SCHUMPETER ON INVENTION,

INNOVATION AND
TECHNOLOGICAL CHANGE
BY

GOVINDAN PARAYIL

I. INTRODUCTION
The resurgence of neo-Schumpeterian theories and models of techno-
logical innovation and development1 is an enduring sign of the historical sig-
nificance of Joseph A. Schumpeter's theoretical works on the dynamics of
economic change as a result of long-term technological change. He
postulated that economic development is spurred by technological innova-
tions spearheaded by entrepreneurs in direct correlation to business cycles.
His theories of innovations and his theories of the impact of innovations on
economic evolution or economic development have made great contribu-
tions to the development of new theories and models of technological
change. Stimulated by these developments, in this essay I examine and
evaluate some important hypotheses of Schumpeter about invention and
innovation and their mutual relationships regarding technological change.
Analysts who are interested in the application of science and technology
to economic development find Schumpeter's theories of innovation and en-
trepreneurship appealing. The simplicity and the supposedly trans-eco-
nomic nature of explanation offered by Schumpeter seem to be the reasons
for this interest. Although mainstream economists do not take Schumpe-
ter's theories seriously for economic and policy analyses,2 Schumpeterian
theories of innovation have established a lasting niche in the theories and
models of technological progress and development. The discontinuity that
he emphasizes in the economic development process, spearheaded by the

Virginia Polytechnic Institute and State University. The author wishes to thank Andrea
Burrows, Steve Fuller, Joseph Pitt, John Pencavel, and Robert Wolfson for helpful comments
and criticisms of earlier drafts of this article.
1. Some of the important neo-Schumpeterian theories and models of technological
change are Nelson and Winter 1977, Dosi 1982, Sahal 1985 and DeBresson 1989. A synthesis
of Nelson and Winter and Dosi is provided by van den Belt and Rip 1987.
2. Schumpeter worked within the classical and the neoclassical traditions, but mainstream
economists of all traditions (except those in the evolutionary/institutionalist tradition) did
not take Schumpeter's works seriously. Robert Wolfson (1958/1959) discusses several

Journal of the History of Economic TTiought, 13, Spring 1991.

0
1991 by the History of Economics Society.

78
 INVENTION AND INNOVATION 79

innovator-entrepreneur, attracted analysts to build models of technologi-

cal change and progress. Schumpeter considered innovation as the most
important factor responsible for economic change or economic evolution
and dismissed invention as a factor outside the realm of economics and
business practices.
I shall review Schumpeter's views on invention and innovation to
ascertain if the extreme dichotomy that Schumpeter ascribed for invention
and innovation should be uncritically adopted. It is my conclusion that the
extreme differentiation that he makes between invention and innovation,
and the exclusion of inventive activities from the technology-economic
nexus do not enrich models or theories of technological change. Invention
and innovation are integral parts of the process of technological change,
and any model of technological change that ignores invention is incom-
plete. The boundary between invention and innovation is rather nebulous, 3
and attempts to draw precise boundaries between these two technological
activities are becoming increasingly difficult with the advent of organized
research and development activities conducted by firms and public institu-
tions. The differentiation that Schumpeter makes between invention and
innovation is limited to the extent of his formulation of the theory of
business cycles. H e did not show much interest in analyzing technological
change, because his research program 4 was confined to analyzing the
economic dynamics of innovation, and was not concerned with the "inter-
nal forces of a given technology" (Zuscovitch 1986, p. 175). Some analysts,
unaware of this contextual factor, adopt the differentiation that Schumpe-
ter ascribed for invention and innovation in qualitatively different circum-
stances pertaining to technological change.
Following the Schumpeterian thesis that innovations cluster, Chris De-
reasons for this apparent indifference on the part of economists. Two of the main problems
that Wolfson delineates are: (1) The inability on the part of economists (particularly
neoclassical economists) to develop models based on Schumpeterian theories because of
difficulties encountered in measuring his concepts due to their rich non-economic contents;
(2) The lack of policy prescriptions in Schumpeter's works, making political economists
indifferent to his works. However, Wolfson adds that since the Second World War, interest
in Schumpeter's concepts has been displayed by economic historians and sociologists, among
others, because of their concern with innovation and entrepreneurship. Wolfson's observa-
tions remain true nearly three decades later.
3. "Measuring" inventive activity by patent statistics is still a common practice, but tech-
nological innovations lead also to the development of new products and ideas, and these are
also patented. Should we therefore call these innovations "inventions" on a post hoc basis?
The definitions of invention and innovation in economic terms are rather restricted and
ahistorical from the point of view of the history of any technology. It might be safer to set aside
the differentiating process and identify the effects of inventions and innovations as techno-
logical change.
4. "Research program" is understood in the Lakatosian sense (Lakatos 1978). Schumpe-
ter had a clear epistemological and methodological agenda when he developed his theory of
business cycles.
80 JOURNAL OF THE HISTORY OF ECONOMIC THOUGHT

