SCHUMPETERIAN MO

OF ECONOMIC GROW
 INTRODUCTION

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

The Schumpeterian model of economic

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

Process of Production;

Dynamic Analysis of the Economy;

Trends of Growth;

The Demise of Capitalism;

 ROLE OF INNOVATION

Innovations may consist of:

The introduction of a new product

The introduction of new method of production

The opening up of a new market

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:
1 He must be having technical knowledge so that he could produce new
goods.
2
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

1 An entrepreneur innovates to earn profits.

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

3 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

1 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.
2
In order to break the circular flow ,the innovating entrepreneurs are
financed by bank-credit expansion.
3
Investment in innovation is risky, they must pay interest on it. Once the
new innovation becomes successful and profitable, other entrepreneurs
4 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 tire etc.
 CYCLIC PROCESS

1 Investment is assumed to be financed by creation of bank credit.

2 It increases money incomes and prices and helps to create a cumulative

expansion throughout the economy.

3 With the increase in purchasing power of the customers, the demand for the
products of the old industries increases to the supply.

4 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
5 After a period the new products start appearing in the market displacing the
old products and enforcing process of liquidation and readjustment.

6 The demand for old product is decreased. Their price fall. some are even
forced to run into liquidation.

7 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.
8
Depression entered.
5 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
6
The impacts are increasing in society’s income and consumption. This
phenomena will lead the entrepreneurs to increase the new capital.

induced investment – increasing of investment because of increasing in

income , production and profit.

autonomous investment – investments which determined by long-term

development, such as new resources found and technology which can
create reformation
NDS OF GROWTH IN THE
CHUMPETER’S MODEL

Creation of new products will lead to The economic development (booming

uncertainty among the entrepreneurs in period) will be followed by economic
terms investment and capital that are recession
needed for business development
Some entrepreneurs who cannot compete
Those entrepreneur who are able to create with those entrepreneurs whose have done
the new products and market will lead to reformation will subsequently failed in their
economic booming However, the business and lost their market and have to
equilibrium point is higher than the close their business.
economic recession period. With the new
equilibrium, the level of per capita income
is higher.
Like Karl Marx, Schumpeter also thinks TRENDS OF GROWTH IN T
that eventually the capitalism will come
to an end and it will be replaced by SCHUMPETER’S MODE
Socialism.

In this respect, he gives following

arguments:

Along with the evolution of capitalism the

entrepreneurs and their techniques of
production will get obsolete. The salaried The capitalism provides the right to speak
managers will take-over the charge of and write. The people will express their
industrial units in place of entrepreneurs. dissatisfaction against capitalism in tea-
houses, parks, hotels and in journals and
Along with the growth of capitalism the newspapers.
'Liberalism' will increase. This will weaken
the institution of 'Monarchy'. The In this way, the capitalism will finally
capitalistic class will get weaker, and it convert into socialism. Thus according to
will depend upon civil and military Schumpeter the capitalism will have a 'Self-
bureaucracy. In this way, an unrest will Demise".
develop in the society.
 CRITISICM

In Schumpeter Model 'the inventor and

innovator has been accorded as an
'Ideal Man'. But now a days the
inventions and innovations are the
1 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 behavior and monetary
Again, Schumpeter assigns top and fiscal measures.
importance to inventions and innovations
2
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
3 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 analyze 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 4
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
 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
civilization”.

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.
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