Fritz Redlich on Entrepreneurship (1)

Fritz Redlich was a unique scholar of entrepreneurship. He is little known now, but for a few decades after World War II, he was an intellectual force that connected to important thinkers such as Joseph Schumpeter and Alfred Chandler. Moreover, his training in Germany had connected him to Max Weber, Wilhelm Dilthey, and Werner Sombart. This foundation drove the nature of his work, which I will characterize, with my characteristic imprudence, as business history with the characteristic openness to social science and philosophy that Schumpeter appreciated about the Youngest German historical School.

For more of Redlich’s personal history, one should read the eulogies prepared by Kenneth Carpenter and Alfred Chandler [“Fritz Redlich: Scholar and Friend,” Journal of Economic History 39(4) (December 1979): 1003-07] and Charles Gaston Arcand, Jr. [“Fritz Redlich, 1892–1978: The Man and the Scholar,” American Journal of Economics and Sociology 40(2) (April 1981): 217-21]. There are several interesting personal points, including Chandler’s story of how Redlich virtually unearthed all of the sources to complete his dissertation.

In 1952, Redlich was invited by Arthur H. Cole (Harvard Business School and the Baker Librarian) to join the Research Center in Entrepreneurial History, which Cole had founded along with Schumpeter in 1948. Redlich had been working for federal and state housing authorities in Boston and was an habitué of the Kress (economics) and Baker (business) libraries. He was known to the Harvard economists; he was part of the German emigrant group that Frank Taussig had recruited in the 1930s. Alas, while Redlich had completed his PhD in economics on the eve of WWI and wrote his Habilitationsschrift in 1935, current events kept him from obtaining a professorship in Europe. As a consequence, he couldn’t get the faculty appointment in the US that he sought.

The Research Center was an active place. It published a journal, Explorations in Entrepreneurial History, and fomented some of the most interesting studies of entrepreneurship in the developed world and how that history was, and was not, echoed in the postwar era in the developing economies. Fritz Redlich was an intellectual leader in this organization; Chandler calls him “the major intellectual force.” Redlich completed much of his work on characterizing entrepreneurs and entrepreneurial activity between 1952 and 1958, when the Center closed due to lack of funding. A significant preoccupation was improving upon Schumpeter’s creative destruction as a way to define entrepreneurial activity.

In this post, I will consider one of Redlich’s lines of inquiry: the nature of entrepreneurial innovation. I will consider in other posts his work on taxonomies of entrepreneurs, including the distinctions between “ideal” and “real” types in the development of entrepreneurial theory.

Redlich was profoundly affected by Schumpeter, but was unafraid of saying that the latter’s concept of “creative destruction” was incomplete and that his ideal type of creative entrepreneur needed more elaboration. One paper makes the distinctions between the creative (Schumpeterian) entrepreneur and others. The creative entrepreneur is a “global” innovator in Redlich’s taxonomy and he uses examples from manufacturing and banking to illustrate. These innovations are copied by others in different geographical markets or in different industries and represent an innovation in that context. These are called derived innovations. As the derived innovations become adopted more widely in the local/regional context, they are simply copies — without any measurable innovation — and eventually they are routine. In any case, Redlich’s training in case studies always grounded his analyses in the empirics of using taxonomies. Consider this quote.

“Just as it is difficult to draw clear dividing lines between the creative entrepreneur and the entrepreneur pure and simple, (i.e., the decision-maker in the enterprise) so it is actually impossible to draw lines of demarcation between innovation and re-innovation, between primary and derivative innovation, between derivative innovation and copying, and between copying and routine. The innovating element in an innovation becomes thinner and thinner the further we descend from genuine innovation to routine, until it becomes nil.” (p. 290)

But rather than throwing in the towel, he brings a second type of innovation into play: subjective innovation. If the creative entrepreneur or the semi-creative (derivative) entrepreneur are innovating in a way that is novel to their experience, they are subjective innovators. They are doing something they had not done before, which requires judgment, alertness, and some of the other elements of a subjective decision process. This is an interesting turn on the normal use of subjectivity in entrepreneurship, though I propose that it is completely consistent with the discussion of subjectivism and entrepreneurship by Foss, Klein, Kor, and Mahoney (2008).