Bresson argues that the best way to induce technological accumulation is to

breed and nurture a "network of innovating firms, and industries" (DeBres-
son 1989, p. 2). DeBresson argues that it is useful to distinguish between
invention and innovation (a la Schumpeter) without offering clear argu-
ments as to why such distinction would enhance the conceptualization of
technological development or "accumulation," as DeBresson puts it. His
model would have been clearer had he included inventive activity along with
innovative activity in the locus of the "technological trajectory" of the firms
that foster technological accumulation. J. A. Bombardier, the entrepre-
neur-innovator whom DeBresson cites as an exemplar to support his model
can be identified as an inventor-entrepreneur as well. It is only a matter of
convention as to when and how to identify Bombardier's automobile
products as a result of either inventive or innovative activities. He has more
in common with Thomas Edison, whom Thomas Hughes (1983) describes
as the greatest inventor-entrepreneur of all time.
In a different approach, using the U.S. biotechnology industry as a case
study, Martin Kenney (1986) claims that the Schumpeterian distinction
between invention and innovation would be useful to explain the growth
and development of this new industry. Those who take the history of
technology seriously as a conceptual tool in the study of technology recog-
nize that the development of biotechnology, at the very least, results from
the combination of several new inventions and innovations carried out by
several different individual and institutional agents.
Although most neo-Schumpeterian models of technological change will
not be affected by these new revelations, a clear reevaluation of a few works
like the above that used the Schumpeterian dichotomy are in order.
Schumpeter's theories and models should be used for their general prin-
ciples and their heuristic guidance for further studies and research on
technological development and change. Even if we admit that the reasons
that Schumpeter cited for his position were necessary for his hypotheses
about business cycles, they need reevaluation and further scrutiny in the
light of spectacular changes in industrial organizations of research and
development activities since he wrote his major works. Before going any
further let me first present Schumpeter's views on invention and innova-
tion.

II. SCHUMPETER ON INVENTION AND INNOVATION

Innovation is the fundamental basis of the model of economic change or
economic evolution in Schumpeter's schema. Attempting to separate inno-
vation from invention, Schumpeter claims that:
Technological change in the production of commodities already in
use, the opening up of new markets or of new sources of supply,
 INVENTION AND INNOVATION 81

Taylorization of work, improved handling of material, the setting

up of new business organizations such as department stores in
short, any "doing things differently" in the realm of economic life
all these are instances of what we shall refer to by the term
Innovation. It should be noticed that that concept is not synony-
mous with "invention." Whatever the latter term may mean, it has
but a distant relation to ours. Moreover, it carries misleading asso-
ciations (Schumpeter 1939, p. 84).
Schumpeter does not, unfortunately, elaborate upon what these "mislead-
ing associations" are. He further adds that "Innovation is possible without
anything we should identify as invention and invention does not necessar-
ily induce innovation" (ibid., p. 84). Schumpeter argues that the motivation
for invention has no economically relevant effect at all. At one point he
offers an inconsistent explanation of invention. Schumpeter argues that the
"discoveries of new countries" are also inventions, and if "we scrutinize the
motives and methods of Columbus's venture, we find that it would be by no
means absurd to call it a business venture" (ibid., p. 8). This characteriza-
tion of invention contradicts Schumpeter's stated view that inventions are
carried out without economic motivations.
The only instance where Schumpeter tries to contrast innovation with in-
vention in a historical case is in a rather simplistic scenario:
In many important cases, invention and innovation are the result of
conscious efforts to cope with a problem independently presented
by an economic situation or certain features of it, such as for
example, shortage of timber in England in the sixteenth, seven-
teenth, and eighteenth centuries. Sometimes innovation is so
conditioned, whereas the corresponding invention occurred inde-
pendently of any practical need. This is necessarily so whenever
innovation makes use of an invention or a discovery due to a happy
accident, but also in other cases. It might be thought that innova-
tion can never be anything else but an effort to cope with a given
economic situation (ibid., p. 85, n. 1).

