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Industry and Innovation
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On knowledge and economic transformation:
Joseph Schumpeter and Alfred Marshall on the
theory of restless capitalism
Stan Metcalfe, Anders Broström & Maureen McKelvey
To cite this article: Stan Metcalfe, Anders Broström & Maureen McKelvey (17 Jul 2024): On
knowledge and economic transformation: Joseph Schumpeter and Alfred Marshall on the
theory of restless capitalism, Industry and Innovation, DOI: 10.1080/13662716.2024.2376318
To link to this article: https://doi.org/10.1080/13662716.2024.2376318
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UK Limited, trading as Taylor & Francis
Group.
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On knowledge and economic transformation: Joseph
Schumpeter and Alfred Marshall on the theory of restless
capitalism
Stan Metcalfe
a
, Anders Broström
b,c
and Maureen McKelvey
b
a
School of Social Sciences, University of Manchester, Manchester, UK;
b
Department of Economy and Society
and U-GOT KIES Centre, School of Business, Economics and Law at the University of Gothenburg,
Gothenburg, Sweden;
c
Swedish Entrepreneurship Forum, Örebro, Sweden
ABSTRACT
Joseph Schumpeter and Alfred Marshall pioneered the study of
innovation and entrepreneurship as key forces of economic devel-
opment. This article oers an overview of key ideas developed by
these inuential economists in works published between 1890 and
1944. We argue that while our own time presents a partly dierent
set of challenges, opportunities and institutional conditions than
those of that age, many insights championed in their work remain
highly relevant for our time and day. Noting how analysis of mar-
kets is relatively absent from some of the strands of contemporary
innovation research, we suggest that re-visiting the foundational
work of Schumpeter and Marshall can help stimulate deep insights
relevant to societal transformation and the potential role of tech-
nical innovations.
Keywords
Joseph Schumpeter; Alfred
Marshall; evolutionary
economics; Schumpeterian
economics
JEL CLASSIFICATION
B310; B520
1. Introduction
What does knowledge have to do with economic transformation?
1
How is wealth created
from knowledge? These are perennial questions; they occupy the time of governments
and of the directors and managers of companies alike and admit of no easy answers. Yet
the answers to these questions are of fundamental significance, in relation to many of the
most pressing issues of the current epoch. How wealth, knowledge and economic
transformation are related is thus a question that should interest and engage all scholars
of innovation and entrepreneurship – both when they are learning from historical ideas
and also when using our field of research in addressing today’s problems.
CONTACT Anders Broström anders.brostrom@gu.se Department of Economy and Society and U-GOT KIES
centre, School of Business, Economics and Law at the University of Gothenburg, Box 625 SE, Göteborg 40530, Sweden
1
The current article is primarily based upon Professor Stan Metcalfe’s research and thinking about restless capitalism in
relation to the works by Marshall and Schumpeter, drawing on his presentation of these views at the Swedish
Schumpeter Lecture 2022. The lecture series is an annual event organised by the Swedish Entrepreneurship Forum,
and the 2022 edition was co-organised with the Gothenburg U-GOT KIES centre. A revised and much longer expose of
Professor Metcalfe’s lecture is openly available, published as Metcalfe (2023) On Knowledge and Economic
Transformation.
INDUSTRY AND INNOVATION
https://doi.org/10.1080/13662716.2024.2376318
© 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/
licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly
cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or
with their consent.
Specifically, this article will highlight ideas on wealth, knowledge and economic
transformation developed in the work of Alfred Marshall and Joseph Schumpeter –
names hopefully familiar to all students of innovation, but perhaps not studied in-
depth by very many aspiring scholars today. These scholars paved the way for our
understanding of innovation and entrepreneurship as the key forces of economic devel-
opment, and a long-standing research tradition draws on Marshallian and
Schumpeterian insights. In one such strand of work, Professor Metcalfe has developed
the notion of ‘restless capitalism’ (Metcalfe 1998, 2002), where the core argument is that
capitalist economies are by nature restless, in the sense that they are driven by experi-
mentation and novelty creation. In restless capitalism, markets and institutions help
make (and break) connections which influence the growth of knowledge.
2
We argue that while our own time presents a partly different set of challenges,
opportunities and institutional conditions than the late 19th and earthly 20th century
experiences that shaped the work of Marshall and Schumpeter, many insights cham-
pioned in their work remain highly relevant for our time and day. Hence, we encourage
especially aspiring scholars today to reflect upon some basic notions in our field. This is
particularly pertinent given how some key insights derived from their analysis are rather
neglected in some of the dominating strands of recent scholarship on innovation.
