Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81

Schumpeter’s Theory of Economic Development: A Study of the Creative Destruction and Entrepreneurship Effects on the Farrokh Emami Langroodi a,* a Goethe University Frankfurt, Graduate School of , Finance, & Management (GSEFM), Department of Finance, Germany

ARTICLE INFO ABSTRACT Article History This paper provides a multifaceted review and Submitted 11 Aug 2021 analysis of Schumpeter’s Theory of Economic Accepted 12 Aug 2021 Development and specifically the creative Available online 13 Aug 2021 destruction effect intertwined with the business

JEL Classification cycles, and their effectiveness in explaining the A12 long-run economic growth by first, looking into the B13 main features of this theory; second, comparing the B31 fundamental similarities and differences of B52 Schumpeter theory with respect to and

Keynesianism, third; a comparison of “Schumpeter” Keywords effect vs. the “refugee” effect in recently published Schumpeter Creative Destruction researches, and finally, the relationship of Schumpeterian and Kirznerian opportunities in Kirznerian modern entrepreneurship. Marxism Keynesianism Journal of Insurance and Financial Management Economic Growth Entrepreneurship

*Corresponding Author: [email protected]

Author(s) retain copyright of the submitted paper (Please view the Copyright Notice of JIFM).

This work is licensed under a Creative Commons Attribution 4.0 International License.

Journal of Insurance and Financial Management (ISSN-Canada: 2371-2112) Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81 66

1. INTRODUCTION

It is well known that Joseph Alois Schumpeter always explained that “analyzing business cycles means neither more nor less than analyzing the economic process of the capitalist era” (Schumpeter, 1939). Consequently, his Theory of Economic Development - naturally embodies what today we would consider an integrated growth and cycle analysis. Starting with his early contributions to crises theory and business-cycle theory (Hagemann, 2003), Schumpeter strived continuously to understand the fundamental elements in the explanation of economic fluctuations. From his Theory of Economic Development (1911) until his monumental two volumes on Business Cycles (1939) and Capitalism, and (1942), he mainly investigated the ways growth and cycle dynamics communicate.

The Schumpeterian system of economic thought was built in such a way as to realize a necessary symbiosis between economic, historical, political, social, and all other elements of the process of the functioning and development of the capitalist world. All of these specific aspects of capitalist society could be approached as separate entities because this was considered to be the most appropriate way to effectively access the economic aspects of reality (Croitoru, 2012). Certainly, from the Schumpeterian point of view, economic phenomena are not isolated and undetermined, but this is not a reason to explain the economic world through external factors. The Theory of Economic Development was the first step in this Schumpeterian effort to create the theoretical tools and concepts which were needed to approach the economic sphere of reality while assigning phenomena such as wars, political upheaval, and cultural or spiritual issues a secondary significance. The important influence of these latter is not effaced, rather Schumpeter succeeded elegantly in focusing the analysis of the economic development of the capitalist world on exclusively economic elements of the process. The central argument of his system of thought assigned the most significant role to Entrepreneurship with its inseparable and embedded innovative nature (Croitoru, 2012).

Schumpeter identified two main interaction channels (Croitoru, 2012). Business cycles, first are interpreted as the unavoidable joint-product of economic development dynamics. Schumpeterian drives innovation, but it also begets imitators, “swarms” of which copy their rival’s innovation, attracting , and leading to a boom. 67 Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81

When the original innovator’s advantage is eliminated, investment moves elsewhere, and the sector may even shrink, until the next disruptive innovation, which restarts the cycle. However, the seemed to challenge Schumpeter’s vision: why were entrepreneurs not jump-starting the economy? Schumpeter’s reply was the ponderous, unlovely Business Cycles (Schumpeter, 1939), a monumentally ambitious two-volume book that attempted nothing less than a history of capitalist processes, and that moreover, attempted to model business cycles as the product of interacting medium (40 months), long (8-10 years) and very long (50- 60 years) wave cycles. Schumpeter’s desire for exact economics led him to abandon the uncertainty and complexity of “irregularly regular” for the false precision of the three-cycle wave theory. said that the book “smacked of Pythagorean moonshine”.

