Manifesto for Comprehensive
Horst Hanusch, Andreas Pyka
Beitrag Nr. 289, Dezember 2006
Manifesto for Comprehensive Neo-Schumpeterian
Horst Hanusch* and Andreas Pyka**
*Economics Department, University of Augsburg, Universitätsstr. 16, D-86135
Augsburg, Ph: +49 (0)821 598 4179, Fax: + 49 (0)821 598-4229
**Economics Department, University of Bremen, Hochschulring 4, D-28359 Bremen,
Ph: + 49 (0)421 218-2151, Fax: + 49 (0)421 218-4974, e-mail: email@example.com
Keywords: Neo-Schumpeterian economics, industrial dynamics, public finance,
JEL: O30, O40, L2, P0, G10, B52
Within the last 25 years large progress has been made in Neo-Schumpeterian
Economics, this branch of economic science which deals with dynamic processes
causing qualitative transformation of economies basically driven by the introduction
of novelties. By its very nature, technological innovation is the most exponent and
visible form of novelty. However, Neo-Schumpeterian Economics should be
concerned with all facets of open and uncertain developments. A Comprehensive
Neo-Schumpeterian approach has to consider not only transformation processes
going on on the industry level of an economy, but also those on the public and
monetary realms. Our manifesto introduces these extensions and complements
towards a Comprehensive Neo-Schumpeterian economic theory, and develops some
guideposts in the sense of a roadmap for necessary strands of analysis in the future.
1. Introduction: Which Economic Approach Is Best Suited To Deal With Future?
Economic development and transformation processes, generally spoken change,
have become much more noticeable in economic reality in the last 25 years than they
have ever been before. That means that economic analysis is dominantly confronted
with the difficulty to tackle the future. As often in the history of economics, this
discipline seems to be taken by surprise and not well prepared to deal with this
challenge: on the one hand major parts of economics are concerned with static
allocation problems; on the other hand the dynamic subfields of economics have
severe difficulties in grasping the structural and qualitative processes coming along
with future orientation and its processes of transformation and development. In this
manifesto we claim that only the Comprehensive Neo-Schumpeterian Economics
approach (CNSE) is able to face the new challenges by integrating a future-oriented
dimension which has necessarily to encompass all economic spheres, namely the
industrial, the public and the financial domains.
Without doubt, economics is the science which focuses on economic welfare and the
means to its increase. This can be stated as a goal for all schools in economics,
among the most important being the Neoclassical and the Keynesian school as well
as the Neo-Schumpeterian approach. But the angle of analysis differs sharply among
these various approaches.
Boiling down the neoclassical approach to its essentials, it can be characterized by
rational individuals acting on markets where the price mechanism is responsible for
an efficient allocation of resources within a set of given constraints. Neo-Keynesian
Economics, briefly characterized, turns out to be a demand-oriented macro
approach, based primarily on short term processes occurring in non-perfect markets.
One of the decisive differences of Neo-Schumpeterian Economics with respect to
those approaches in economics is the strong emphasis put on knowledge, innovation
and entrepreneurship. Innovation is identified as the major force propelling economic
dynamics. In this emphasis on innovation the Neo-Schumpeterian approach explicitly
makes the future to its major concern. Generally, one may say that novelty, i.e.
innovation, is the core principle underlying the Neo-Schumpeterian approach.
Innovation competition takes the place of price competition as the coordination
mechanism of interest. Of course, prices are also significant, but concerning the
driving forces of economic development they are not central. Whereas prices are
basic concerning the adjustment to limiting conditions, innovations are responsible
for overcoming previous limiting conditions and – as in economic reality, everything
has an end - setting new ones.
Inseparably connected with innovation, true uncertainty in the sense of Frank Knight
enters the scene with important consequences for analysis. Precisely defined
probability distributions over a closed set of possibilities cannot be assumed any
longer, instead the set of possibilities itself is subject to unexpected changes. By this
intrinsic relationship between innovation and uncertainty, more complex modes of
behaviour, which include ‘potential surprises’ become relevant (see e.g. Shackle,
The focus on novelties and uncertainty, i.e. the future, is thus the most important
distinctive mark of Neo-Schumpeterian economics. By its very nature, innovation,
and in particular technological innovation, is the most visible form of novelty.
