by Russ Roberts on September 20, 2007

in Books, Podcast

I’m fifty pages into Prophet of Innovation, the bio of Schumpeter by Thomas McCraw, preparing for a podcast with McCraw. Enjoying it very much so far. McCraw claims that the marginalism insights of the Austrian School were a genuine intellectual revolution that paved the way for business to lower price in hopes of exploiting lower marginal costs due to economies of scale. Not sure it’s true but it’s an interesting claim. Looking forward to the discussion of the role of entrepreneurship. The interview is about two weeks away, so feel free to read the book in advance and send me any questions you might for McCraw. Here is McCloskey’s thoughtful review (HT: Greg Mankiw).

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SaulOhio September 20, 2007 at 5:25 pm

As I understand it, the businesses were dong this before the economists observed it happening and came up with the priciple. Thats how things work in economics. Pin makiers were dividing up the labor before Smith figured out the principle of division of labor.

Deb Mills-Scofield September 21, 2007 at 9:34 am

I loved McCraw's book on Schumpeter from both a 'biographical' and 'economic' standpoint. My only contention with Schumpeter is on creative deconstruction and it could be semantics – since I work with entrepreneurs and established businesses, sometimes innovation does truly achieve creative deconstruction – but sometimes those that are incremental or quasi-disruptive can have tremendous impact – changing markets and industries so it's not an 'either/or' situation as Schumpeter tends to present, but a 'both' –

Mathieu B├ędard September 21, 2007 at 7:32 pm

Not only is that idea is already is Smith, as SaulOhio mentioned, but that that supposes that a)there was an era of atomistic market, b)that era is long gone and now we have totally different market structures. Both statement don't really sound quite right, and they're pretty unSchumpeterian…

Ben September 24, 2007 at 4:35 am

Firstly, economies of scale generally come from replacing large marginal costs with large fixed costs, i.e. you invest in automation. But that has to be paid for, and won't allow you to reduce prices unless overall costs are down. So businesses are trying to reduce overall costs per unit, not marginal costs, which they don't give a toss about per se. This is the same reason why prices don't actually get driven down to marginal cost.

Secondly, Businesses are experimentalists — they see what works. They may take a suggestion from a theorist and try it out, but equally they try all sorts of things out all the time, and businesses have known about capital investment and economies of scale since at least the spinning jenny, and almost certainly for millenia. So giving the credit to economists is a bit presumptious.

Conversely if they are making money hand over fist they are not going to stop just because a theorist tells them it is impossible.

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