Furthermore, he elaborated his famous process of Creative Destruction: the selective mechanism exerted in the and depression phases of the cycle which although it has a short-term negative impact, Schumpeter regarded as positive for long-run economic dynamics. Creative Destruction refers to the incessant endogenous mutation of the economic structure through the destruction of the old, established behavior and plans, and the creation of new ones by entrepreneurs. It is clear then that for Schumpeter growth and cycle dynamics are mutually influencing (Legrand & Hagemann, 2017). Creative destruction although certainly the most famous Schumpeterian concept is also rather complex, i.e., the outcome of a liquidation process and a reallocation of productive resources during a recession, and particularly a depression phase. Both mechanisms can have rather damaging economic consequences in the short run. For that reason, and also because of his earlier position on lack of justification for intervention to help the economy to escape the Great Depression, Schumpeter is generally considered a non- interventionist or a pure liquidationist (Legrand & Hagemann, 2017).

2. MAIN FEATURES OF THE THEORY OF ECONOMIC DEVELOPMENT

The main features of Schumpeter’s theory of economic development are as follows (Schumpeter, 1961):

1) Circular Flow 2) The Role of the Entrepreneur 3) Cyclical Process or Business Cycle 4) End of Capitalism

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2.1. Circular Flow According to Schumpeter, in the first chapter of the Theory of Economic Development, “in a circular flow, from which we always start, the same products are produced every year in the same way. For every supply there awaits somewhere in the economic activities are repetitive”. It means that the are in equilibrium at each point in time and the economy is in its stationary state. The circular flow is based upon a state of perfect competitive economy which is in a stationary state and there is perfect competitive equilibrium (Schumpeter, 1961).

The costs of the firms are equal to the receipts; the are equal to average costs. There are no profits no rates, no , no investment, and no . According to Schumpeter, this stationary equilibrium is characterized by the circular flow which continues to revive itself every year in the same system as the blood circulates in a human body.

As regards economic development Schumpeter in his theory states that “the development is a spontaneous and discontinuous change in the channels of the circular flow, disturbance of equilibrium which forever displaces the equilibrium state previously existing”. Schumpeter's theory of development is the key element of a dynamic process that consists of new resource combinations, so-called innovations, or technological changes. When innovations or changes (economic, social, political, and technical) take place in the economy, the stationary equilibrium or circular flow is displaced, and the process of development starts. These features imply that the circular flow is used in a static setting. To make it dynamic and consistent with development, changes must take place in the . These changes can be brought through innovations.

Innovations may be defined as a change in the existing system introduced by the entrepreneur to make profits and reduce costs. The innovation is closely linked with Schumpeter defined development as a “spontaneous and discontinuous change in the channels of flow, disturbance of equilibrium which, forever alters and displaces the equilibrium state previously existing” (Schumpeter, 1961).

He assumed that change is the basic element of a dynamic process and those changes come in the form of innovations. The innovations may consist of the following aspects:

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1. The discovery of the new source of raw materials.

2. The presentation of a new product.

3. The implementation of the modern method of production.

4. The search for new markets.

5. The creation of a or the establishment of a new type of .

Schumpeter, thus, emphasizes the introduction of new products through the improvements in the technological and other economic and non-economic resources which lead to economic development.

2.2. The Role of the Entrepreneur as an Innovator The entrepreneur is the key figure in Schumpeter’s analysis of the process of development. Schumpeter’s model starts with the breaking of circular flow with innovation in the form of a new product. He occupies the central place in the development process because he initiates development in a society and carries it forward. Entrepreneurship is different from the functions of a manager. A manager simply manages the affairs of an enterprise whereas the entrepreneur also takes a high degree of risk. The role of an entrepreneur has been glorified by Schumpeter based on functional abilities. According to him, entrepreneurs is to:

a. Appreciate the possibilities of innovation, b. Overcome the socio-psychological barriers against the introduction of new things, c. Direct the into new channels, d. Persuade the banker to provide him with necessary finance for innovations, e. Induce other producers in his branch of activity for taking risks, f. Create an environment conducive to the satisfaction of wants as the normal motive, g. Provide leadership, and h. Take a high degree of risk in the economic world.