Therefore, it is not very surprising that Neo-Schumpeterian economics today is most
appealing in studies of innovation and learning behaviour at the micro-level of an
economy, in studies of innovation-driven industry dynamics at the meso-level, and in
studies of innovation-determined growth and international competitiveness at the
macro-level of the economy.
2. The Principles of Comprehensive Neo-Schumpeterian Economics
If we resume the basics and hallmarks of Neo-Schumpeterian Economics given in
the introduction of this manifesto, one easily sees that this approach can contribute a
lot to the understanding of the dynamic processes going on in a capitalistic economy.
However, at the present stage of development, Neo-Schumpeterian economics is still
far from offering an integral theory of economic development. Most of the research of
the last decades has primarily concentrated on the real sphere of an economy
(Hanusch 1999, Hanusch and Pyka 2007). Technological innovations propelling
industry dynamics and economic growth obviously are a major source of economic
development. But technological innovations are not the only source, nor can industry
development take place in a vacuum. Instead, development is accompanied and
influenced by the monetary realms of an economy as well as the public sector. The
high degree of maturity which the Neo-Schumpeterian approach meanwhile has
reached in the field of industrial dynamics, admittedly does not hold when it is aiming
at the future-orientation of financial markets and the development of the public
sector. Undoubtedly, the Neo-Schumpeterian Approach has to be set on a broader
For this purpose we suggest Comprehensive Neo-Schumpeterian Economics
(CNSE) as elaborated in Hanusch and Pyka (2006). CNSE has to offer a consistent
theory which encompasses all realms relevant to an improved understanding of the
economic processes of change and development, i.e. the future. Consequently, we
argue that it is high time for Neo-Schumpeterian economics to devote considerable
attention to the role of the financial and the public sector with respect to economic
development. In particular, we introduce the CNSE approach as a theory composed
of 3-pillars: one for the real side of an economy, one for the monetary side of an
economy, and one for the public sector (figure 1).
Figure 1: The 3-pillars of CNSE
In this light, the notion of innovation, i.e. the introduction of novelties, has to be seen
as all encompassing, covering not only scientific and technological innovation, but
including also all institutional, organizational, social and political dimensions.
Furthermore, besides this result-orientation of innovation, a process-orientation has
to be considered, both because innovations are taking place in time and because of
the uncertainty intrinsic to economic development. This means that uncertainty
caused by the future-orientation is relevant for each of the single pillars as well as the
interrelated processes which take place between them. This is illustrated by the
bracket orientation towards the future in figure 1 which encompasses all 3-pillars and
introduces uncertainty to the analysis.
This fundamental importance of uncertainty thus has not only to be seen as a
characteristic concerning the single pillars, but also as a phenomenon shaping the
relationships between the 3-pillars causing a high degree of complexity. To deal with
this complexity, we suggest to introduce the following separation in the analysis of
the existing connections:
(i) Between each of the 3-pillars many points of contacts exist, which in the
light of CNSE have to be considered not only as interfaces but as
intersections which illustrate a deeply interwoven mutual dependency.
These intersections will be treated in section 4 of this manifesto.
(ii) Additionally, the relationships between the 3-pillars drive or hinder the
development of the whole socio-economic system in a non-deterministic
and co-evolutionary way. By this, qualitative changes, so importantly
shaping economic development, emerge, allowing for a prolific exploitation
of new potentials. In this case economies may stay within a so-called Neo-
Schumpeterian corridor of prosperous development. In the other case, the
economies will find themselves outside this corridor, either in regions of
stagnation or in regions of dangerous hyper developments, both
threatening their future potentials. The Neo-Schumpeterian corridor is
introduced in section 5 of our manifesto.
But, before dealing with the pillars’ intersections and their co-evolutionary
relationship, we describe in more detail the future-orientation of the single 3-pillars as
the central elements of CNSE.
3. The 3-Pillars as Central Elements of CNSE
We begin with the first pillar namely industry development and the current and future
challenges in this area of research. Then, we proceed to the financial markets and
the public sector, the second and third pillar of a comprehensive approach.