He goes on to describe why derivative entrepreneurship matters: it creates value, even if it is not as boldly done as Schumpeter’s uber-innovator.

“The following case of subjective innovation, non-innovating in character, has come under my observation: In a Vermont village a run-down drug store was taken over by a young man who shortly thereafter decided to buy an ice cream machine. Tens of thousands of them are in operation all over the country and many have been sold to drug stores, groceries, restaurants, etc., in the state. There is in fact an elaborate business organization active in providing the owners of such machines with materials. But there was none in this particular area before. For the economist the young entrepreneur simply copied. But in fact his action led to opening up a new market. Ice cream comes out of the machine so much colder than the ice cream delivered to stores by manufacturers that unlike the latter it can be transported to the farms. Thus the farmers in the area got into the habit of buying ice cream to take home. This new market made it possible to amortize the machine in less than twelve months instead of the expected three years and made the subjective innovator of non-innovating character one of the high-income men of the township.” (p.289)

Redlich then proposes that there are positive benefits to the economy from all the levels of innovation, derived and or primary, introduced by creative and semi-creative subjective entrepreneurs. The heroic Schumpeterian innovations lead to economic development (Schumpeter’s conception); the others lead to economic growth. And the latter is the stuff of most economic analysis.

Redlich, Fritz. 1951. “Innovation in Business: A Systematic Presentation,” American Journal of Economics and Sociology 10(3) (Apr., 1951): 285-91.

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6 Responses to Fritz Redlich on Entrepreneurship (1)

  1. Peter Klein says:

    Great post!

    Bert Hoselitz’s important “Early History of Entrepreneurial Theory” appeared in Explorations in Entrepreneurial History. The periodical is certainly not as well known as it deserves to be.

    The ice-cream story reminds of the confusion, so common in the academic literature, between innovation in the economic sense and innovation in the engineering sense. (“Consumers preferred the longer recording times and lower prices of VHS machines, but Betamax machines were _really_ much more innovative!”) It also called to mind a passage from the infamous RIM open letter that circulated last week: “25 million iPad users don’t care that it doesn’t have Flash or true multitasking, so why make that a focus in our campaigns? . . . a product’s technical superiority does not equal desire, and therefore sales… How many Linux laptops are getting sold? How did Betamax go? My mother wants an iPad and iPhone because it is simple and appeals to her. Powerful multitasking doesn’t.”

  2. Randy says:

    Peter, I am formulating a short post on the over links between Redlich and Hoselitz. They actually referenced each other about a decade apart.

  3. Pingback: Two posts on the History of Entrepreneurship Thought — elsewhere « Randall Westgren's pages

  4. Why is Redlich forgotten today? Has his thinking been overturned or refuted?

    Ripe for a revival? How was he influenced by Sombart?

    cambridgeforecast

    • Randy says:

      @cambridgeforecast: I think Redlich is forgotten for a couple of “micro” and “macro” factors. At the micro level, Redlich lost his academic connections when the Research Center in Entrepreneurial History closed. He eventually self-published a collection of his papers in English, but the German papers haven’t been translated. It takes some effort to track down copies of much of what he wrote. There are some publications available through JSTOR, but others are not available. At the macro level, Redlich was publishing his historical analyses when the entrepreneurship literature was being over-run with psychological analyses of the entrepreneur (cf. David McClelland), which crowded out functional analyses.

      Because Redlich was in Berlin during his studies, he would have had to work hard to avoid the “younger” and “youngest” historical schools, including Sombart. Somewhere there may be a record of shared seminars, but I don’t have it.

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