Though Schumpeter has given a comprehensive explanation of the role of the entrepreneur, it cannot be considered an adequate explanation of the general theory of capitalistic development. For entrepreneur himself is a product of the social environment, which compels him to innovate or get eliminated, because of the forces of competition. Despite

Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81 70 this fact, credit goes to Schumpeter who has emphasized the role of an entrepreneur in capitalist development.

The entrepreneurs require two things to perform their functions. Firstly, there must exist technical knowledge with which the entrepreneur can introduce new products or new combinations of factors of production. This according to Schumpeter does not pose a problem because there always exists the reservoir of unused technical inventions, which can be explored and exploited by the prospective entrepreneurs; secondly, to carry out the new inventions, the entrepreneur requires the services of the factors of production. For this, she needs purchasing power in the form of credit and , which can be provided by banks and other financial institutions. Therefore, credit and banks play an important role in the economic development of a country (Schumpeter, 1961).

Role of profits: An entrepreneur innovates to earn profits. Profits are conceived, “as a surplus over costs – a difference between the total receipts and outlay – as a function of innovations” (Schumpeter, 1961). According to Schumpeter, under competitive equilibrium, the of each product just equals its cost of production and, thus, there are no profits. According to him, profits arise on account of dynamic changes resulting from innovation. They continue to exist till the innovation becomes general.

Breaking the circular flow: The central theme of the Schumpeterian theory of economic development lies in the breaking up of the circular flow with innovation in the form of a new product by an entrepreneur raising the level of investment in the economy. The bank credit can help largely in this context (Schumpeter, 1961). Since investment in innovations is risky, the entrepreneurs must pay interest in it. Once the new innovations prove to be more profitable and quite successful, other entrepreneurs also follow them in ‘swarm-like clusters’. Innovations in one field may stimulate innovations in other allied fields. However, the trend of the expansion of innovations in other firms is never found to be 100%.

2.3. Cyclical Process or Business Cycle The next component of development according to Schumpeter is the business cycle. To analyze the business cycle is to analyze the economic process under capitalism. Schumpeter’s approach to the business cycle or crisis is historical, statistical, and analytical. He believes that business cycles are not merely the result of economic factors 71 Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81 but also of non-economic factors. Schumpeter concludes that crisis is the “process by which economic life adapts itself to the new economic conditions” (Schumpeter, 1961).

Bank credit is an essential element of Schumpeter’s model. According to Schumpeter, the creation of bank credit is assumed to accelerate incomes and prices in the economy. It creates a cumulative expansion throughout the economy, with the increase in the purchasing power of the consumers, the demand for the products increases with supply. The rising prices and high rates of profits stimulate producers to raise by borrowing from the banks.

The secondary wave of credit starts with the entrance of new entrepreneurs in the field of production which superimposes on the primary wave of innovations. This may be called “boom” or “prosperity”. Extreme optimism and speculation in business also further enhance prosperity.

During prosperity, new products start appearing in the with the entrance of new entrepreneurs. These products displace the old ones and thus decrease their demand and in the market. Consequently, the prices of old products fall, intending to liquidate their stocks, the old firms start selling their at a low price and hence most of the firms incur losses. Investment declines and unemployment starts, leading to a fall in the . As the entrepreneurs start repaying bank loans, the quantity of money in circulation is reduced and prices start falling. Profits too decline and come to zero, uncertainty and risk increase. A wave of pessimism sweeps the entire economy, boom ends, and phase of depression starts.

Schumpeter believes in the existence of the long wave of upswings (boom) and downswings (depression). Once the upswing begins, ultimately, the economic force of recovery comes into operation and brings about a revival, once again the economies come across new equilibrium, and the new boom period starts.

2.4. End of Capitalism Like , Schumpeter also believes that capitalism is self-destructive. He stated, ”there is inherent in the capitalist system a tendency towards self-destruction, those factors make not only for the destruction of the capitalist system but for the emergence of socialist civilization” (Schumpeter, 1961).

Schumpeter agrees with the Marxian thesis that capitalism has itself the seeds of its own

Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81 72 destruction and ultimately it will come to an end. The very success of capitalism will bring about its decay.

