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Innovation Economics :-A new belief / theory which revolves
round innovation being the main cause for the trade cycle.
Propounded by Mr J.A. Schumpeter - around 15 years back.
Knowledge , technology , entrepreneurship and innovation are
positioned at the centre of the model
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JOSEPH ALOIS SCHUMPETERJoseph Alois Schumpeter(8 February 1883 8
January 1950)was anAustrian Americaneconomistandpolitical
scientist. He briefly served asFinance Minister of Austriain
1919
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SCHUMPETERS MODEL OF ECONOMIC GROWTH
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ROLE OF INNOVATION An innovations may consist of: 1.The
introduction of a new product 2.The introduction of new method of
production3.The opening up of a new market 4.The conquest of a new
source of raw material According to Schumpeter ,it is the
introduction of new product / process and the continual
improvements in the existing ones that lead to growth and
development.
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ROLE OF ENTREPRENEURSchumpeter identifies entrepreneurial profit
as the prime motivatorthe premium put upon successful innovation.
Schumpeter says that 'Entrepreneur' is such a factor of production
who introduces new combinations of factors of productionIn order to
perform his economic functions the entrepreneur is need of two
things: (i) He must be having technical knowledge so that he could
produce new goods. (ii) He could easily get the funds. In this
respect, credit plays an important role. Because of credit, an
entrepreneur gets a command over factors of production.
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BREAKING THE CIRCULAR FLOWSchumpeters model starts with the
breaking up of the circular flow with an innovation in the form of
a new product by an entrepreneur for the purpose of earning
profit.
In order to break the circular flow ,the innovating
entrepreneurs are financed by bank-credit expansion.
Investment in innovation is risky, they must pay interest on it.
Once the new innovation becomes successful and profitable, other
entrepreneurs follow it.
Innovations in one field may induce other innovations in related
fields. The emergence of motor car industry may in, in turn
,stimulate a wave of new investments in the construction of
highways ,rubber tyre etc.
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CYCLIC PROCESSInvestment is assumed to be financed by creation
of bank credit.It increases money incomes and prices and helps to
create a cumulative expansion throughout the economy.With the
increase in purchasing power of the customers, the demand for the
products of the old industries increases to the supply.Price rise
,profit increase and old industries expand by borrowing from the
banks. It induces a secondary wave of credit ,inflation which is
superimposed or the primary wave of innovationAfter a period the
new products start appearing in the market displacing the old
products and enforcing process of liquidation and readjustment.The
demand for old product is decreased. Their price fall. some are
even forced to run into liquidation.As though innovators start
repaying bank loans out of profits, the quantity of money is
decreased and prices tends to fall. profit decline. Uncertainty
&the impulse for innovation is reduced.Depression entered.
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Analysis begun with the assumption that countrys economic
performance is in rigid condition, i.e., there are no population
growth and net investment, and high level of unemployment. Some
entrepreneurs committed to reformation and followed by other
entrepreneurs until there is an increase in investment
The impacts are increasing in societys income and consumption.
This phenomena will lead the entrepreneurs to increase the new
capital.
(a)induced investment increasing of investment because of
increasing in income , production and profit.
(b)autonomous investment investments which determined by
long-term development, such as new resources found and technology
which can create reformation
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TRENDS OF GROWTH IN THE SCHUMPETERS MODEL
The economic development (booming period) will be followed by
economic recession
Some entrepreneurs who cannot compete with those entrepreneurs
whose have done reformation will subsequently failed in their
business and lost their market and have to close their
business.
Creation of new products will lead to uncertainty among the
entrepreneurs in terms investment and capital that are needed for
business development
Those entrepreneur who are able to create the new products and
market will lead to economic booming However, the equilibrium point
is higher than the economic recession period.With the new
equilibrium, the level of per capita income is higher.
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PREDICTION OF THE DEMISE OF CAPITALISM
Like Karl Marx Schumpeter also thinks that eventually the
capitalism will come to an end and it will be replaced by
Socialism.In this respect, he gives following arguments:
(i) Along with the evolution of capitalism the entrepreneurs and
their techniques of production will get obsolete. The salaried
managers will take-over the charge of industrial units in place of
entrepreneurs.(ii) Along with the growth of capitalism the
'Liberalism' will increase. This will weaken the institution of
'Monarchy'. The capitalistic class will get weaker, and it will
depend upon civil and military bureaucracy. In this way, an unrest
will develop in the society.(iii) The capitalism provides the right
to speak and write. The people will express their dissatisfaction
against capitalism in tea-houses, parks, hotels and in journals and
newspapers.In this way, the capitalism will finally convert into
socialism. Thus according to Schumpeter the capitalism will have a
'Self-Demise".
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CRITICISM OF THE THEORYIn Schumpeter Model 'the inventor and
innovator has been accorded as an 'Ideal Man'. But now a days the
inventions and innovations are the routine activities of industrial
concerns. Schumpeter regards innovation as the main cause of
economic developmentToo much importance to bank -creditIt is wrong
to say that society, will eventually move towards socialism. As if
we analyse Europe and America like capitalist countries they have a
higher degree of industrial development. They have a right to speak
and write. But till now no possibility has emerged whereby the rich
capitalist country could turn towards socialism. While the reverse
has occurred and the socialists countries are converting themselves
into 'Market Economies', after the disintegration of Soviet
Union.
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DIAGRAMATIC REPRESENTATION OF THE SCHUMPETERIAN MODEL
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BIBLIOGRAPHYOFFLINE SOURCES OF INFORMATION-INTERNATIONAL
ECONOMICS-J.E.CURRYTHE THEORY OF ECONOMIC DEVELOPMENT:AN ENQUIRY
INTO PROFITS,CAPITAL,CREDIT,INTEREST & BUSSINESS
CYCLE-J.A.SCHUMPETERFUNDAMENTALS OF FINANCIAL MANAGEMENT-EUGENE
BRINGHAM & JOEL F. HOUSTON
ONLINE SOURCES OF INFORMATION- WIKIPEDIA THE ECONOMIST
ECONOMICSCONCEPT.COM