SCHUMPETERIAN MODEL OF ECONOMIC GROWTH

PRESENTED BY,

ARNAB PAL,

CSE-1,ROLL-73,

WBUT ROLL NO.-14800111024

TABLE OF CONTENTS

ECONOMIC GROWTH IN GENERAL

JOSEPH ALOIS SCHUMPETER

SCHUMPETER’S MODEL OF ECONOMIC GROWTH

ROLE OF INNOVATION

ROLE OF ENTREPRENEUR

ROLE OF PROFIT

BREAKING THE CYCLIC FLOW

CYCLIC PROCESS

TRENDS OF GROWTH IN SCHUMPETER’S MODEL

PREDICTION OF DECLINE OF CAPITALISM

CRITICISM OF THE THEORY

DIAGRAMATIC REPRESENTATION OF SCHUMPETER’S

MODEL

ECONOMIC GROWTH

Economic development is the development of economic wealth of countries or regions for the well-being of their inhabitants.

Economic Growth & development are two different terms used in economics. Generally speaking economic development refers to the problems of underdeveloped countries and economic growth to those of developed countries.

JOSEPH ALOIS SCHUMPETER

Joseph Alois Schumpeter (8 February 1883 – 8 January 1950) was an Austrian American economist and political scientist. He briefly served as Finance Minister of Austria in 1919. One of the most influential economists of the 20th century, Schumpeter popularized the term "creative destruction" in economics.

SCHUMPETER’S MODEL OF ECONOMIC GROWTH

Schumpeter Model of Economic Growth:

The Schumpeterian model of economic growth moves round the

inventions and innovations. This model is explained with the following: 

(1) Process of Production,

(2) Dynamic Analysis of the Economy,

(3) Trends of Growth,

(4) The Demise of Capitalism.

ROLE OF INNOVATION

An innovations may consist of:

1.The introduction of a new product 2.The introduction of new method of production 3.The opening up of a new market 4.The conquest of a new source of raw materials

According to Schumpeter ,it is the introduction of new product and the continual improvements in the existing ones that lead to growth and development.

ROLE OF ENTREPRENEUR Schumpeter says that 'Entrepreneur' is such a factor of production who

introduces new combinations of factors of production. He is neither a technician, nor he is a finance manager. He just makes inventions and innovations. He makes inventions just for the sake of inventions. However, he is also influenced by the desire of profit and socio-cultural set-up of the society. In 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. Not doubt, in short run the credit leads to create inflation in the economy, but still it encourages the inventions and innovations.

 

The above discussion reveals that in Schumpeter model, economic growth depends upon technical and technological conditions of the economy. Whereas the technological changes depend upon the activities of entrepreneurs; and the activities of entrepreneurs depend upon entry of new. entrepreneurs and creation of credit.

ROLE OF PROFITS

An entrepreneur innovates to earn profits.

Profits are conceived “as a surplus over costs :a difference between the total receipts and outlay –as a function of innovation

According to Schumpeter ,under competitive equilibrium the price of each product just equals its cost of production and there no profits. Profits arise due to dynamic changes resulting from an innovation. They continue to exist till the innovation becomes general.

BREAKING THE CIRCULAR FLOW Schumpeter’s 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.

CYCLIC PROCESS Investment 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 innovation

After 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.

Analysis begun with the assumption that country’s 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 society’s 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

TRENDS OF GROWTH IN THE SCHUMPETER’S 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.

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".

CRITICISM OF THE THEORY In 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 further says that economic fluctuations occur because of inventions and innovations. But it is not true. They come into being because of business expectations, psychological behaviour and monetary and fiscal measures.

 

Again, Schumpeter assigns top importance to inventions and innovations in respect of economic development. But in countries like India where there is shortage of funds and resources, inventions might not always be feasible.

 

Schumpeter depends upon credit creation for the sake of inventions. But it is objected by saying that in short run the Bank Credit may be helpful for industrial development. But in case of long run the bank loans will be inadequate for such development. In such situation, the industrial development will be depending upon sale of shares etc.

 

According to Meir and Baldwin it 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.

DIAGRAMATIC REPRESENTATION OF THE SCHUMPETERIAN MODEL

BIBLIOGRAPHY

OFFLINE SOURCES OF INFORMATION-

INTERNATIONAL ECONOMICS-J.E.CURRY

THE THEORY OF ECONOMIC DEVELOPMENT:AN ENQUIRY INTO PROFITS,CAPITAL,CREDIT,INTEREST & BUSSINESS CYCLE-J.A.SCHUMPETER

FUNDAMENTALS OF FINANCIAL MANAGEMENT-EUGENE BRINGHAM & JOEL F. HOUSTON

ONLINE SOURCES OF INFORMATION-

WIKIPEDIA

THE ECONOMIST

ECONOMICSCONCEPT.COM