3.1 The Industrial Pillar
The raison-d’être of CNSE is the prevailing transformations of economies, which
persist at the macro-, the meso- and the micro-levels. However, although the
transformations are very visible at the macro level, they cannot be analysed or
understood on this level (e.g. Carlsson and Eliasson 2003). The sources of these
qualitative changes instead can be found in the industry dynamics at the meso-level
(e.g. Saviotti and Pyka 2004). Yet, the dynamic potential of industries is propelled by
the creation of novelties and entrepreneurial decisions at the micro-level of the
Consider, for example, the transformation of economies with respect to employment
shares towards service industries which has led to the so-called Fourastier
Hypothesis. This by no way can be explained by referring to the proportional growth
of existing industries. Instead new industries emerge again and again throughout the
history of capitalism, driving out existing ones or at least changing considerably their
relative weights. The emergence of the new industries is driven by innovation and
tested by entrepreneurial action.
Perhaps the most severe transformation in structure and organization the
industrialized world has undergone is the current one, caused by the increased
importance of knowledge, in particular scientific knowledge relevant for production
activities combined with an increasing internationalization of business. For many
years now, knowledge intensification and globalization have been widely considered
to be the most important challenges with which industrialized and industrializing
economies are confronted (e.g. Pyka and Hanusch 2006). In addition, severe
qualitative changes in the sectoral composition, in the relevant competences and in
the institutional settings lead to catching up and leapfrogging processes which affect
the international competitiveness of nations and regions, and confronts established
companies with major technological and organizational transformation processes.
These changes can immediately be traced back to developments going on at the
meso- or industry level. The underlying industrial dynamics are characterized by a
crucial transformation of the nature of competition. Especially in technological
intensive sectors, such as biotechnology-based industries and information and
communication technologies, due to the high degree of complexity of the underlying
knowledge base, competition no longer takes place between single companies only,
but often occurs between networks of actors, where new knowledge is created and
diffused collectively. Most importantly, firms often no longer compete in a price
dimension only, as competition in innovation has taken the dominant role.
Accordingly, competition and cooperation are simultaneously guiding the decisions of
economic actors. Whereas traditional manufacturing firms are forced by the ongoing
globalization to become ever larger, either through own growth or by mergers and
acquisitions on an international basis, and are acting in an environment of strong
price competition, they are at the same time intensively engaged in a competition for
innovation. To cope with the pressure stemming from complex modern innovation
processes they are obliged to search for possibilities of collaboration with small and
new entrepreneurial and technological intensive start-up companies. In knowledge-
intensive industries we often observe the co-existence of small entrepreneurial firms,
shaping technological development and contributing strongly to technological
progress, and large established companies performing their business in routinized
ways (see Pyka and Saviotti, 2005).
By emphasizing the decisive role of entrepreneurial business formation and the
emergence of new industries, we are already hinting on the processes at the micro-
level of the economy underlying all these development processes. Innovations,
affecting potentially the composition of sectors, are born at the micro-level. New
ideas paired with well developed absorptive capacities of entrepreneurs, who are well
connected to their own financial and scientific/technological networks, eventually lead
to a wide and fast diffusion of novelty and thus to new industries (e.g. Grebel, Pyka
and Hanusch 2003). As a prerequisite for a prolific creation of a new industry, of
course, consumers also have to be aware of the new commodities and services
Knowledge generation and diffusion processes stand behind innovation. Thus, an
examination of knowledge in general and knowledge dynamics in particular is
absolutely necessary in Neo-Schumpeterian economics. The simplified treatment of
knowledge as a public good, such as it is a concern in neoclassical economics, is
intellectually no longer profitable. Instead, the tacit, local, and complex character of
knowledge is emphasized.
By focusing on the generation and dissemination of new knowledge, from the point of
view of knowledge dynamics, severe non-linearities enter the Neo-Schumpeterian
economic system, decisively affecting the dynamics of the sectoral development as
well as the sectoral composition of an economy. As a consequence, Neo-
Schumpeterian Economics has rid itself of the concept of a representative agent.
Heterogeneous agents with varying competences and capabilities, industries at very
different stages of maturity, and institutional frameworks differing between sectors,
regions and nations co-exist, enriching strongly the complexity of the economic
systems under analysis. The changes going on at the macro-level of the economy
then are not only the aggregates of the changes at the micro- and the meso-level, but
instead several emergent properties and non-linearities have to be considered, such
as unbalanced growth processes, catching-up - , leapfrogging - as well as forging-
ahead – dynamics, which become part of the economic reality.
3.2 The Financial Pillar
Let us now turn to the second pillar of a comprehensive approach to Neo-
Schumpeterian Economics, the role of finance.