Further, Schumpeter claims that "The social process which produces inven-
tions and the social process which produces innovations do not stand in any
invariant relation to each other" (ibid., p. 86). However, he does not tell
us what these differences are. Unlike invention, he argues, innovation is a
"distinct internal factor of change" of the capitalist economic system. The
"economic leadership" that carries forward the innovative functions is
vested in the entrepreneurs. Schumpeter dwells no more on invention, and
goes on to define innovation "rigorously" by means of the production
function.
82 JOURNAL OF THE HISTORY OF ECONOMIC THOUG HT

Schumpeter conceives of the production function as the way in which

"quantity of product varies if quantities of factors wary" (ibid., p. 87). In
simple terms, he defines "innovation as the setting up of a new production
function" (ibid.). The movement of the isoquants will be the indication of
the setting up of a new production function. However, he insists that this
shift of the isoquants should not be construed as "change in techniques"
(ibid., p. 87, n. 2). He stresses this point because a change in technique could
be the result of a new invention. The modus operandi of innovation are the
construction of new plants, creation of credits, and facilitating the emer-
gence of entrepreneurs or the "New Man." Schumpeter calls the emer-
gence of new production method, the act of "creative destruction." 5 The
innovating entrepreneurs set up new methods of production to produce old
goods at lower cost (Schumpeter 1934). The emergence of these factors
disturb the circular flow of the economic system culminating in a new
equilibrium as more goods and services are added to the system. In a
nutshell, Schumpeter's model of economic change "rests on the innovation
process and the innovator, on the credit mechanism, and on the drive for
profit maximization" (Wolfson 1959, p. 45). Thus, the concept of innova-
tion forms the core of Schumpeter's business cycle theory. In Solo's words,
"Schumpeter regards innovation as the truly dynamic element in the
economy, the source of credit, interest, and profit as well as business
fluctuations" (Solo 1951, p. 427).
It may be useful to take a closer look at Schumpeter's concept of the
production function to read more into his notion of innovation. This should
clarify the point that Schumpeter and the neoclassical economists did not
differ much in terms of their concept of technical change represented by the
production functions. His concept of innovation was basically the setting up
of a new production function. His version of the production function
differed only slightly from its neoclassical version. In his version the input
of factors are land and labor, and in the neoclassical version the inputs are
capital and labor. Despite these differences, Ruttan (1959) argues that the
production function Solow developed in his growth study model (1957) is
functionally similar to Schumpeter's version of it. Ruttan further argues
that "current interest in technological change and growth of total produc-
tivity is focused on the same problem which Schumpeter treated under the
heading of innovation" (Ruttan 1959, p. 76). However, Schweitzer cor-
rectly cautions that the technological change implied by the shift in the