It seems to us that markets currently play a relatively minor role in some of the most
active debates over innovation. That is not to say that fundamental Marshallian and
Schumpeterian views of markets as a central and important mechanism for stimulating
change in the economy are absent in contemporary writing. Innovation remains a key
topic in economic analysis of productivity and job creation (Broström and Karlsson 2017;
Dosi and Mohnen 2019), and fundamental principles are being advanced, e.g. in work on
Experimental Capitalism (Klepper 2016). However, a broad array of literature streams
discuss innovation as a social phenomenon seemingly detached from market-based
analysis. Unfortunately, we feel that studying innovation has – in many studies and in
many academic institutions – separated itself from the study of entrepreneurship, and
thereby lost focus of the basic Schumpeterian insight that for the invention to be turned
into a (market or business) innovation, entrepreneurs and an entrepreneurial function
are required in the economy (Henrekson, Johansson, and Karlsson 2024).
Our main concern is that while focusing on the ramifications of innovation that are
important topics in their own right, several very influential lines of research have
downplayed the role of product markets and factor markets and thereby also downplayed
the importance of competition and of the need for experimentation by both innovators
and entrepreneurs. While leading conceptualisations of innovation ecosystems include
important elements of competitive, market-based interactions (Granstrand and
Holgersson 2020), much research employing this perspective tends to depict collabora-
tion as the key mechanism of interchange, and de-emphasise competitive interactions as
a basis for progress (Baldwin et al. 2024; Oh et al. 2016). With the accelerating integration
between the traditions of innovation studies and transition studies (Markard, Raven, and
Truffer 2012; Smith, Voß, and Grin 2010), innovation is increasingly treated as the means
for actions and ambitions facilitated by the public sector of the economy rather than the
2
See the articles in the Special Issue in Honour of Professor Metcalfe of the journal Economics of Innovation and New
Technology (Howells and Ramlogan 2013; Loasby 2013).
2S. METCALFE ET AL.
result of entrepreneurial experimentation (Fagerberg 2018; Murtinu, Foss, and Klein
2022). In a non-trivial share of the work addressing innovation in the context of
sustainability transitions, profit-seeking market interaction is portrayed as the problem
to which publicly guided innovation is to be the answer.
Against this development, we find it timely to urge young scholars in the field to
acquaint themselves with the scholarship of Marshall and Schumpeter. Bringing back ‘the
missing markets’ into the core of the study of innovation by means of revisiting historical
writers can help stimulate deep insights relevant to societal transformation and the
potential role of technical innovations, in relation to the economy.
2. Foundations of economic evolution
Marshall and Schumpeter shared a deep awareness of the evolving nature of capitalism.
Their vision of the modus operandi of capitalism is of a system distinguished by its
endless development, a system in which innovation and the search for knowledge to solve
problems play a central role. For Schumpeter and for Marshall, modern capitalism has
a restless, autocatalytic nature, always on the move, seeking out and acting on new
productive opportunities and, in the process, raising the standard of life for countless
millions of people. Why and how is this so? Their answer is that the dynamic features of
capitalism flow from growth and application of new knowledge of many different kinds:
of the natural world, of human artifice and of human organisation. Moreover, the
creation of knowledge is also a restless process as each advance points in the direction
of further advances; it is as if the solution to any one problem serves only to identify yet
further problems. For this to be possible, our economic institutions must define an open
system just as the creation of knowledge is defined by an open system. It does not seem
unreasonable to suggest that when the production of knowledge is properly organised,
human knowing has the scope to grow combinatorially fast, and faster than our immedi-
ate capacity to capitalise on all that is new. This does not imply, of course, that all
problems are capable of solution at any one time, only that the trend is to add progres-
sively to those that are solved.
The role of Schumpeter in promoting such a world view is beyond doubt; his work
inspired an entire school of economic writing and empirical investigation around
innovation-related phenomena that flourishes today. The contribution of Marshall is
less obvious to many. Marshall was also an evolutionist and one who came very close to
articulating a variation-cum-selection account of innovation and the competitive
process.
3
Like Schumpeter, Marshall emphasises business differentiation through inno-
vation as a key component of the market process. Both scholars apply an evolutionary
perspective to question about why some innovations fail while others succeed, how
successful ones increase their economic impact over time, how scarce resources are
allocated to the innovation process, and how the gains and losses from innovations are
3
Marshall’s evolutionism is largely forgotten today and he is remembered as a toolmaker and early formulator of what
became the neoclassical viewpoint but otherwise he has been overtaken and is considered rather unprofessional in his
quaint obsessions with morality, with realism, with his warnings about excessive abstraction in economic reasoning.