Schumpeter himself gives a first hint of the important role of the financial sector for
economic development in his Theory of Economic Development of 1912. Besides the
creative entrepreneur, the risk taking banker is the second most important force
behind economic dynamics. Obviously, in modern terms better notions for
Schumpeter’s banker are industrial banks and private equity firms, as these agents
are engaged in investment activities whereas the major interest of banks has shifted
towards the repayment of their loans. Indeed, the entrepreneur and the banker have
to be considered as in a symbiotic relationship: the entrepreneur opens up the
possibilities of investment for the banker, and the banker enables venturing
possibilities for the entrepreneur.
In this respect, J. P. Morgan (1837–1913) - as a banker who also took active roles in
real ventures such as the American Railways - can be considered as an example par
excellence of a Schumpeterian Banker. Generally, one can claim, that the major task
for the financial sector as a whole has to be seen in the acquisition and supply of
capital over time needed by firm actors for their entrepreneurial activities.
Keeping in mind the research objective of Neo-Schumpeterian economics, it is
difficult to distinguish between the evolution of the financial sector and its role and
function in particular stages of development in capitalistic economies. For this
reason, we only try to give a brief overview of the most important developments,
without claim of being comprehensive.
The banker and the bank system turn out to be not sufficient in describing the prolific
development of capitalistic economies. Besides banks, stock markets entered the
scene and played an outstanding role for firms in their endeavours to acquire capital.
The amount of capital needed to finance ventures in the new industrializing world
since the end of the 18
century accelerated the diffusion of stock markets
The mixture of bank and stock market financing only recently was extended by the
emergence of private equity and venture capital firms. Basically, due to the increased
techno-economic opportunities within knowledge-based economies going hand in
hand with strongly felt uncertainties of scientific and technological innovation, venture
capitalists appeared as a blend of financial and technological knowledge focusing on
acquiring capital for risky innovative start-up companies.
These developments obviously fulfil the requirements of Neo-Schumpeterian
economics as the financial sector’s development follows the increasing and
differentiating needs of the real sector and at the same time enables the
development of the real sector. From a Neo-Schumpeterian perspective, the future
orientation of the finance sector is essential and can be traced back, on the one
hand, of course, to the uncertainty of innovation processes. On the other hand,
however, a major feature of knowledge creation and innovation is the extreme time
consuming nature of these processes. Both characteristics make a long-term
orientation in the real as well as in the financial sector absolutely necessary.
Of course, the future orientation of Neo-Schumpeterian economics also makes it
necessary to rethink the role of monetary policy and central banks. In Monetarism
and Neoclassical Economics, this role is clearly defined: It is the stability of consumer
prices or low inflation rates which more or less defines the only benchmark for the
policy of central banks. The main instruments to fight inflationary tendencies can then
be seen in regulating the supply of money and liquidity and in fixing short-term
interest rates. These instruments still remain important when we turn to the Neo-
Schumpeterian context. What changes, however, is the main goal of monetary policy.
Besides, or even instead of fighting consumer price inflation, the political support of
growth and development in an economy or in a global economic area, for instance
the European Union, takes center stage in strategic thinking, with severe
consequences concerning the economic and the political role of central banks, for
instance the European Central Bank.
On the one hand, this means that the supply of money and liquidity should be
intended above all to foster Neo-Schumpeterian innovation dynamics, being the main
source and the basis of modern growth and development. On the other hand, central
banks continuously have to consider carefully the symbiotic relationship between the
real and the financial spheres of an economy, as mentioned above. Because a policy
of cheap liquidity, for instance, aimed initially at inducing and accelerating economic
growth, may easily turn a regular Neo-Schumpeterian development into a hyper-
dynamic one, with the tendency to build up explosive bubbles on the financial, and
(today, even more importantly) on the asset and energy markets. This might
especially be the case when huge speculative orientated hedge funds enter the
markets and try to maximize short-term profits.
In this case central banks, from a Neo-Schumpeterian perspective, have the task of
observing and controlling such inflationary tendencies. For modern economies, these
tendencies may be increasingly important, compared to the ordinary consumer price
inflation considered exclusively in the past. This argument is even stronger if one
considers that Neo-Schumpeterian dynamics, based on innovation, sooner or later
will be accompanied by remarkable productivity gains and quality improvements,
which very likely restrict consumer price inflation to a moderate rate.