5. Based on detailed empirical research, Strassmann (1959) argues that Schumpeter's de-
scription of "creative destruction" in which dominant new production methods completely
overwhelm old methods is inaccurate. He contends that old technologies (production meth-
ods) often exist in an industry which is undergoing technological change. Strassmann argues
that a new technology completely replaces an old technology only if the rate of obsolescence
in the industry occurs with "unforseen rapidity" (Strassmann 1951, p. 336).
 INVENTION AND INNOVATION 83

production function is "far too restrictive" because it excludes "changes in

productive techniques other than those which result in shifts in the produc-
tion function" (Schweitzer 1961, p. 153).
As Schweitzer points out, "change in productive techniques" also shifts
the production function. The change in "productive technique" may be
caused by an invention. Hence, the shift in production function can be
caused by an invention.6 Thus, Schumpeter's insistence that only innova-
tion causes the production function to shift is incorrect. The only rationale
for his belief that the shift of the isoquants due to a "change in technique"
cannot form a new production function is that change in techniques are
normally caused by new inventions, and according to him, inventions are
not direct variables in production functions. A more reasonable position
might have been the neoclassical one of not differentiating between inven-
tion and innovation at the production stage, and instead looking at the
increase in productivity due to technical change as a result of the forward
shift of the isoquant.

III. INVENTION, AN ECONOMIC ACTIVITY

It is not clear why Schumpeter considered invention as an exogenous
activity, occurring outside the economic system. In a footnote in his
Business Cycles (1939, p. 85, n. 1) he acknowledged consulting the works of
S. C. Gilfillan (1935), A. P. Usher (1929), and R. K. Merton (1935). Usher
and Merton, more than Gilfillan, considered invention as an activity within
the economic system. As a possible explanation of Schumpeter's charac-
terization, we might look at some personal history. Schumpeter and Usher
were long-time colleagues in the Economics Department at Harvard.
Usher's research program was based on regarding invention as the major
cause for economic growth, and Schumpeter's research program was based
on the concept of innovation as the major cause. It is plausible that
irreconcilable differences might have resulted in their views on invention
and innovation.7 Another plausible explanation is that Schumpeter consid-
ered inventive activity as a socio-psychological phenomenon that is outside
the realm of economics. His negative view on invention is further evident
from his statement that "As long as they are not carried into practice,
6. The only difference is that the invention causes the shift in a more roundabout fashion.
This is the case only if the invention is an intermediate good, such as a new machine or a new
method of production. If the new invention is a final consumption good, then the shift is
straightforward.
7. There is hardly any professional communication between Usher and Schumpeter in
their works. Schumpeter just acknowledges Usher by saying that "We take the opportunity
to refer to Professor A. P. Usher's History of Mechanical Inventions, 1929, from which work
the present writer derived much help" (Schumpeter 1939, p. 85, n. 1). Usher, writing in 1951
in the Review of Economics and Statistics as a tribute to Schumpeter, who died in 1950, does
not mention innovation even though the title of his article is "Historical Implications of the
84 JOURNAL OF THE HISTORY OF ECONOMIC THOUGHT

inventions are economically irrelevant" (Schumpeter 1934, p. 88). Other

than these strong statements, he does not offer a conceptually clear
explanation in economic or social or technological terms for the exclusion
of invention in the dynamics of economic development. Neither does he
offer an explanation for the origin, individual characteristics and dynamics
of inventive activity as an important point in the trajectory of technological
change. The lack of knowledge (or possible disinterest) of the historical de-
velopment of technology is evident in Schumpeter's works. For all practical
purposes, he puts technology in a "black box," an act consistent with the
views of many neoclassical economists.8 Schumpeter was never specific
about what technology meant for him while developing his theories (Nelson
1989, p. 231). Thus he was not able to provide a clear conceptualization of
the process of technological change in any of his works. Though Schumpe-
ter relies heavily on Marx's historical scholarship on the development of
industrial capitalism, he does not show much interest in Marx's keen
interest on technology and technological change.9 Innovation became an
all inclusive concept for Schumpeter, in which technology was neglected
through lack of interest.10
It is important to review Usher's theories of invention to contrast them
with Schumpeter's. Schumpeter himself did not analyze Usher's theories of
invention and technological change. He only offered a mere acknowledge-
ment in Business Cycles. Nevertheless, one of the most comprehensive and
historiographically rich treatises on invention and technological change
was written by Usher under the title The History of Mechanical Inventions
(1929/1954).11 He rejects the transcendentalist and the mechanistic inter-
pretation of inventive activity, and instead offers a theory of cumulative
synthesis as the basis for invention and technological change.12 He argues
that "There is no difference in the general character of the behavior of
entrepreneurs and technologists" (1955, p. 49),13 and contends that "The

