Schumpeterian Leadership: A Complex Systems Perspective

Here is another paper I wrote for a class ... not nearly thorough enough, but very interesting for a quick paper I hope.

Schumpeterian Leadership: A Complex Systems Perspective

Arthur Fewell

Northcentral University

  

Abstract

This paper seeks to analyze Austrian economist Joseph Schumpeter’s work on development through the complex adaptive systems framework. Recent research has sought to combine equilibrium and disequilibrium based economic models into a unified complexity-based theory of strategic leadership; however, this review finds that Schumpeter utilized complexity based approaches heavily, inferring that his model is already based in complexity theory. This understanding can provide greater insight into Schumpeter’s approach and a simple translation into complexity frameworks to build upon the body of research.  Further, this paper cites evidence and argues that equilibrium based approaches do not accurately describe the economic reality of creative destruction and therefore should be limited to strategic management only within an economic norm. 

Schumpeterian Leadership: A Complex Systems Perspective

As the global economic crisis of the early 21^st century continues to bear down on society causing significant human impact, progress is desperately needed; however as the economy flounders, disagreement about causes and indecision about solutions for improving economic woes proliferate. While there is little disagreement that financial mismanagement, short-sighted and misguided industrial management and rampant corruption have contributed significantly to economic woes, policy makers disagree on methods to correct the situation (U.S. Senate, 2011). While this disagreement abounds, the human toll of a poor economy continues to be very real, and it is apparent that more conclusive, effective and actionable research is necessary to move the economy forward (Walumbwa, Avolio, Gardner, Wernsing & Peterson. 2008). In addition to the need for consensus on methodology to improve the economy, there is also a great need to better understand organizational and sociological dynamics required to effectively introduce change. While there is currently tremendous research done on abstract personality attributes associated with follower-perceived leadership efficacy, additional empirically supported research is necessary to promote consensus support for strategic leadership approaches within the complex dynamics of real-world environments. In recent years, a growing body of research has been emerging to support the application of complexity theory to organizational behavior based on the notion that organizations behave as complex adaptive systems. Of particular note, substantial research by Bettencourt, Lobo, Helbing, Kuhnert, & West (2007) has provided strong empirical support demonstrating that organizations and industries do function as complex systems.  However, complexity based approaches are a relatively new area of focus for researchers, and while the tremendously broad range of applications for complexity theory demonstrates its relevance across all biological and sociological sciences, the breadth also distributes the efforts of researchers interested in organization complexity research across a wider range of applications. Again while this breadth has very positive implications for research, there is also tremendous need for increasing focus on the most urgent and immediately actionable research implications. In contrast to more recent attempts to support organizational complexity theory, Schumpeterian economic theories were established in the 1930’s and have had the benefit of 80 years of research (Diamond, 2007, p. 4). In recent years the popularity of Schumpeter’s theories have amplified as modern interpretations such as disruptive technology theory have gained tremendous popularity and support (Wiggins & Ruefli, 2005, p. 5). While Schumpeterian theories have shown tremendous promise in economics, there is a lack of clear linkage to the multitude of organizational processes that need to be established to create organizational efficacy, which is further convoluted by years of misguided research into Porter’s (1980) equilibrium based approach. In contrast, complexity theory provides actionable research that supports every aspect of complex systems; however it lacks a framework and clear ties to empirically established economics theory. This paper proposes that Schumpeter was heavily influenced by early complexity research in biological sciences, and that an examination of select works reveals striking parallels between the foundation of Schumpeterian principles and organizational complexity theories. A strong linkage between these areas of research could provide direction for advancement in complexity research by supporting the notion that the empirical support for Schumpeter could be applicable to organizational complexity theory. A sufficient demonstration of linkage between these concepts provides a clear precedent to direct and inspire further research, and lend support to the notion of complexity theory as a unified theory across sociological systems, and linking the implications of organizational complexity theory to strong economic growth indicators.

Cunha & Vieira (2006) suggest that research in strategy has traditionally been divided into “planning” and “learning” schools of thought. The “planning” school of thought is related to Porter’s (1980) work which suggests that deep knowledge of the environmental variables can provide an organization with a defensible competitive position (Cunha & Vieira, 2006, p. 839). The “learning” school of thought is based in Schumpeterian theories of creative destruction and perpetual disequilibrium (pp. 839-840). Cunha & Vieira suggest that a third paradigm has recently begun to emerge that synthesizes these two schools of thought into a unified “complexity theory of strategy” (p. 840). I would like to suggest however, that this unified complexity theory of strategy is neither new nor recent, but that Schumpeter utilized identical principles commonly found in complexity based approaches to strategic leadership in the formation of his economic theories (Schumpeter, 1993, 2005). Complexity theory proposes that novelty arises when “collections of actors with simple individual behavioral characteristics combine to produce complicated coordinated patterns of group behaviors that change and adapt to environmental circumstances”. In striking parallel, Schumpeter notes “The fundamental economic truth can be formulated as follows: all observable variables seek to place themselves in a certain relation to each other, or in other words, they adapt themselves to changes in data at all times.”