Three noticeable forces are the beginning of the creeping death of capitalism. They are:

1. The decadence of the entrepreneurial function, 2. The disintegration of family, and 3. The destruction of the institutional framework of the capitalist society.

The tendency towards concentration into big concerns weakens and destroys the twin institutions of private property and freedom of contract. According to Schumpeter, “capitalism cannot survive; it will die on its own accord”. It will ultimately give place to socialism”.

3. SCHUMPETERIAN VS. MARXISM AND KEYNESIANISM

3.1. Who is the Hero?

In , the tragedy is a genre of the “growth” story, which is to be contrasted with the “equilibrium” story. All equilibrium narratives end in the same place; in equilibrium. Growth stories, in contrast, are more open-ended, uncertain, and path- dependent. In growth stories, history matters. Even tragedies, which also end predictably, must tell the beginning first. Thus, the political economy’s best-known growth stories provide a hero (McCraw, 2009).

Adam Smith’s hero was the prudent man. Commercial society depends upon the prudent man, who behaves virtuously even when it is in his material interest to do otherwise.

Marx, too, wrote in the growth genre. So, even Marx’s determinism – wherein capitalism necessarily seeds its own destruction – found room for a hero: the radical intellectual. Never mind that the death of capitalism was preordained: it is the radical intellectual who can pierce the veil of his false consciousness to correctly see the truth of historical inevitability, and it is the radical intellectual who can lead the vanguard of proletarian revolt (McCraw, 2009).

For , the hero was the qua expert. The hero economist sees the folly of crushing war reparations, and the error of Say’s Law, and urges upon the powerful a new law -- that prudent monetary and fiscal stimulus can restore traction 73 Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81 to aggregate demand temporarily mired in a (McCraw, 2009).

Schumpeter was not averse to Keynes’ economist-as-hero construct. But Schumpeter thought that Keynes’ stagnationist ideology provided intellectual cover to those far more hostile to capitalism than he and that Keynes’ emphasis on the short run invited trouble from governments naturally inclined to profligacy and incompetence (McCraw, 2009). It was naïve, Schumpeter believed, to hope that the state would do what its economic experts tell it to do. And government fecklessness to one side, what if the experts have got it wrong?

Schumpeter’s hero, of course, was the entrepreneur, “the agent of innovation,” and, Schumpeter said, “the pivot on which everything turns” (McCraw, 2009).

3.2. Schumpeter vs. Marx

It is well-known that Schumpeter postulated an “inevitable decomposition of capitalist society” (Schumpeter, 1942). “Can capitalism survive?” he asked pointedly. “No, I do not think it can” (Schumpeter, 1942). Capitalism's prospective demise is not perceived to emanate from “its breaking down under the weight of economic failure ....” Instead, “its very success undermines the social institutions which protect it, and inevitably creates conditions in which it will not be able to live, and which strongly point to socialism as the heir apparent” (Schumpeter, 1942). In short, the “paradoxical conclusion” is not the result, but the process: “capitalism is being killed by its achievements” (Schumpeter, 1942). Popular expositions generally present a sharp dichotomy between the themes of Marxian contradiction (“capitalism cannot survive because of economic failure”) and the Schumpeterian paradox (“capitalism is being destroyed because of its very creative success”).

The “essential point to grasp” about capitalism, according to Schumpeter, is that it is an “evolutionary process,” as “was long ago emphasized by Karl Marx.” Capitalism is “by nature a form or method of economic change and not only never is but never can be stationary” (Schumpeter, 1942). This evolutionary dynamic of capitalist development has three salient characteristics: It comes from within the economic system and is not merely an adaptation to exogenous changes. It occurs discontinuously rather than smoothly. It brings qualitative changes or “,” which fundamentally displace old equilibria and create radically new conditions. Economic development is accompanied by growth, i.e., sustained increases in national income. As Marx expressed it in the

Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81 74 bourgeoisie “has played a most revolutionary role in history.” Marx's emphasis on capitalism's creative propensities is reinforced by the . Capitalism, Marx argues in this work, destroys the old pre-capitalist economy “and constantly revolutionizes it, tearing down all the barriers which hem in the development of the forces of production, the expansion of needs, the all-sided development of production, and the exploitation and exchange of natural and mental forces” (Marx, 1973). Interestingly, Schumpeter virtually identified his position on creative destruction in this sense with that of Marx.

