For Schumpeter, entrepreneurs and the companies they found are the engines of wealth creation. This is what distinguishes capitalism from all previous forms of economic society and turned Marxism on its head, the parasitic capitalist becoming the innovative and beneficent entrepreneur. Since the 2008 crash, Schumpeter’s lessons have been overshadowed by Keynesian macroeconomics, in which the entrepreneurial function is reduced to a ghostly presence. As Schumpeter commented on John Maynard Keynes’s “General Theory” (1936), change—the outstanding feature of capitalism—was, in Keynes’s analysis, “assumed away.”
Progressive, ameliorative change is what poor people in poor countries need most of all. In “The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty,” Harvard Business School’s Clayton Christensen and co-authors Efosa Ojomo and Karen Dillon return the entrepreneur and innovation to the center stage of economic development and prosperity. The authors overturn the current foreign-aid development paradigm of externally imposed, predominantly government funded capital- and institution-building programs and replace it with a model of entrepreneur-led innovation. “It may sound counterintuitive,” the authors write, but “enduring prosperity for many countries will not come from fixing poverty. It will come from investing in innovations that create new markets within these countries.” This is the paradox of the book’s title.
The authors’ notion of innovation is Schumpeterian, as is the singular importance they accord it in the economic process. Their conception goes beyond final products to embrace production, process, organization and financing. They are especially insightful about the catalyzing effects of market-creating, behavior-changing and culture-forming innovation on economic development by providing products and services people didn’t know they needed, thereby converting nonconsumers into consumers. “By investing in market-creating innovations,” Mr. Christensen and his co-authors argue, “investors and entrepreneurs inadvertently engage in nation-building.”
Skeptics will contend that the stony ground of today’s poorest countries—the book lists 20 countries whose 2015 per capita income had declined below its 1960s levels—is too barren for growth. “Many prosperous countries today,” the authors respond, “were once poor, corrupt, and badly governed.” America in the 1850s was more impoverished than present-day Angola, Mongolia or Sri Lanka. Institutional capacity was weak and corruption rife. “Successful economies develop in spite of widespread corruption,” the authors write. South Korea’s spectacular economic growth in the 1960s and ’70s occurred during the corrupt rule of Gen. Park Chung-hee.
Innovation, regardless of circumstances, is possible, Mr. Christensen and his co-authors say. Examples drawn from the developing world, past and present—including 19th-century America and postwar Japan and South Korea—illustrate the book’s central idea: that development takes root when innovation harnessed to the entrepreneur’s ambition pulls in the resources a society needs to become prosperous.
One example that the authors cite is Tolaram Group, a Singapore-based conglomerate that created the instant-noodle market in Nigeria, pushing out 4.5 billion packets annually and generating revenue of almost $1 billion a year. Sourcing, manufacturing, distributing and selling its Indomie-branded noodles required that Tolaram invest in a broad and deep logistics and distribution chain; create a retail network; develop specialized training; acquire its own electricity generation; build a water and sewage-treatment plant; and construct a deep-water port in the city of Lekki. Had Tolaram waited for the Nigerian government to address these infrastructure and institutional challenges before investing in the country, the company would still be waiting. Other examples include British businessman Mo Ibrahim’s pan-African Celtel, which built a cellphone network across 13 African countries and gained 5.2 million customers in six years, and India’s Narayana Health, which has brought the cost of open-heart surgery down to $1,000.
Some of the authors’ examples operate with an explicit social purpose, and plenty do not, but profit is what sustains all of them and makes their societal contributions sustainable. What the author describes and advocates is simply capitalism in action.
Not all innovation works this way, of course. Did the North American Free Trade Agreement have a retarding effect on Mexico by encouraging it to specialize in efficiency innovations and somehow leach out home-grown innovation? “We do not know the answers to all of the development puzzles in our world,” the authors admit. Instead of a book of glib answers, they present something much more powerful—a work of creative destruction for today’s failed development-policy paradigm.
Rupert Darwall is the author of “Green Tyranny: Exposing the Totalitarian Roots of the Climate Industrial Complex.”
This article appeared in the January 31, 2019, print edition of Wall Street Journal as ‘A Better Way To Fight Poverty.’