3.3 The Public Pillar
Let us finally turn to the third pillar of CNSE, the public sector:
Our considerations of a Neo-Schumpeterian theory of the public sector focus on the
justification of the state and encompass a normative perspective in the sense of
defining tasks for public activities as well as a positive-empirical perspective
supposed to explain real developments.
The existence and necessity of a public sector can be explained within the Neo-
Schumpeterian approach again by the persistence and inevitability of uncertainty
accompanying every kind of innovation. Schumpeter’s notion of creative destruction
in his 1942 book Capitalism, Socialism and Democracy hints at the two sides of the
innovation coin: in every innovation process, we find winners and losers. Ex-ante it is
impossible to know who will win and who will lose the innovation game. Accordingly,
the uncertainty of innovation processes throws a veil of ignorance over the economic
actors. In this sense, the ideas of John Rawls Theory of Justice (1971) can be
transferred to the Neo-Schumpeterian context. An individual as a member of society
can agree on a social contract to deal with the peculiarities and imponderables of
innovation processes. This social contract then has to be executed by a state
authority. In the Neo-Schumpeterian context, sure enough the social contract also
applies to firm actors and entails both support for uncertain innovation activities as
well as social responsibilities in the case of innovative success (e.g. Acs 2006).
The normative perspective of an economic theory of the state is supposed to guide
the deviation and design of all public activities - encompassing public expenditures
as well as public revenues - which in a Neo-Schumpeterian context has to include
the developmental potential of the economy. In this sense, basically all public
interventions have to be scrutinized, as to whether they support or hinder the
potential of economic development. Accordingly, for public activities, an orientation
towards the future is postulated.
Two types of failure generally endanger this goal and can be considered the cardinal
errors of economies: the first deals with the danger of discarding promising
opportunities too early, whereas the second deals with the possibility of staying for
too long on exhausted trajectories (Eliasson 2000). In both cases, resources for
future development are wasted, which demands for policy intervention.
But why do economies and economic actors tend to these failures? The sources of
potential failures are manifold, but again stem from the uncertainty underlying
economic processes as well as the complex nature of novelties:
A first example is given by consumers’ decisions concerning so-called merit goods as
introduced by Richard Musgrave (1958) in public finance. Due to the future
orientation and the complex character as well as the high probability of positive
spillover effects of merit goods, individuals tend to undervalue strongly their
consumption as, e.g. in education, or to underinvest in respective activities, as, e.g.
with respect to R&D. A future-oriented policy, therefore, has to consider these
shortfalls, e.g. by improving the knowledge of economic actors concerning the
benefits of the respective goods and activities and/or by supporting their
consumption, use and production.
A second example deals with different and unbalanced speeds of development,
which is symptomatic of dynamic innovation-driven processes. Creative destruction in
a Schumpeterian sense is most often closely connected to the obsolescence of
labour qualifications which might cause severe problems of mismatch unemployment
on the labour markets – the new qualifications are not sufficiently available, whereas
obsolete qualifications abound. From the perspective of Neo-Schumpeterian
economics this mismatch on labour markets demands not only an administrative
design of labour policy, but also an active future-oriented or knowledge-based
design. With respect to recent labour market policy designs, the Danish model
implemented since the 1990s is a good example of such a future-oriented approach.
With respect to a positive-empirical approach of a Neo-Schumpeterian theory of the
state, which seeks to explain real developments, a promising starting point again
comes from public finance and an empirical observation discussed more than 100
years under the heading of Wagner’s Law (Wagner 1892). Adolph Wagner (1835-
1917) formulated this law following empirical observations that the development of an
industrialized economy is accompanied by an increasing absolute and relative share
of public expenditures in GNP. According to Wagner, the reasons for the income
elasticity above unity towards public goods are to be seen in the increasing
importance of law and power issues as well as culture and welfare issues in
industrializing and developing economies. This way, public dynamics are narrowly
connected to Neo-Schumpeterian dynamics, which demand higher qualities of public
goods such as infrastructure, education, basic research etc. as a condition sine-qua-
non for economic development.