Schumpeter (1941) highlights Marshall’s evolutionary stance and the fact he” carried his ‘evolution mindedness’ into his
theoretical work”. Around the same time, Marshall’s student Gerald Shove (1942) recognised that ‘Marshall’s whole
conception of the nature of economic change is coloured by what may be called the Biological approach’ (312). Raffaelli
(2003) offers a deeply reasoned account of Marshall’s evolutionary bent, its foundations and its reception.
INDUSTRY AND INNOVATION 3
distributed. In particular, we are here referring to four of their key works: Schumpeter’s
Theory of Economic Development (TED 1912), and Capitalism, Socialism and Democracy
(CSD 1944), and Marshall’s Principles of Economics (P. 1890 and 1920) and Industry and
Trade, (I. 1919)
4
It might help at this point to draw attention to one of the potentially significant
differences between their respective approaches and one significant point of common-
ality. The difference is the matter of continuity. For Schumpeter, innovation-induced
development is a process marked by discontinuity, by step changes, a new point of
equilibrium cannot be reached by infinitesimal steps as he puts it (TED, 64).
5
In contrast,
Marshall is famous for his emphasis on gradualism, development through the continual
accretion of small changes summarised by his epigram, natura non facit saltum. This
difference should not get in our way. For Schumpeter, development is a break with the
past, while for Marshall, development emerges out of the past. Perhaps these are views
from opposite ends of the same telescope. Every radical innovation, and many of lesser
note, is typically a prelude to a series of incremental follow-up innovations, sequelae that
explore the particular design space and take time to emerge and spread. At each stage,
including the initial innovation, the incremental economic effects are likely to be of small
magnitude, but cumulatively over time they may constitute the complete transformation
of a particular industry. Looking back, the historian may identify pre- and post-
innovative worlds and their discontinuities, but in reality, they are connected by one
enduring process.
Consider next the point of commonality, their rejection of the concept of equilibrium.
Equilibrium is a notion that is deeply embedded in economic discourse and will remain
so, but it is a slippery construct. Marshall and Schumpeter use the word freely, but not in
the way one might imagine. As commonly used in economic theory, it simply means that
an investigator has posed a problem and a set of solutions have been found: our equilibria
are pencil and paper constructs. This is far from irrelevant, for it provides a basis for
changing the problem and comparing the different sets of solutions, and we routinely
teach students of microeconomics to do this. However, any such comparison of alter-
native solutions invites the question of movement from one solution to another, and an
explanation of movement cannot be of the same content as an explanation of
equilibrium.
Equilibrium means a state of rest, a state where all the internal sources of change
specified within the problem have been exhausted, and here it matters not whether we are
talking about an equilibrium position or an equilibrium path. Once in equilibrium, one
can never escape from it, other than through the operation of external events that alter
the operant forces – the ‘influences from without’. In contrast, Schumpeter and Marshall
deploy the word equilibrium to capture the coordinating balance of forces by which
markets clear and an ordered pattern of economic relationships tends to emerge. Their
schemes are not at rest, for the very process of moving towards coherence gives rise to
new knowledge, and new ideas beget further new ideas (P. IV, 271). Furthermore, the
4
We rely on the second edition of the Theory of Economic Development, based on the Redvers Opie translation published
in 1934. The first edition appeared in 1912. All references to the Principles, are to the 8th and final edition published in
1920.
5
Schumpeter rejects any reliance on organic metaphor, stating baldly, ‘It is a fact that the economic system does not
move along continually and smoothly’. The language is the language of disruption, of setbacks of breakdown. (TED 216)
4S. METCALFE ET AL.
generation of new knowledge transforms the position the system is heading towards and
the position it came from. They are irreversible developments; there can be no going back
to the starting point. This is made abundantly clear in Marshall’s claim that,
‘The world’s material wealth would quickly be replaced if it were destroyed, but the ideas by
which it was made were retained. If however the ideas were lost, but not the material wealth,
then that would dwindle and the world would go back to poverty’. (Principles
6
Appendix C,
780)
Marshall made his claims for biological, or better expressed evolutionary methods of
analysis, for economic affairs are an expression of living force and movement. The way
Schumpeter makes his evolutionary case is that economic life changes its own data by fits
and starts, in his memorable phrase, it leads to development that arises ‘from within’ by
its ‘own initiative’, surely one of the most powerful insights in all of his writing (TED, 63).