Although the content and emphases are different, the analyses of capitalism's dysfunctional properties in Marx and Schumpeter share important common elements. For both, capitalism is tremendously creative and successful. Its dysfunctional propensities, from creative destruction perspective, actually serve as the cause as well as the effect of its development process. And whatever its tendencies toward system-decay, it is not in danger of imminent economic collapse.

Schumpeter's analysis of capitalism's prospects is “not pure economics, of course,” but economics “seen in a wide context and with a broad historical horizon.” The combination of economic theory, politics, sociology, and history, which is Schumpeter's “major characteristic” (Stolper, 1979), is strikingly similar to Marx's endeavor “to unite , sociology and economics in a kind of ménage a trois...” (Meek, 1967). Furthermore, Schumpeter's vision, like Marx's, contains no timetable. Its constituent elements, “while everywhere discernible, have as yet nowhere fully revealed themselves.” Superficial “temporary reverses” on the “surface” may easily mask “the tendency toward another civilization that slowly works deep down below.” The Schumpeterian outlook, no less than the Marxian one, is a long-run vision in an accounting system in which “a century is a short-run …” (Schumpeter, 1942).

In this comparison, we focused exclusively on the vision(s) of capitalism's creatively destructive properties and preparation for socialism, where parallels between Marx and Schumpeter are strongest. In ideological commitment, in the details of their respective technical analyses of the behavior of the capitalist economy, and their perceptions of the socialist future, differences in perspective are both clear and significant.

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3.3. Schumpeter vs. Keynes Both Schumpeter’s Theory of Economic Development and Keynes’ General Theory famous masterpieces contained problems with . Keynes explicitly attacks the classical framework (Dillard, 1948), Schumpeter on the other hand implicitly accepts it and uses it as a base to explain his dynamic model (Velde, 2001). They both share two different views on how capitalism operates, Keynes believed government policies are essential to sustain a capitalistic economy (Dillard, 1948). Schumpeter, however, believed that the process of capitalistic development is initiated by the introduction of a new combination through innovation created by the entrepreneur, backed by the sponsor (Velde, 2001).

Schumpeter disagreed with the unchanging production function that Keynes’ based his analysis on in the General Theory (Smithies, 1951). Schumpeter believed a changing production function is essential to capitalistic development. In the General Theory, Keynes strongly advocates for government policies, and Schumpeter, like most Austrian , disagrees with this assumption. He believed any form of government intervention would impair capitalistic behavior (Smithies, 1951).

Although both Schumpeter and Keynes's theories are primarily concerned with two different things, they do have similarities in their work. In terms of monetary theory, they both share two common points of view. First, in contrast to mainstream theory, both state that the diffusion of money induces a radical modification into how an economy works (Bertocco, 2006). Secondly, they both describe reasons why money and financial aggregates are not neutral, they highlight the crucial role of the credit market and the banks (Bertocco, 2006).

4. SCHUMPETER EFFECT VS. RFEUGEE EFFECT Entrepreneurship refers to an individual allocation of human capital that depends upon the economic situation (Aubry et al., 2015). According to the “refugee” effect, unemployment can lead to new-firm start-ups, i.e., unemployed people choose to create their own job. The “Schumpeter” effect rather conveys the fact that new-firm start-ups reduce unemployment, i.e., in an entrepreneurial society, most new jobs are created by new-firm start-ups. Indeed, revealing the causality from new-firm start-ups to the unemployment rate may reflect the presence of the “Schumpeter” effect while the existence of causality from the unemployment rate to new-firm start-ups may reflect the existence of the “refugee” effect.

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The analyses of the cross-correlations between these two variables will make it possible to characterize the effects. Generally, to study the unemployment and new-firm start-ups causalities, one needs to consider a variety of factors such as regional factors, cultural factors, legal factors, political and social factors, education systems, even natural resources, workforce availability, etc.