To avoid either an unbounded growth of public activities, which Schumpeter (1950)
himself labelled the march into socialism, or an increasing privatization of public
goods e.g. in the health and education sector - which goes hand in hand with an
increasing uneven distribution of services - itself an obstacle for economic
development - a policy recommendation of Neo-Schumpeterian economics has to
focus on adding a qualitative dimension to Wagner’s quantitative dimension. This can
be achieved only by taking seriously the normative requirement in the design of all
public activities of the Neo-Schumpeterian approach, namely their orientation
towards future development. In the case of potential insane Wagnerian dynamics
leading to an overall expansion of the public sector, a Neo-Schumpeterian policy
design will have to encompass a strengthening of the absorptive capacities of
consumers towards superior merit goods.
The last example already illustrates the important co-existent relationship between
the different pillars of CNSE which in the following sections will be discussed more
4. Interfaces and Intersections between the 3-Pillars
Without doubt between the 3-pillars many points of contact exist, which co-determine
the dynamics going on in a particular pillar under consideration. Conceptually this is
by far not new to economics and usually leads to a set of assumptions which are
considered to frame economic processes and decision making. However, we claim
that in order to investigate the important relationship- dimensions between the 3-
pillars, it is by far not sufficient to identify only the interfaces between the pillars in
order to derive a set of subsequent constant assumptions. In addition to interfaces
we apply the notion of intersections between the pillars in order to stress their mutual
interdependencies and co-evolutionary potentials.
These intersections comprise all pillars including (i) the industrial-public pillar
intersection, (ii) the public-financial pillar intersection as well as (iii) the financial-
industrial pillar intersection.
(i) The industrial-public pillar intersection has an important manifestation in the
design of modern innovation organization which in the literature is labelled as
collective innovation processes (e.g. Pyka 1999). Private firms and public
research institutes collaborate in knowledge creation and diffusion which
includes besides inter-institutional collaborations between firms and public
research institutes, the engagement of private firms in basic research e.g.
among others in areas as molecular biology and nanotechnologies, as well as
pro-active technology transfer in public-private research partnerships.
Or consider the international and interregional competition for industrial
settlement, its impact on future development of nations and regions, and the
role the design of tax systems plays in this competition. A future oriented Neo-
Schumpeterian policy has to scrutinize whether the conditions generated by
public activities allow for, or even open up, developmental potentials for the
industrial sectors in the future.
(ii) The public-financial pillar intersection comprises policy activities to attract
financial actors i.e. their international location decisions, and to provide for
knowledge and information in high uncertain areas of innovation and industry
development in order to support the decision making processes of financial
actors. It also includes the cooperation of financial actors when it comes to the
implementation and application of policy programmes to further innovation and
entrepreneurship. In particular a long-term commitment based on sound
technological forecasts is postulated to be an essential ingredient of a future
orientation of the financial pillar, which, however, demands for joint efforts of
and fine-tuned coordination between the two pillars.
(iii) Closely related, the financial-industrial pillar intersection on the one hand
embraces the supply with uncertainty capital on the financial side, as well as,
on the other hand, the provision of future promising investment possibilities
like the emergence of new industries on the industrial side. It is the industry
and service sector of an economy which has to provide the potentials for
innovative growth and development in an economy and it is the financial
sector which has to provide for the financial resources to spur these
processes. In this sense there exists a kind of symbiotic relationship between
these two pillars, as we already have pointed out in our discussion of the
The above examples can show how many different interrelationships and
intersections exist between each of the pillars and how relevant they are for a future
oriented concept of economic development. A last brief example, however, may
illustrate the importance of this connectiveness for the policy design of social
systems aiming at and using the concept of pillar intersection in a general way by
including all 3-pillars into consideration.
Consider, for example, the increasing life expectancies and demographic changes
which are key issues in almost all industrialized countries and which demand new
models and programs aiming at a future-oriented design of social systems and
programmes. These programmes have to include both educational dimensions
covering the early periods of life as well as the retirement system aiming at social
security in the old age. A future-oriented policy design following the idea of pillar
intersection first of all should look at and consider the possibilities of each pillar to
reach the desired goal. Naturally, this includes the deliberation of negative as well as
positive feedbacks between the respective pillars which might further and hinder the
achievement of the desired policy objectives.