For both, the idea of enterprise and its agent, the entrepreneur, is central. It is not their
role to invent, it is their role to imagine a different economic world and then act so as to
lead and guide the use of resources into new channels. It is the interplay between creative
insight and action that matters, and action means introducing novelty and letting the new
work it’s magic by displacing the old relatively and absolutely. That which is destroyed in
terms of economic and epistemic activity is as much part of the story as that which is
created.
3. Schumpeter’s Theory of Economic Development
The purpose of Schumpeter’s great work is to elaborate on the role of enterprise in the
process by which capitalism operates as a self-transforming as well as a self-organising
system. The focus is on the entrepreneurial role, how it generates new combinations of
production and innovations to perform existing activities at lower cost or with greater
efficacy. The basis for the innovations may be technical, organisational or commercial,
and they extend to the new product as well as the new production process.
The rewards to successful enterprise are the profits that are generated as a surplus over
costs when the new methods are evaluated at the prices and factor payments supported
by the existing ‘old’ methods. Stage two of the drama, as he puts it, involves the
elimination of those profits. In a telling passage, Schumpeter writes that profits are ”the
child and victim of development” (TED, 154). That is to say, profits point the way to
a new value system and, in so doing, necessarily shape the future channels of innovation.
It is competition that destroys the entrepreneur’s profit and it does so in a very
particular way, it is certainly not perfect competition as that term is understood. The
insights that underpinned the innovation are not protected property; they are transfer-
able to others who, if they are in a position to do so, imitate and increase the proportion
of output that is produced by the new method.
7
The implication is that the adjustment
process is driven by new entrants or by imitating old producers and not by the organic
growth of the innovating businesses.
8
The ensuing struggle destroys the old producers
who do not imitate, and with it the old value system. A new order is established, where
6
Principles of Economics, hereafter referred to by P.
7
Of course, patents are a possibility but the effects are so obvious as to not merit discussion (TED, 131)
8
Schumpeter draws explicit attention to the great difficulties of building an innovation around a large business. (TED 133)
INDUSTRY AND INNOVATION 5
profits are eliminated, although there are no hints as to how quickly this might occur. The
overwhelming conclusion is that innovations suspend for a time the traditional laws of
value.
The brilliance of this thesis lies partly from his use of the device of the fictitious
circular flow as its counterpoint. It was a rhetorical masterstroke to insist that the
important features of the development process can only be understood by starting
from a position where innovations and their correlated phenomena are absent. One
should not explain the process of development in the context of ongoing development,
even though in fact all development rests on prior development. This is in sharp contrast
to Marshall’s method, as we shall see.
When Schumpeter returned to this theme in Capitalism, Socialism and Democracy
(Schumpeter 1943) we find an even more forthright statement of his views. The perennial
gale of creative destruction is linked to innovation in the hands of large businesses, an
evolutionary process that can never be stationary and which can only be judged by its
performance over time. Innovation-based competition attacks not just the profits and
outputs of established businesses but their very claim to existence (CSD, Chapter VI).
Such vivid imagery was never within Marshall’s scope, yet he thinks of capitalism in an
entirely compatible way.
4. Alfred Marshall’s Account of Economic Development
The Principles of Economics was Marshall’s great work, and it has largely passed unno-
ticed that it dealt with economic development in no less interesting a fashion than had
Schumpeter, although you have to work a little harder to extract the core of the argument.
Marshall opens his account of economic development with an assertion that economic
development is a question of the accumulation of new knowledge and its application
through organisation, which, incidentally, is also required to shape the growth of knowl-
edge. How these processes work in the context of markets, industries and firms is the
focus of the rest of his work.
After the Principles were well established, Marshall turned his attention to a volume
that would deal with economic superstructure rather than economic foundations. That
work never appeared, but some of the ideas fell gradually into the form of Industry and
Trade, which appeared in 1919.
9
In these two works, Marshall developed his evolutionary
dynamics of competition and economic development, one that gives the entrepreneur
a central role, one that is complementary to Schumpeter’s thinking. But it goes further.
Our attention is switched to the processes by which an economy adjusts to innovation to
capitalise on its potentialities for transformation. Market processes, the formation of
prices, investment and the growth of differentiated firms are at the heart of this perspec-
tive. The act of innovation alone is not sufficient. If one may, Marshall is much more
explicit about the second act of the drama.
9
Industry and Trade is a work of economic history and contemporary analysis more than anything. It relies on the ideas in
the Principles but does not develop them. It is rightly seen as a work of applied economics in which Marshall drew
together his immense knowledge of economic phenomena: so much knowledge of detail that he found it very difficult
to shape and settle the form of the book.
6S. METCALFE ET AL.
