge of what
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they are doing they like the idea of
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coming up with a new idea and then
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working on it and bringing it to market
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and seeing it succeed there is a sense
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of achievement not just the the profits
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and the economic rewards there is
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personal a personal sense of achievement
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and that is part of the reward that the
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day experience so in this video what
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we've done is we've looked at Schumpeter
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we've looked at the idea of creative
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destruction we've talked about the
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circular flow as put forward by
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Schumpeter we've looked at the economic
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more
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that underpinned is perfectly
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competitive model and there are videos
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about that available on the course we've
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moved away at the end towards looking at
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innovation as the the destructive force
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but the force is going to bring about
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change economic development and a higher
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standard of living and a better life
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because we are getting new products
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getting changing products and they're
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making our lives better and we finally
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isolated this is all down to the
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entrepreneur it's the entrepreneur who
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brings about the innovation brings about
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the changes it's the entrepreneur who's
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got the idea the idea for the change and
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having championed the idea gets it
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introduced and if the idea is good and
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acceptable the reward is higher profits
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from the business but also for the
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entrepreneur and the sense of
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achievement for the entrepreneur and
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that's all we're got to deal with in
00:23:30
this video that's the famous book if
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you're passing the library sometime just
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have a look at it and just brush through
00:23:43
it and see it's written in a very nice
00:23:46
style it is accessible and at some stage
00:23:50
on your personal reading list perhaps in
00:23:53
years to come when you have less
00:23:54
pressure you might want to return and
00:23:57
have a look at you but that's all about
00:24:00
deal with so let's leave it with that
00:24:01
and say thank you for for watching
