KRISHNA LALAM.PHILL SEM IIDEPARMENT OF ECONOMICS & PLANNIG,SCHOOL OF SOCIAL SCIENCES,CENTRAL UNIVERSITY OF GUJARAT.SHUMPETER’S THEOY OFECONOMIC DEVELOPMENT
Introduction• Joseph Alois Schumpeter, Australian-AmericanEconomist.• Book “The Theory of Economics Development, 1934” & “Businesscycle, 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 androutine 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 andLabour)2,partly immaterial (Technical facts and facts of socialorganization).• In Dynamic Analysis Schumpeter assigns greater importance totechnical 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 bytechnology & socio culture is accelerate effect.
Production Function• Two classes influence on dynamic evolution of economy, effect ofchange in factor K,N,L availability which constitute growthcomponents 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 itso profit are generated only through new innovations.
Production Function• Rate of capital accumulation depends upon rate of technologicalchange,• (5)• In this theory technological change is the first component ofdevelopment and than socio cultural environment, change in sociocultural 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 and5, change in the organization of industry.
Role of Entrepreneur• Development cannot take places spontaneously. It must bepromoted by some agents within the system, Schumpeter calledthis agent “Entrepreneur” i.e. function is to initiate innovations.• Innovation means applying a discovery or innovation for economicpurposes. The sole distinguishing character of an entrepreneur isthat 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 entrepreneurrequires 2 factors,1,Technical knowledge2,Bank credit
The Crisis• The progress of capitalism is characterized by cyclically inducedrising levels of National and per capita income• The long run increase in National income goes distributed in favorof low income groups.• Schumpeter says that capitalist economies will not approachstationary state and expansion of output is geared to rate ofinnovation. Since Technical progress not subject to DecreasingReturns, 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 ofentrepreneur.2,Technological progress, economies of scale in production and distribution,inevitable result is concentration of industry and big business. This leadscapitalist to private property, shareholders become owners, they lack theinitiative 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 alsocome up. Capitalist rationality and liberalism disappear.5, The disintegration of family as a result of capitalist rationalitydiscourages savings and capital forms.6, Capitalism breeds a class of intellectuals who acute a social atmospherehostile 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, atendency towards self-destruction, those factors make not only thedestruction of capitalist, but also for the emergency of a socialistcivilisation”.• Hence, Schumpeter’s theory of Development states that given therate of growth of population, the dynamic evolution of capitalisteconomy is determined by the rate of innovation, entrepreneurialtalent and credit institutions. Innovation appear discontinuousswarms.• Therefore, Development occurs in cycles. The success of capitalismwill eventually lead to its decay and downfall.