4.1. Marshallian Competition
It is natural to see business competition in terms of contests and races and this suggests
that we have to pay attention to the rules that regulate the contest, who may compete and
on what terms, the prizes on offer and on what terms they are to be distributed, as well as
the terms on which competitors are to be penalised for rule breaking and, in the limit,
eliminated from the competition. As in any competition worthy of the name, the
different characteristics of the competitors are the key, as is a degree of unpredictability
as to outcomes. Uncertainty is an essential part of the process, and it is often predicated
on a lack of knowledge of the competitive attributes of rivals, especially the new
competitor. This is the mode of competition that runs throughout Marshall’s work and
its defining characteristic is the differentiation of the competitors as he puts it, this is
a matter of ‘constant forethought and restless enterprise’ (P. I, 5).
Marshall thought that this type of competition was made possible by the emergence of
an open economic system characterised by freedom of industry and enterprise or
economic freedom. (P. I, 10) The propensity to differentiate and challenge the status
quo gives modern capitalism its distinctive flavour and makes it an evolutionary system
notable for the acceleration of change as well as the breadth of change.
10
Economic freedom alone is necessary but not sufficient to explain the nature of the
competitive process. The instituted market frame in which competition is played out is
equally important and this depends very much on seeing a market as a device for
producing and disseminating information between buyers and sellers of goods as well
as factors of production. Markets need to be open systems too. The degree of perfection
of a market is a matter of its organisation and consequent ability to connect together
those who wish to sell and those who wish to buy. It is not only a set of instituted rules, it
is also a set of communication processes that enable connections to be made and broken
and these communication processes come at a cost. Thus, throughout the Principles and
Industry and Trade, Marshall pays much attention to innovations in transport and
communication technologies (printing and the telegraph, railways and the steamship).
These are critical advances, as the spread of timely information increases the geographi-
cal scope of markets, while innovations in transport reduce the costs of acting on such
information. The result is that the domain of markets becomes larger while their tempo
of operation becomes quicker.
11
Perhaps the most distinctive feature of Marshall’s framework lies with an insistence
that different economic forces act with different velocities so that their consequences are
reaped over different periods of time, even though all the forces are in play all the time.
This is evident in his treatment of business competition, which is a long – run process in
10
Of course, there is no connection here with the idea of a perfectly competitive equilibrium. Hayek (1946, reprinted in
Hayek (1948)) captured this when he reminds the reader that to compete is a verb, a verb is an action word, but in the
theory of competitive equilibrium there is no action. He further goes on to say ‘it becomes even more obvious that in
real life there will at any one moment be as a rule only one producer who can manufacture a given article at the lowest
cost and who may in fact sell below the cost of his next most successful competitor, but who, while still trying to extend
his market, will be overtaken by somebody else, who in turn will be prevented from capturing the whole market by yet
another, and so on’ (102). This is pure Marshall and, indeed, Schumpeter and it incorporates innovation at its heart. We
simply remark that three renowned economists of very different intellectual backgrounds enunciate essentially
a common approach to what we have called evolutionary competition.
11
The extension of markets through the spread of transport and communication innovations is a central plank in
Marshall’s account of the forces of economic progress, ‘for the dominant economic fact of our own age is the
development not of manufacturing, but of the transport industries’ (P VI, 674–675)
INDUSTRY AND INNOVATION 7
his terminology. That is to say, it is concerned with investment and the growth of
productive capacity in rival producers as they struggle for business dominance.
Without investment, the process of business competition withers away, no matter what
differential advantages firms may have. The differential growth of competing entities in
a population is also the essential idea behind a variation-cum-selection account of
evolution. In short, business competition is an explanation of how and why the economic
world changes.
Since business characteristics and their differentiation are so central to the argument,
let us turn to the question of business leadership and its close cousin, the entrepreneur.
4.2. Business Management and the Entrepreneur
Brian Loasby has suggested perceptively that one understands Marshall more if one
approaches him via Adam Smith rather than from the present state of textbook neoclas-
sical economics (Loasby 1989, 48). One of Smith’s enduring ideas is that of the division of
labour as a form of organisation that increases productivity but which is limited by the
extent of the market. The division of labour plays a central role in the Principles too, and
it is defined in terms of countless forms of organisation, each one of which needs to be
managed so that its component parts are suitably constituted and connected. Schumpeter
makes a sharp separation between the economic roles of the entrepreneur and the
manager. What does Marshall have to say about this?
