Schumpeter Theory of Economic Development

KRISHNA LALA

M.PHILL SEM II

DEPARMENT OF ECONOMICS & PLANNIG,

SCHOOL OF SOCIAL SCIENCES,

CENTRAL UNIVERSITY OF GUJARAT.

SHUMPETER’S THEOY OF ECONOMIC DEVELOPMENT

Introduction • Joseph Alois Schumpeter, Australian-American

Economist.• Book “The Theory of Economics Development, 1934” & “Business cycle, 1939”• The most influential economist of 20th century• His popularized term “Creative Destruction”• Introduce “Dynamics of Capitalist”• “Innovation” and “Entrepreneur”

Main Theory• Circular flow of economics life• Economics development as a discontinuous process• Importance of innovations• Role of entrepreneur • The crisis

Circular flow • The same product are produced every year in the same way means• all economic activities are repetitive and follow a familiar and routine course.• Demand and Supply are always equilibrium.• The optimum level of output.• Prices are equal to Average cost of production.• Introduction of innovations by entrepreneurs break circular flow.

Circular flow • There are two types of productive forces 1,partly material (Land and Labour)

2,partly immaterial (Technical facts and facts of social organization).• In Dynamic Analysis Schumpeter assigns greater importance to technical and social factors.

Production Function• Y=f(K,N,L,S,U)… (1)• K, produces means of productions• Rate of change in economic activity can be written as follows,

(2)•Where development by L & L is gradual effect and development by technology & socio culture is accelerate effect.

Production Function• Two classes influence on dynamic evolution of economy, effect of change in factor K,N,L availability which constitute growth components and S & U constitute development components• land is fixed and limited in supply• (3)• Population growth is exogenously determined L=f(Lt).. (4)• K, capital increases with increase into saving and profit.• In circular flow value of means of production are incorporated in it so profit are generated only through new innovations.

Production Function• Rate of capital accumulation depends upon rate of technological change,• (5)

• In this theory technological change is the first component of development and than socio cultural environment, change in socio cultural environment can be written as..• (6)

• Thus rate of change in output is..• (7)

Importance of innovations

• Is innovation and new combinations of productive factors.• Economics is assisted by technology process and innovations . • Innovations are take place in five different forms.

1,Introduction of a new commodity,

2,introduction of new method of production,

3,opening of a new market,

4,discovery of a new source of raw material and

5, change in the organization of industry.

Role of Entrepreneur• Development cannot take places spontaneously. It must be promoted by some agents within the system, Schumpeter called this agent “Entrepreneur” i.e. function is to initiate innovations.• Innovation means applying a discovery or innovation for economic purposes. The sole distinguishing character of an entrepreneur is that he is an innovator.• According to Schumpeter entrepreneur is not a capitalist, technician, profession or financier manager.• In order to perform his economic functions the entrepreneur requires 2 factors,

1,Technical knowledge

2,Bank credit

The Crisis• The progress of capitalism is characterized by cyclically induced rising levels of National and per capita income • The long run increase in National income goes distributed in favor of low income groups.• Schumpeter says that capitalist economies will not approach stationary state and expansion of output is geared to rate of innovation. Since Technical progress not subject to Decreasing Returns, a ceiling in per capita output is ruled out.• Yet Schumpeter predicted the decline of capitalism i.e. “”the crisis” Capitalism is super ceded by socialism by Following reasons,

The Crisis1,evolution of capitalism leads to decay of entrepreneur function. Entrepreneur replaced, bureaucracy which fails to do the function of entrepreneur.2,Technological progress, economies of scale in production and distribution, inevitable result is concentration of industry and big business. This leads capitalist to private property, shareholders become owners, they lack the initiative and drive of entrepreneurs.

3, The rise of trade unions destroys the free of contract.

4, Attitudes which are against the long run interests of capitalism also come up. Capitalist rationality and liberalism disappear.

5, The disintegration of family as a result of capitalist rationality discourages savings and capital forms.

6, Capitalism breeds a class of intellectuals who acute a social atmosphere hostile to existing social order.

This Results,•Weakening entrepreneurial class• Destruction of the institution of private property • Freedom of contract• Removal of protective political barriers • Declining of the driving force behind the capitalist progress.

Conclusion• Thus, Schumpeter wrote “there is inherent in the capitalist, a tendency towards self-destruction, those factors make not only the destruction of capitalist, but also for the emergency of a socialist civilisation”.• Hence, Schumpeter’s theory of Development states that given the rate of growth of population, the dynamic evolution of capitalist economy is determined by the rate of innovation, entrepreneurial talent and credit institutions. Innovation appear discontinuous swarms. • Therefore, Development occurs in cycles. The success of capitalism will eventually lead to its decay and downfall.