One important step for many European countries to improve the future-orientation of
their social security systems, for instance, facing severe difficulties stemming from
demographic changes would be the switch from a public pay-as-you-go-system to a
retirement system based on private capital markets and on the funding principle. By
this step large amounts of capital will be collected in pension funds which have to be
re-invested in future-oriented activities in order to create the desired returns needed
to finance the pension payments. This will both generate the necessity to invest in
the most dynamic and innovative industries as well as to provide the uncertainty
capital to do so, i.e. supporting entrepreneurial activities leading to the emergence of
In this case and in a world which is characterized by knowledge-based societies and
global financial markets a country or an economic region like the EU will hardly have
a chance to escape from an international competition of future-oriented system
transformation and policy reform. The reasons for that may be manifold, but primarily
it is the general interrelatedness of the 3-pillars which shows up even on a
transnational level. If highly developed countries want to secure their competitiveness
in a modern globalized world they have, at first, to rely on and to expand and develop
the economic potentials of their future oriented industries. These industries, however,
need huge financial means as well as the corporate pressure of return oriented
investors to generate new and to use the existing possibilities for profit making in an
innovative manner. Firms which cannot accept this close connexion between the
financial and the real business sphere sooner or later will get into trouble. They will
be confronted not only with the diminishing expectations of the actors in the world of
international finance, but also and most severely will have to cope with a lack of
funding of their specific activities. The flexibility and the mobility of international
financial investors doing their business in global markets will give a country with a
future-oriented national security system, strongly fixed on high returns of the
collected savings for future pensions, sooner or later the chance and the opportunity
to build-up its own social security system so successfully that it will dominate those of
other countries not in line with that specific system.
In addition, this situation will give the progressive, future-oriented country a great
chance to transfer the financing of its own system to other countries which are not
willing to give up their pay-as-you-go-system, based on the solidarity principle of
generations. This means that countries, for instance those in the EU, which are not
prepared to change from the presence-oriented solidarity principle to the future-
oriented funding or rentability principle in the end will find themselves in a situation,
where they not only will have to finance their own social systems via taxes or
contributions, but also will be pressed to partly secure the system of a foreign
country, like the USA. Responsible for this pillar-interrelatedness even on a global or
international level are primarily the high returns being earned in future-oriented
companies or industries in Europe, for instance, and being paid by the financial
markets to foreign US-pension funds or other global investors like hedgefunds or
private equity firms acting for or in the name of such pension funds.
5. Economic Co-evolution: The Concept of a Neo-Schumpeterian Corridor
As we already saw, CNSE focusing on innovation driven, future-oriented
development has to offer theoretical concepts to analyze the various issues of all 3-
pillars: industry, financial markets, and the public sector and their encompassing
qualitative interrelations. Innovation and, as a consequence thereof, uncertainty are
ubiquitous phenomena characteristic of each of these pillars and also of their
intrinsically interwoven connectiveness. An improved understanding of the
development processes going on in modern capitalistic economies can only be
expected when these co-evolutionary dimensions of the 3-pillars are taken into
account. This is illustrated with the concept of a Neo-Schumpeterian Corridor shown
in figure 2.
Figure 2: The Neo-Schumpeterian Corridor
In a CNSE perspective, there exists only a narrow corridor for a prolific development
of socio-economic systems. Profound and Comprehensive Neo-Schumpeterian
development takes place in a narrow corridor between the extremes of uncontrolled
economic success (growth) and exploding bubbles, on the one hand, and
stationarity, i.e. economic stagnancy, on the other hand. Consider for example the
case of the financial sector, exaggerating the developments taking place in the real
sector and leading to dangerous bubble effects, which might cause a breakdown of
the whole economy. Or think of the case in which the public sector cannot cope with
the overall economic development, and infrastructure, education, social security etc.
become the bottlenecks of system development.
Economic policy in the sense of CNSE is supposed to keep the system in an upside
potential including both overheating-protection, i.e. on the macro-level bubble
explosions and on the micro-level insane explosive growth, and downside-protection,
i.e. on the macro-level stagnation and on the micro-level bankruptcy.
A brief view on the economic history of different economies in the second half of the
last century may illustrate that the two threats - bubble explosion and stagnation -
shape the quantitative and qualitative processes of economic co-evolution. It
emphasizes also the necessity to develop further CNSE in order to get a grip on the
importance of these co-evolutionary processes.
In the post Second World War period, both Japan and Germany recovered extremely
well in economic terms, whereas the United States increasingly lost ground.
However, both countries fell from the Neo-Schumpeterian corridor - in opposite
directions – whereas the United States returned to the corridor. What happened?