As an example of recent research regarding these causalities, Aubry et al. (2015) tried to study the influences of new start-ups on growth in its two main dimensions: the regional dimension because entrepreneurial firms flourish in an ecosystem of innovation which is specific, and the macroeconomic dimension to identify the existence of the “refugee” effect versus the “Schumpeter” effect. They analyzed the interactions in the short run and long run between regional new-firm formation, (GDP), and the regional rate of unemployment, in France, during the 1993–2011 period. Their empirical results highlight many interactions between new-firm startups, economic growth, and employment. At the national level, GDP fluctuations are an early indicator of new-firm start-ups. In the long term, no relationship between GDP and new- firm start-ups could be established. The results obtained at the national level are confirmed at the regional level, but the “refugee” effect seems to be dominant at this level.

Several authors have in the past focused their research on the measure of the “refugee” and the “Schumpeter” effects. Their results are mixed and most of them failed to measure the real dimension of these two effects because they analyze relationships from a static perspective. Storey (1991) noticed the ambiguity of the results when some studies argue for the “pull” (i.e., Schumpeter) effect, while other studies support the “push” (i.e., refugee) effect. For example, Evans and Leighton (1989), Acs et al. (1994) find a “refugee” effect with American data. Storey (1991) finds a mixed effect with American data as do Tervo and Niittykangas (1994) at the regional level for Finland and Audretsch et al. (2001) for OECD countries. Audretsch and Acs (1994) consider that new-firm start- ups are positively linked to GDP but also that unemployment has a positive effect on new- firm start-ups that seems to be contradictory with their first result. Thurik et al. (2008) reconcile ambiguities by measuring the two effects using a vector autoregression model. Finally, Koellinger and Thurik (2012), using panel data from 22 OECD countries for the period 1972–2007, demonstrate that new-firm start-ups cause, in the sense of Granger, macroeconomic cycles at the global level: opportunity motives for new-firm start-ups lead 77 Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81 the cycle by two years at the global level.

Therefore, it can be observed that a large literature trying to ascertain the relationship between unemployment and entrepreneurship has produced ambiguous results at best. While some studies find a positive link between unemployment and entrepreneurship (the “refugee” effect), still others find evidence supporting a negative relationship (the “Schumpeter” effect). Audretsch et al. (2001) study has attempted to disentangle what is an obviously complex relationship. Based on empirical evidence from OECD countries for a recent period, the evidence suggests that the relationship between unemployment and entrepreneurship is, in fact, both negative and positive. Changes in unemployment clearly have a positive impact on subsequent entrepreneurship. At the same time, changes in entrepreneurship have a negative impact on subsequent unemployment. Because these are essentially dynamic inter-temporal relationships, previous studies estimating contemporaneous relationships have confounded what are essentially two relationships with each working in the opposite (dynamic) direction (Audretsch et al. (2001)).

5. SCHUMPETERIAN ENTREPRENEUR VS. KIRZNERIAN ENTREPRENEUR

Shane (2003) proposes “the nexus between enterprising individuals and valuable opportunities” as the general framework to understand entrepreneurship. The individuals who engage in the entrepreneurial process, are those that identify, perceive as valuable, and exploit opportunities to meet or create new market demands, or to fulfill existing demands in new ways, by mobilizing and organizing resources in new organizational forms. The existence of a closely connected nexus implies that different individuals will pursue different types of opportunities through the entrepreneurial process. Perhaps the most known characterization of opportunities reflects Schumpeter (1934) and Kirzner (1973) views, generally regarded as antithetic, about the role of the entrepreneur in the process of market competition. In Schumpeter’s view, the entrepreneur is an innovator and a leader who, by introducing new combinations in an economic system in equilibrium, temporarily undermines the economic rents and lives of incumbent firms, leading to a dynamic process of “creative destruction”.

In Kirzner’s view the entrepreneur is an arbitrager who, by being passively alert and in a position to see opportunities that others do not see, because of specific and unevenly distributed prior knowledge, exploits imperfections currently existing, or perceived to

Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81 78 exist, in the market and, by doing so, through price adjustments, brings back the system into equilibrium.