Research on systems dynamics reveals that in simple systems, individual agents in a system may fall into attractor patterns in which similar agents will organize in a collectivist manner and resist variation. Heylighen, (2006) observes “once the components have entered into this mutual arrangement (attractor), they will tend to stick to it, and no longer be able to undergo certain types of relative variation” (p. 3). Schumpeter (1993, 2005) again describes similar observations, “A continuous increase in population and wealth immediately explains an equally continuous improvement of roads and an increase of the mail coaches in circulation in a step-wise adapting manner. But add as many mail coaches as you please, you will never get a railroad in that way” (p. 115).

The difference between a simple system and a complex system according to complexity theory is the introduction of “strange attractors”, which, according to Boal and Schulz (2007), are “products of nonlinearity and interactivity” (p. 413). These types of attractors are considered to be ‘strange’ because they represent a partial move from stasis; systems devolve into chaos if stasis is not maintained, however novelty by its nature contradicts stasis. Such attractors are therefore considered to exist “between stable equilibrium points and complete randomness … these regions are typically referred to as the edge of chaos” (Boal and Schulz, 2007, p. 413).  Again Schumpeter (1933, 2005) describes strikingly similar characteristics in his observations, describing the “edge of chaos” in his own terminology noting that novelty arises between determinacy and indeterminacy, “Novelty is the true core of everything that must be accepted as indeterminate in the most profound sense. Novelty always exists together with a wide area of circumstances and processes that, in principle, are deterministic” (p. 113). Schumpeter further describes his view of novelty, distinguishing the concept of “development” from the concept of “growth”, defining growth as a series of linear adaptive steps, and defining novelty or development as phenomena that cannot be traced back through linear steps or linked solely to environmental or any other known causality.  Schumpeter never claims to have identified what the source of novelty is exactly other than that it is phenomena; however, he provides further linkage to complexity thinking by noting the similarity with Darwinian adaptation. However he does break with the Darwinian approach in that Schumpeter believed whatever the source of novelty is, if it is discoverable, will be discovered through economics as he suggested that the source of all novelty is inherently related to scarcity, stating that economics is “the origin of all concepts” (p. 118). So while numerous researchers have suggested the merging of deterministic and indeterministic theories into a common complexity theory (Cunha & Vieira, 2006; Holmdahl, 2005; Davis and Eisenhardt, 2005), it would appear that Schumpeter’s approach was already based in complexity theory.  Porter’s (1980) equilibrium approach was never an accurate description, and would never lead towards the sustainable differentiation that was the very aim of the theory; rather, equilibrium based approaches have served as a distraction that have led economic strategists and policy makers in exactly the wrong direction. Clearly however, there have been numerous empirical studies to support Porter’s equilibrium approach to strategy, which at the surface could make it appear as though the equilibrium approach has merit by which it can contribute to a larger complexity-based theory of strategic management. The answer to this seeming paradox is perhaps most evident in Wiggins & Ruefli’s (2006) landmark study in which they demonstrated exhaustively that companies which were pursuing equilibrium-based sustained competitive advantage approach did achieve superior growth; however, as would be expected according to Schumpeter’s thesis, the equilibrium based approach overwhelmingly led to diminishing returns and did not provide sustainable competitive advantage. Porter’s approach and related research provide excellent guidance for strategic efficacy within a given norm, however when new norms arise, Porter’s approach offer’s no guidance and can lead towards increasing entrenchment in existing products (McNamara, Vaaler, and Devers 2003; Constantinos & Oyon, 2010).  While this paper has not provided evidence beyond Wiggins and Ruefli on the accuracy of disequilibrium over equilibrium based approaches, the linkage supports the notion that empirical research in Schumpeterian economics lends support for complexity theory, and vice versa. Perhaps more importantly, a re-examination of Schumpeterian economics through the lens of complexity theory can provide a framework by which to better understand and to extend upon Schumpeter’s research. Schumpeter noted that he did not believe it would be possible to identify the root cause of novelty, but he also noted “We find novel phenomena in the economy as in any other social domain, and there is no difference between novelty in the economy and elsewhere. As usual, however, our vision is sharper in the economic domain than in other domains, because economics is the most quantitative of all sciences. Of all sciences, not just of the social sciences.” And Schumpeter indicates that perhaps it is possible to identify the source of novelty. “I have used the word ‘impossible.’ I think it is more correct to speak of a new task. This task obviously involves the logical and mathematical, but, at least if there is any truth in what has been said in the above, eventually economics, the origin of all concepts.” 

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