In both countries, Japan and Germany, specific institutional arrangements and
organizational forms evolved after World War II which were not simple copies of the
previous successful US-system, but instead proved to be relatively superior. In
particular, one may stress the important meaning of the financial sectors designed for
economic recovery and the overtaking of the Japanese and the German industrial
sectors. In both cases, long-term relationships between industry and banks opposed
the short-term character of these relationships within the US financial sector. This
long-term commitment was extremely beneficial for the economic development of
large industries in this period of comparatively stable technological environments. In
the same vein, labour markets and their institutions were oriented towards long-term
relationships compared with hire-and-fire policies in the US which furthered well
But during the late 1970s and early 1980s, the German system could not cope with
the new challenges coming from the information and communication technology
revolution, as the starting event of the so-called knowledge-based economies. Its
institutions and organizational designs now proved to be too sedate, and its economy
drifted upwards in the stagnation sector of figure 2.
By the end of the 1980s and early 1990s, also the Japanese economy broke down
and moved into a development period, today referred to as the decade of near-zero-
growth. The major reason was a overheating of the financial sector which led to
speculative bubbles, which, after their bursting, affected the whole economy.
The American model, by contrast, was now regarded as the epitome of dynamism
and entrepreneurship, and was seen as a guidepost for the 21
century. The US
economy thus entered the Neo-Schumpeterian corridor in the new-growth period
again. Since the early 1990s, a high rate of creation of technology-intensive firms
combined with a substantive raise in privately financed R&D, led to the emergence of
world leading technology clusters such as the famous Silicon Valley and Route 121.
Thus, economic development of the 1990s was characterized by high average
growth rates, low unemployment and low inflation.
The historical examples illustrate the powerful economic dynamics shaping overall
economic development. The historical examples illustrate further the explanatory
power of the Neo-Schumpeterian Corridor, which allows an analysis of the underlying
mechanisms. In this sense, we emphasize the important need to develop further the
CNSE approach in the directions outlined in this manifesto.
6. Conclusions: Comprehensive Neo-Schumpeterian Economics versus
CNSE has an important source of inspiration in the mainly descriptive approaches of
systems theory. Here, learning and the building up of competences are considered to
take place in an interactive and collective ensemble of subsystems. Besides
economic actors - basically firms - institutional actors such as universities and other
public research laboratories as well as the institutional frameworks and governance
structures shape the innovation process taking place in national (e.g. Nelson 1993
and Lundvall 1988), sectoral (e.g. Malerba 2002 and 2005), regional (e.g. Cooke
2002) as well as corporate innovation systems (e.g. Cantwell, Dunning and Janne
2004) and is important in determining their performance.
CNSE share with these system-theoretic approaches the major concern, namely an
explicit consideration of the mutual interdependencies of various actors and
economic domains driving innovation processes as well as the interactions between
However, CNSE offers certain advantages in relation to system-theoretic approaches
and goes beyond their possibilities. In particular, the agent-based foundation of
CNSE (see e.g. Pyka and Fagiolo 2007) allows the integration and analysis of
decision making in the process of development. It includes explicitly the main actors
in a modern capitalistic economy, namely industry, the financial markets, and the
public sector. And, it is able to consider theoretically as well as empirically the future-
orientated goals and instruments of these actors as well as their particular constraints
Elsewhere (Hanusch and Pyka, 2006) we have shown that CNSE is drawing on
complexity economics, evolutionary economics, industry dynamics and public finance
as well as on a process-oriented understanding of innovation and therefore has a
profound and adequate theoretical foundation and an appropriate framework for the
analysis of dynamic co-evolutionary processes. Compared to the snapshot
description of innovation systems in the system-theoretical literature this offers a
decisive advantage in theoretical as well as in policy analysis.
In this sense we consider CNSE as the broader analytical approach which on a
sound theoretical base allows for quantitative as well as qualitative empirical studies
of innovation processes; and their consequences for economic development; keeping
in mind that these innovation processes may be traced back to and have an impact
on the co-evolutionary relationship of the 3-pillars of modern capitalistic economies.
In this light, this manifesto has to be seen as a first step to consider CNSE as a
theoretical and empirical framework for economic analysis as well as economic policy
in a world which more than ever before is in need for a serious future-orientation to
be considered in all domains of life.
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