You might be surprised to hear that the entrepreneur is a constant presence in
Marshall’s writing, whether as the business undertaker of old or the modern man of
genius who builds a great business, or as the new man who sets the pace or as the bold
reformer who transforms firms and industries. Indeed, we are told that we may divide
employers and other undertakers into two classes:
‘.those who open out new and improved methods of business and those who follow beaten
tracks’ (P. VI, 597)
It is to the former that we must look for constructive enterprise, the bold and enlightened
discharge of which is the principal source of economic progress (IT, 847).
As an example, Marshall points to the founder of the Vanderbilt family, that person of
great constructive genius, who rescued the New York Central Railroad (P. VI, 686). As
with other entrepreneurs, his rewards were probably less than the value of his enterprise
to the country as a whole. This is a persistent theme; the benefits that inventions and
innovations render to society are, in many cases, out of all proportion to the financial
rewards of their originators, even if they have ‘died millionaires’ (P. VI, 598).
12
Surely
there is nothing here that Schumpeter would disagree with.
However, in Marshall, we don’t find the sharp separation between the entrepreneurial
and the managerial functions that we find in Schumpeter. Business ability is multi-
dimensional, and it is to differences in the distribution of business ability that we must
look in explaining how firms innovate and grow and how industries evolve. This is the
foundation of Marshallian evolution.
12
Marshall further observes ‘that there is a far more close correspondence between the ability of businessmen and the
size of the businesses which they own than at first sight would appear probable’ (P. IV, 312)
8S. METCALFE ET AL.
Managerial leadership, what we might call top management, is clearly a cerebral affair,
and it is the ability to think differently from rivals that ultimately creates the scope for
innovation and evolutionary competition.
13
The able leader must be endowed not so
much with specialist knowledge but broad capacities for considered and prompt deci-
sion, sound judgement and an eye to the future. In other words, “thought, initiative and
knowledge are the most powerful instruments of production (IT, 593). On this basis, the
weak are differentiated from the strong. The latter attract the capital necessary to their
operations and can grow the business, the former destroy the capital at their command
and decline, so that the ultimate effects of managerial differences are reflected in the
competitive dynamics of growth and decline. In other words, it is to the problems of
management that Marshall points in explicating his evolutionary credentials.
We are told directly that business variation is the ‘chief source of progress’ (P. V, 355).
No two businesses structure their processes in the same way, and so no two firms are
likely to owe their success to the same set of advantages (P. IV, 298). Furthermore, no two
firms conduct business experiments in the same manner. Business experimentation is
a constant theme in Marshall, each business seeks to discover better ways of conducting
its operations, that is to say adding to its stock of knowledge.
14
Here, we find a deeper
consequence of a system of free competition, for,
‘the advantages of economic freedom are never more strikingly manifest than when
a businessman endowed with genius is trying experiments, at his own risk, to see whether
some new method, or combination of old methods, will be more efficient than the old’. (P.
V, 406)
The importance of business differentiation prompts a question that Marshall poses in
true evolutionary fashion, namely,
‘what are the causes which make different forms of business management the fittest to profit
by their environment, and the most likely to prevail over others?’ (P. IV, 265)
In all of the emphasis on creative enterprise and the capacity to invest and grow
a business, there is something of a paradox. Marshall and Schumpeter place their
emphasis on the rationality of entrepreneurial decision-making on an ability to calculate
and weigh the consequences of alternative courses of action. Calculation requires infor-
mation but, in respect of innovation and investment more generally, that economic
information does not yet exist, hence the paradox of rationality without data. No one
can know the outcome of any business investment decision before it is implemented and
tested by the market, especially one that entails innovation. Of course, the prevailing
environment, the order as we have called it, provides a datum against which to vicar-
iously test new business conjectures but it is no more than that, and the greater the radical
nature of the innovation, the more it invokes surprise and a sense of novelty, the greater
is the difficulty in making calculable choices. That is why entrepreneurs are a different
13
When writing about the characteristics of the single owner in less complicated times, Marshall admits that physical
tiredness was to be expected at the end of the day, but the owner’s brain, ‘was seldom weary’. (P. IV, 292)
14
This relates directly to the principle of substitution which has three forms. First, in relation to efficiency within the
bounds of current knowledge, the adjustment of factors in the proportions that produces lower costs of production at
the prevailing factor prices. This became standard in textbook economic theory, but it is the static part of the trio.
Secondly the search for better productive methods, that is to say the experimental search for innovations, and, thirdly,
the search by purchasers for suppliers that are more efficient and sell at lower prices (P. V, 341). Here, substitution is
a dynamic question of supply and demand adjustments requiring differences in and changes in business knowledge.
