Industrial and Corporate Change, Volume 15, Number 2, pp. 353–371 doi:10.1093/icc/dtl003 Advance Access published March 22, 2006 © The Author 2006. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved. Schumpeter, Winter, and the sources of novelty Markus C. Becker, Thorbjørn Knudsen, and James G. March This article examines what Joseph Schumpeter said on the emergence of novelty in economic institutions, what Sidney Winter did to build on and deviate from that foundation, and what puzzles remain. Winter built a framework for answers to a puzzle that Schumpeter could not solve—how novelty emerges in a system based on routines. He identified two major sources of novelty: the combinatorics of routines and the unreliability of routine imitation. As possible inspirations for further progress in evolutionary thought, the article points to ideas from chemis- try, linguistics, and the diffusion of fashion for elaborations of these key Winte- rian insights. 1. Introduction In his brilliant and pioneering paper on a neo-Schumpeterian theory of the firm, Sidney Winter anticipated many of the subsequent developments of an evolutionary approach to understanding firms and markets (Winter, 2006). On this occasion, we want to acknowledge the debt of the field to Sidney Winter by reviewing briefly what Joseph Schumpeter said, what Winter did to build on and deviate from that founda- tion, and what puzzles the two of them have left for the rest of us. It is a journey worthy of considerably more elaboration than we can provide here. The resolution of all unresolved issues is left to the reader as an exercise. 2. A routine-based firm of limited rationality 2.1 Behavior as following routines A conception of a routine-based, limited rationality is fundamental to an understand- ing of firms as developed by both Schumpeter and Winter. As Winter noted and applauded, Schumpeter saw the firm as embedded in a history and future with dimen- sions of space and time that make talk of an optimum frivolous and rational calcula- tion of little value. As an alternative to assuming that firms were guided by explicit rational calculations, Schumpeter saw most of the behavior in business firms of his time as following routines, rules, and procedures that provided reliable responses to