The document discusses Joseph Schumpeter's theory of economic development, which highlights the role of entrepreneurs in driving spontaneous and discontinuous economic changes through innovations. It explains how profits, credits, and interest are integral to this process and examines the cyclical nature of economic growth and crisis. Additionally, Schumpeter presents a pessimistic view on the eventual decay of capitalism due to factors such as the obsolescence of the entrepreneurial function and the destruction of institutional frameworks.

1. THE THEORY OF
ECONOMIC DEVELOPMENT
AN INQUIRY INTO PROFITS, CAPITAL, CREDIT, INTEREST, AND THE
BUSINESS CYCLE
PREPARED BY: SANDRA A. BONIFACIO

2. JOSEPH ALOIS SCHUMPETER
• an AUSTRIAN POLITICAL ECONOMIST.
• He write the book “ MAGNUS OPUS”, which was published in 1911 in
GERMANY and main parts of it was written on the Ukrainian ground,
when he was a professor at the Chernivtsi University. in the year
1934, the english edition appeared.
• the book is A CLASSICAL ANALYSIS OF CAPITALIST SOCIETY.

3. THE THEORY OF ECONOMIC DEVELOPMENT
• schumpeter proclaims that ECONOMICS IS A NATURAL SELF
- REGULATING MECHANISM WHEN UNDISTURBED BY “
SOCIAL AND OTHER MEDDLERS”.
• he argues that despite weaknesses, theories are based on
logic and provide structure for understanding fact.

4. THE THEORY OF ECONOMIC DEVELOPMENT
schumpeter assumes a perfectly competitive economy which
is in stationary equilibrium. in such a stationary state, there is
perfect competitive equilibrium. no profits, no interest rates,
no savings, no investments and no involuntary
unemployment. this equilibrium is characterized by the term
“circular flow” , continues to repeat itself every year. the same
products are produced every year in the same manner.

5. THE THEORY OF ECONOMIC DEVELOPMENT
economic development is “spontaneous and discontinuous
change in the channels of the circular flow, disturbance of
equilibrium, which forever alters and displaces the
equilibrium state previously existing”.
development is possible in carrying out of new combinations.
new combinations come about in the forms of INNOVATIONS.

6. innovations
an innovations may consists of:
• the introduction of the new products
• the introduction of the new method of production
• the opening up of a new market
• the conquests of a new sources of raw materials.
• the carrying out of a new organization of any industry like
the creation of monopoly.

7. innovations
according to schumpeter, it is the introduction of new product
and the continual improvements in the existing one’s that
lead to development.

8. the schumpeterian theory of economic
development

9. role of entrepreneur
• in the schumpeterian analysis of development,
entrepreneurs have to play the central role in the business
cycles. they initiate the economic development in the
spontaneous and discontinous manner. the cycling swings
are the cost of economic development under capitalism.

10. role of entrepreneur
• entrepreneurship is different from managerial activities. a
manager simply directs production under existing
techniques but entrepreneurship, requires the introduction
of something new.
• an entrepreneur is also different from a capitalist. the
capitalist simply furnishes the funds while entrepreneur
directs the use of the funds.

11. role of entrepreneur
in economic system, there is a high degree of risk, thus
entrepreneur is motivated:
a. the desire to find a private commercial kingdom.
b. the will to conquer and prove his superiority.
c. the joy of creating, getting things done or simply of
exercising one’s energy and ingenuity.

12. role of profits, credits and interest
• the role of profits:
- an entrepreneur innovates to earn profits.
- profits are conceived “as a surplus over costs: a difference
between the total receipts and out lay, as a function of
innovation”.
- profit arises due to dynamic changes resulting from an
innovation, they continue to exists till the innovation becomes
general.

13. role of profits, credits and interest
• schumpeter regards economic development as a dynamic
and discontinuous process. the society progresses through
trade cycles.
• in order to break the circular flow, innovating entrepreneurs
are financed by bank credit expansion.
• investment in innovation is risky, they must be paid bank
interest on it.

14. role of profits, credits and interest
• bank credit is an essential element of schumpeter’s model.
• according to schumpeter, the creation of bank credit is
assumed to accelerate money incomes and prices in the
economy.
• it creates a cumulative expansion throughout the economy.
the demands and purchase increases, the higher rates of
profits stimulate producers to raise investments by
borrowing from the banks.

15. role of profits, credits and interest
• the credit inflation starts with the entrance of new
entrepreneurs in the field of production, which
superimposes on the primary wave of innovations. it may be
called boom or prosperity period.

16. the business cycle or cyclical process
• schumpeter’s approach to business
cycle or crisis is historical, statistical
and analytical.
• he believes that business cycle or
crisis is not merely the result of
economic factors.
• he concludes that crisis is the
“process by which economic life
adapts itself to the new economic
conditions”.

17. the decay of capitalism
• the continuous technical progress results in an unbounded
increases in total and per capita output.
• the economic success of capitalism will eventually lead to its
decay.
• capitalism can maintain itself only so long as entrepreneurs
behave like knights and pioneers.
• schumpeter holds a very pessimistic view about the survival
of capitalism.

18. the decay of capitalism
schumpeter’s reasons for the disintegration of capitalism:
a. the obsolescence of entrepreneurial function -he observes
that the success of early captains of industry have made
innovation a routine activity. the new lords of business are
managers, depersonalised owners and private bureaucrats.

19. the decay of capitalism
schumpeter’s reasons for the disintegration of capitalism:
b. destruction of institutional framework - the tendency
towards concentration increases in the size of production
units destroy capitalisti institutions like private property and
freedom of contract.

20. the decay of capitalism
schumpeter’s reasons for the disintegration of capitalism:
c. destruction of protecting political strata - it will administer
the last blow to captalist system. the goup that protected
early capitalism politically is also destroyed. it is destroyed by
the royal power. merchants and industrialists became
economically powerful and they begin to dominate in political
field due to the progress of capitalism.

21. thank you