Theory of Economic Development" (1951). However, Usher criticizes Schumpeter's con-

cept of innovation in a paper titled "Technical Change and Capital Formation" (1955).
8. For more on the neoclassical economists' perception of technology, see Rosenberg
1982.
9. For more on Marx's interest in technology, see MacKenzie 1984 and Rosenberg 1982.
10. In fact, Ruttan claims that "Neither inBusiness Cycles nor in Schumpeter's other works
is there anything that can be identified as a theory of innovation" (1959, p. 76). On a related
topic Nelson adds that "Schumpeter never was specific about what he thought technology
was..." (1989, p. 231).
11. Rosenberg identifies Usher as the "most careful twentieth-century student of technol-
ogy" (Rosenberg 1982, p. 48).
12. As opposed to Usher's view that technological change is cumulative and temporal,
Schumpeter sees it as spontaneous and irreversible. He highlights this point with the
following argument: "innovations are changes in production functions which cannot be
decomposed into infinitesimal steps. Add as many mail-coaches as you please, you will never
get a railroad by so doing" (Schumpeter 1951, p. 136).
13. By technologists, Usher implies innovators.
 INVENTION AND INNOVATION 85

term 'innovator,' as applied by Schumpeter to the entrepreneur, suggests a

kind of differentiation from inventors in the technical fields that is likely to
be misleading" (ibid., p. 47). Ruttan (1959) argues that if Schumpeter did
not offer a clear theory of invention, then the basis for such a theory can be
found in Usher.
As historians of technology and economics argue, invention, innovation,
transfer and diffusion of technology ought to be considered as different
stages in the process of technological change.14 Ruttan holds that invention,
innovation and technological change must be seen as a logical sequence,
"that is, invention in some manner is antecedent to innovation, and
innovation in turn antecedent to technological change" (Ruttan 1959, p.
73). Technologies do not require a new invention for every change any
more than the development of a new technology necessitates a new inven-
tion. New technologies may evolve and old technologies may change due
to a combination of factors.15
Arguing within the capitalist economic framework, Carolyn Solo con-
tends that technological change "includes changes in the knowledge avail-
able [for production], which may be termed inventions, and changes in the
actual technological arrangements when existing knowledge is applied,
which may be termed innovations" (Solo 1951, p. 417). Solo vehemently
criticizes Schumpeter's exclusion of invention from the calculus of business
activities, and argues "that invention and innovations are subject to costs
and result in revenues like any other business activity; and that both are
carried out in competitive struggles by firms which are at once producers
and innovators" (ibid., pp. 417-18). Solo further adds that the research
activities conducted by governments, universities, endowed institutions,
private individuals and firms add to the inventory of inventive and innova-
tive activities of business firms. It becomes obvious that the advent of R &
D activities is a factor that Schumpeter overlooked, thus missing the point
of including inventive activities in the economic realm.16
Richard Nelson, while presenting a detailed survey of the literature in the
"economics of invention" stresses that "invention is strongly motivated by

14. See Rosenberg 1976 and 1982, Hughes 1983, Ruttan 1959, among many others.
15. Advances in science and engineering, and other extant economic, social and cultural
factors, among others.
16. Schumpeter's ignoring of R & D activities in his theories is hard to understand, since
they were important facets of business activities while he was writing Business Cycles. Firms
like General Electric, Bell Telephone, and others had established R & D laboratories long
before Schumpeter formulated his theory of business cycles. In fact, the first industrial
research laboratory appeared in the German dyestuffs industry during the second half of the
nineteenth century (Beer 1958). Following the German models of industrial research,
General Electric set up its industrial research lab in 1900 and AT&T followed suit in 1911
(Reich 1985).
86 JOURNAL OF THE HISTORY OF ECONOMIC THOUGHT