INDUSTRY AND INNOVATION 9
economic breed, a class apart (P. VI, 663). Perhaps this is also why we often find that the
ultimate markets that an innovation conquers are different from the much narrower
range envisaged by the innovator. Their vision is constrained by their understanding of
the prevailing order, which contains all the hard data that they can possess.
4.3. Technology, Science and the Innovation System
Even in the early years of the 20th century, it must have been clear that scientific research
was leading to new discoveries of great importance for the economy. We see this insight
clearly reflected in Marshall’s work, where investments in knowledge and their conse-
quences over extended periods of time play important roles. The innovation process had
moved on from Victorian times, a new foundation for evolutionary competition was
emerging. In this new world, the single inventor cum entrepreneur, a Kay or
a Stephenson, is diminished in importance and replaced by a process of organised
research by large groups of specialised students working over extended periods of time.
Inevitably, this has become a more capital-hungry process that takes it beyond the scope
of smaller firms (IT, 96).
Quite remarkably, Marshall sketches what is, to all intents and purposes, an innova-
tion system in which the resources devoted to the growth of the various kinds of
knowledge are rendered more fruitful in terms of economic development. Failure to
form such a system implies that the productive combination of creative imagination and
wealth creating economic action is dissipated.
He begins by identifying developments in the organisation of knowledge production
in terms of three classes of research laboratories, each of which must be organised and
managed internally as well as externally. University laboratories are the proper place for
scientific discovery for its own sake. Industrial laboratories set up by giant businesses are
the proper place for the investigation of production processes and, where smaller
businesses are concerned, there should be a resort to cooperative research arrangements.
Marshall was always careful to distinguish forms of collaboration that worked in the
public interest from those, such as cartels or trusts, which normally did not. Finally, given
the importance of technical standards to the working of markets and production pro-
cesses, there are testing laboratories responsible for the checking of performance, some
are publicly funded and deal with standards that are effectively public good, and some are
private laboratories concerned with the particular standards of a given line of trade. This
threefold division of labour needs to be connected and the scientists would gain by
keeping in touch with industries where pure knowledge may be the basis for their
improvement. It may even be the case that some scientists take their knowledge into
business ventures; another way to connect pure and practical knowledge. Conversely, the
industrial laboratories would benefit by reciprocal contacts with universities and the
standard setting and testing laboratories (IT, 99–103).
15
These are remarkable ideas for their time, and they show great awareness of a newly
emerging ecosystem to promote innovation. Indeed, part of Marshall’s concern is that the
innovation ecosystem in a rival such as Germany may be a superior engine of progress
15
A specific example is given by the chemical industry, where scientists and industrial leaders share common interests
and so work together to invade the ‘borderland between science and technique’ (IT, 205)
10 S. METCALFE ET AL.
than the one in England. He is aware that the former has a university system for turning
out more scientifically educated graduates than does the latter and that the former has
industrialists who are more scientifically aware and has more laboratories of the first
and second kind than does England. It may therefore be necessary for government to
intervene and set up better means of generating and communicating relevant research for
specific industries. The closest he comes to this is when advocating the public creation
and support of cooperative industry research laboratories with partial support from the
public purse.
16
Of course, the implication is that such developments add to the external
economies available to firms and are of a kind that favours particularly the smaller
producer. None of this is necessarily easy to achieve for the exploitation of the hinterland
between science and technique cannot be taken for granted (IT, 205).
Marshall is aware that inventions and innovations come in very different forms; they
draw upon and add to multiple kinds of knowing, while those different kinds of knowl-
edge are produced in different organisational contexts with different incentives in play
and funding from public and private sources. As Mowery and Rosenberg (1998) have
observed, all this amounts to a new institutionalised form of innovation. There is no
simple solution to the question of which form of organisation for invention and innova-
tion is best. Indeed, the question is nonsensical; an open invention and innovation system
needs to recognise the reality of diversity and differentiation in the sources of innovation.
Many modern students of the process would agree.
17
5. Reprise
The creation of wealth from knowledge remains a defining economic characteristic of
modern capitalism. Its dynamics have changed the way we live for a clear two centuries
and we still cannot know where it is leading our societies. The outcomes of its deeper
processes are always shrouded in uncertainty, and Schumpeter and Marshall understood
why this is so and yet how capitalism is an engine of progress.
Their greatest insight was to recognise that economic order is essential for economic
evolution but that order is transformed by the knowledge gained in the process of
establishing order. Unlike many leading economists before them and since, they had
no time for the idea of a stationary capitalist economy. Perhaps their greatest contribu-
tion was to give the market order and its prices a dual role, to coordinate the formation of
order and to guide the transformation of that order. Creativity and imagination turn out
to be at least as important as calculative ability in understanding how capitalism works.