Although the identification and exploitation of opportunities are central in many modern theories of entrepreneurship, empirical investigations of opportunity types are scarce. Several scholars in the Entrepreneurship and Austrian economics literature have extensively elaborated on the elements that distinguish Schumpeter and Kirzner’s views. One major framework is that Shane (2003) proposes in summarizing these perspectives into a typology of entrepreneurial opportunities. Shane identifies five bipolar dimensions to differentiate Schumpeterian and Kirznerian opportunities: (I) disequilibrating / equilibrating; (II) requires new information / does not require any new information; (III) very innovative / less innovative; (IV) rare / common; and (V) involves creation / limited to discovery (Shane 2003).

De Jong and Marsili (2011) empirically explore the distinction between Schumpeterian and Kirznerian opportunities by analyzing survey data of 184 high-tech small businesses in the Netherlands entrepreneurs engaging in opportunity exploitation using the framework proposed by Shane (2003). De Jong and Marsili (2011) outcome supports the view from the opportunity-based entrepreneurship theory that Schumpeter and Kirzner's perspectives are not antithetic but instead represent the variety of opportunities that can simultaneously be present in the economy; they define a typology of entrepreneurial opportunities. Such reconciliation between the two perspectives is expressed in Kirzner's (2009) words:

“In spite of the contrast with Schumpeter that I emphasized in 1973, the truth is that my understanding of the dynamic market process certainly can (and should!) also encompass the consequences of Schumpeterian entrepreneurship (…) Casual observation surely confirms Schumpeter’s insights into entrepreneurial creativity (…) Apparently, there must be scope for both a creative entrepreneur (…) and a passive, alert entrepreneur (…) It seems reasonable to see the full dynamic of the capitalist system as being the outcome of two distinct kinds of entrepreneur-driven changes” (p. 148-149).

De Jong and Marsili (2011) found that the way individual entrepreneurs perceive opportunities that shape their business strategy, whether they see them realizing in the future or in present time, contributes to explaining the emergence of Schumpeterian vis-a- vis Kirznerian type of opportunities. Thus, the nature of opportunities pursued reflects, 79 Emami Langroodi F. / Journal of Insurance and Financial Management, Vol. 4, Issue 3 (2021) 65-81 among other factors, the strategic orientation of the entrepreneur; this is an element of distinction that Kirzner in more recent writings asserts as fundamental. Furthermore, De Jong and Marsili (2011) observe that more creative and pro-active entrepreneurs, who actively search for innovation, and those that are more strongly oriented towards growing their ventures to satisfy future needs through proactive product development, are more likely to identify and exploit Schumpeterian opportunities than Kirznerian opportunities, while individuals with a strategic focus on the exploitation of present demands are more likely to pursue Kirznerian opportunities. In contrast, the risk-taking propensity of the individual entrepreneur does not seem to matter in our data when it comes to the nature of the opportunity exploited. Concerning the entrepreneur’s experience, the formal education of the entrepreneur does not help to predict the type of opportunity exploited, although the results observed for the entrepreneur’s age could suggest that it is life experience more than formal education to direct entrepreneurs towards Schumpeterian opportunities as compared to Kirznerian opportunities.

6. SUMMARY

In summary, this paper tries to introduce Schumpeter’s Theory of Economic Development and its main features, centered around the entrepreneur and the concept of Creative Destructive, followed by a brief historical comparison of Schumpeterian theory vs. Marxism and Keynesianism. Then a multifaceted review and analysis of the researches in the 20th and 21st centuries are presented by focusing on the role and importance of the entrepreneur, entrepreneurship, and their effectiveness in creating economic growth, especially in the capitalist economies. This paper addresses separate phenomena and topics by comparing the so-called “Schumpeter” effect vs. the “refugee” effect in recently published researches, as well as the relationship of Schumpeterian and Kirznerian opportunities in modern entrepreneurship. All of the reviewed papers get to the conclusion that entrepreneurship and creating new businesses, especially since the great depression, has had a positive and significant effect on the economic growth and disrupting the business cycles, however, other factors affect the entrepreneurship and/or changes in the business cycles which is one of the main critics of the Schumpeter’s theory that puts too much emphasis on the role of the entrepreneur to create the growth singlehandedly.

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