perceived profit opportunities," and that the state of scientific, and pre-
sumably technological knowledge, significantly affect cost and demand
factors which in turn affect the "profitability of invention" (Nelson 1959, p.
101). Nelson treats invention as an important factor that induces techno-
logical change and economic growth. A clear parallel can be made between
his treatment of invention and Schumpeter's treatment of innovation. The
four case studies Nelson offers: hybrid corn, short-wave radio, the develop-
ment of the atomic bomb, and aircraft engines, can be considered as the
development of new technologies involving both inventions and innova-
tions. In an effort to find a "useful theory of innovation" Nelson and Winter
argue that the term "innovation" is being used as a "portmanteau to cover
the wide range of variegated processes by which man's technologies evolve
over time" (Nelson and Winter 1977, p. 37). Commenting on Schumpeter's
distinction between invention and innovation, they argue that "in the
current institutional environment with much of innovation coming from
internal R & D, the old Schumpeterian distinction is much less useful than
it used to be" (ibid., p. 61).
Notable also is the work of Jacob Schmookler (1966), who argues that
inventive activity is essentially an endogenous economic activity, and
current tools of economic analysis can be used to explain it. Schmookler
uses extensive empirical examples to contradict Schumpeter's assertion
that invention is an activity outside the realm of economics. Rosenberg
(1976), commenting on Schmookler's work, argues that the long-held
tradition of treating technological change as an endogenous activity outside
the economic sphere has been reversed by the path-breaking work of
Schmookler, despite his neglect of the supply responsiveness of inventive
activities. Rosenberg also complains that the uncritical acceptance of
Schumpeter's model of innovation as the major model by every one inter-
ested in technology and economics resulted in a lack of consideration of
activities other than major innovations that helped productivity increases
and economic growth. Rosenberg argues that the reason Schumpeter
distinguishes invention from innovation lies in his concept of the discon-
tinuous nature of innovative activity. The "clustering of innovations was at
the heart of his business cycle theory" (ibid., p. 67). But he wonders why
Schumpeter never examined invention as a "continuing activity whose
nature, timing, and special problems are relevant to the subsequent Schumpe-
terian stages of innovation and imitation" (ibid.). Rosenberg complains
that by "creating artificial disjunctions between innovative activity and
other activities with which it is not only linked, but which in fact constitute
major parts of the historical process of innovation itself," we have created
major "intellectual barriers" to understanding the nature of technological
change and economic growth (ibid., p. 77).
 INVENTION AND INNOVATION 87

IV. CONCLUSION
Invention is an essential part of the technological activity in every
economic system. There are as many economic reasons for inventions as
there are intellectual, psychological, and social ones. Without any doubt,
economic reasons stand out as the most prominent ones. Invention and
innovation are both important technological and economic activities and
are important points in the locus of technological change. Schumpeter's
banishing of invention from the realm of economic activities therefore
seems to be unwarranted. Correspondingly, Ruttan appears to be correct
when he suggests that, to get out of the restrictive definitions of invention
and innovations, we should abandon our attempts to provide analytically
different definitions of these activities (Ruttan 1959, p. 83). He further
suggests that we consider invention as "an institutionally defined sub-set of
technical innovations" so that this conceptualization can accommodate the
emergence of new technologies according to Usher's inventive schema of
"cumulative synthesis" (ibid.).
Schumpeter's concept of innovation, once modified, may be a useful tool
for studying technological change, even though Schumpeter himself did not
pay much attention to the phenomenon of technological change. After all,
his concept of innovation and entrepreneurship are inextricably linked to
his theories of business cycles.17 Whatever the appeal of his dichotomy
between invention and innovation, transposing that dichotomy into a
different context involving "technological accumulation" or technological
progress or technological change is untenable. The hypothesis that innova-
tions spur economic development and that it follows an evolutionary
trajectory are Schumpeter's greatest contributions to studying technologi-
cal change. Schumpeter's assertion that invention is not a direct variable in
the calculus of business dynamics and hence not a part of the technology-
economic nexus needs reexamination in the wake of changing organiza-
tional structures of research and development activities promoted by
businesses and governments where most of today's inventions and innova-
tions take place.

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