6. Conclusion
During their lives, Marshall and Schumpeter witnessed the effects of a remarkable stream
of innovations and their economic and social consequences, a stream which created
16
In the 1920s the British Government set up the Department for Scientific and Industrial Research along with many
industrial research associations attached to distinct, fragmented industries such as cotton, wool and steel manufactur-
ing. Research was financed by a levy on participating firms plus a contribution from government. Lessons learnt in WWI
were, in Marshall’s view, instrumental in setting up this movement. (IT, 99 and 180).
17
See, for example, Nelson, Peck and Kalacheck (1967), Mowery and Rosenberg (1998), Jewkes, Sawers and Stillerman
(1969) and Mokyr (1990).
INDUSTRY AND INNOVATION 11
a canvas for their thoughts and respective visions. The durability of their writing reflects
the fact that the role of innovation is a relevant today as it was in their lives; indeed, there
are grounds for thinking that we are at a stage in history where innovation-related
challenges are of a profound nature. Many illustrations suggest the role of inventions
and innovation in societal transformation. Consider the role of robotics and Artificial
Intelligence more generally in transforming modern production processes for goods and
services, the effect of genetics on agriculture and medicine, and the impact of new energy
production and storage technologies on ameliorating carbon emissions, each of these
developments acting on a global scale. They are of the same substance as those world-
shaping innovations found in the half century from 1870 while Marshall and Schumpeter
were writing, namely: the generation of electricity, the aeroplane, synthetic materials and
the internal combustion engine. In studying the opportunities, conditions and conse-
quences of innovation, the present and the incoming generation of innovation scholars
would do well to connect with the fundamental insights of restless capitalism in the spirit
of Marshall’s and Schumpeter’s work.
One aspect that we see as highly important concerns the very definition of ‘innovation’
as a subject of study. For classical authors and foundational scholars, the notion of
innovation was firmly rooted in market processes. That definition differentiates between
what we could today call the pre-market stage of ideas, ideation and invention from the
market competition and diffusion phases of innovation as creating value on a market. We
feel that this core definition remains analytically valuable, but observe it being increas-
ingly challenged by contemporary tendencies to re-label innovation as any type of change
(cf. Gault 2018). The problem this causes is that both scholars and policymakers end up
with very loose definitions of innovation and innovation policy, which continually
change in terms of dimensions, measurements and outcomes depending on the context.
Tendencies towards conceptual drift, where the use of a term over time changes from
one set of phenomena to a much wider set, are natural for a popular notion such as
innovation (cf. Godin 2015). However, such drift is clearly problematic from a scholarly
point of view. In our view, innovation studies as a field cannot continue to thrive as a field
of social science if the key object of study becomes too elusively vague.
We recognise the fundamental importance of discussions about modern concepts
such as responsible research and innovation and social innovation and entrepreneurship.
We also recognise that organisational as well as business model innovation are part and
parcel of the domain of innovation research (Avila-Robinson, Islam, and Sengoku 2022).
We argue neither that innovation scholars should neglect important phenomena of
technological, economic or organisational change driven primarily by non-pecuniary
concerns, nor that innovation scholars are to refrain from concerning themselves with
assessing the consequences of innovation beyond market-focused outcomes. But it seems
to us that insistence that innovation is a form of novelty whose value has been demon-
strated in a market context provides a useful demarcation criterion for innovation as the
focus of a field of study.
Anchoring the study of innovation more firmly in market-oriented theory allows
innovation scholars to revisit classic questions about how wealth is created from knowl-
edge in the 21st century and beyond. It also allows us to contribute novel insights on the
limitations of markets and appropriate market-complementing policy options. Is it the
case that the market process always ensures that the better firms in terms of efficiency
12 S. METCALFE ET AL.
and effectiveness are the ones that can prosper and grow in importance in their trade?
Restless capitalism can be uncomfortable. The consequences of innovation can leave
employees and their communities devastated by the destruction of a branch industry.
What are effective checks and balances?
In continuing our work to address these questions, we believe that thinking along the
lines of Schumpeter and Marshall still to this day helps phrase the questions with more
precision and guide our analysis. That is quite a legacy for our two pioneering scholars,
and a reminder that studies of the history of economic thought are not an arcane and
impractical occupation for contemporary students of innovation.
Disclosure statement
No potential conflict of interest was reported by the author(s).
ORCID
Anders Broström http://orcid.org/0000-0003-0820-2769
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