Any attempt to discuss the way in which railroads have promoted the rise of the American economy must assume some theory of economic evolution. The following analysis is based upon Schumpeter's theory of innovations. Briefly this theory holds that economic evolution in capitalistic society is started by innovation in some production function, that is, by new combinations of the factors in the economic process. These innovations may center in new commodities or new services, new types of machinery, new forms of organization, new firms, new resources, or new areas. As Schumpeter makes clear, this is not a general theory of economic, much less of social, change. Innovation is an internal factor operating within a given economic system while the system is also affected by external factors (many of them sociological) and by growth (which means, substantially, changes in population and in the sum total of savings made by individuals and firms). These sets of factors interact in economic change. “The changes in the economic process brought about by innovation, together with all their effects, and the response to them by the economic system” constitute economic evolution for Schumpeter.
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