schumpeterpresentation-120213195241-phpapp02-130222100513-phpapp02

8/13/2019 schumpeterpresentation-120213195241-phpapp02-130222100513-phpapp02

1/16

SCHUMPETERIAN MODEL OF

ECONOMIC GROWTH

PRESENTED BY,

ARNAB PAL,

CSE-1,ROLL-73,

WBUT ROLL NO.-14800111024


2/16

TABLE OF CONTENTS

ECONOMIC GROWTH IN GENERAL

JOSEPH ALOIS SCHUMPETER

SCHUMPETERS MODEL OF ECONOMIC GROWTH

ROLE OF INNOVATION

ROLE OF ENTREPRENEUR

ROLE OF PROFIT

BREAKING THE CYCLIC FLOW

CYCLIC PROCESS

TRENDS OF GROWTH IN SCHUMPETERS MODEL

PREDICTION OF DECLINE OF CAPITALISM

CRITICISM OF THE THEORY

DIAGRAMATIC REPRESENTATION OF SCHUMPETERS

MODEL


3/16

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 growthto those of developed countries.


4/16

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.


5/16

SCHUMPETERS MODEL OF ECONOMIC

GROWTH

Schumpeter Model of Economic Growth:

The Schumpeterian model of economic growthmoves round the inventions andinnovations. 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.


6/16

ROLE OF INNOVATION

An innovationsmay consist of:

1.The introduction of a new product2.The introduction of new method of production3.The opening up of a new market4.The conquest of a new source of raw materials

According to Schumpeter ,it is the introduction of newproduct and the continual improvements in theexisting ones that lead to growth and development.


7/16

ROLE OF ENTREPRENEUR

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

introduces new combinations of factors of production. He is neither atechnician, nor he is a finance manager. He just makes inventions andinnovations. He makes inventions just for the sake of inventions. However, he isalso influenced by the desire of profit and socio-cultural set-up of the society. Inorder 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. Notdoubt, in short run the credit leads to create inflation in the economy, but still itencourages the inventions and innovations.

The above discussion reveals that in Schumpeter model, economic growthdepends upon technical and technological conditions of the economy. Whereasthe technological changes depend upon the activities of entrepreneurs; and theactivities of entrepreneurs depend upon entry of new. entrepreneurs and

creation of credit.


8/16

ROLE OF PROFITS

An entrepreneur innovates to earn profits.

Profits are conceived as a surplus over costs :a difference

between the total receipts and outlayas 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.


9/16

BREAKING THE CIRCULAR FLOW

Schumpeters model starts with the breaking up of the circular flow with

an innovation in the form of a new product by an entrepreneur for thepurpose of earning profit.

In order to break the circular flow ,the innovating entrepreneurs arefinanced by bank-credit expansion.

Investment in innovation is risky, they must pay interest on it. Once thenew innovation becomes successful and profitable, other entrepreneursfollow 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 ofnew investments in the construction of highways ,rubber tyre etc.


10/16

CYCLIC PROCESS

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

It increases money incomes and prices and helps to create a cumulativeexpansion throughout the economy.

With the increase in purchasing power of the customers, the demand forthe 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 issuperimposed or the primary wave of innovation

After a period the new products start appearing in the market displacingthe 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 quantityof money is decreased and prices tends to fall. profit decline. Uncertainty&the impulse for innovation is reduced.

Depression entered.


11/16

Analysis begun with the assumption that countrys economic performance is in

rigid condition, i.e., there are no population growth and net investment, and highlevel of unemployment. Some entrepreneurs committed to reformation and

followed by other entrepreneurs until there is an increase in investment

The impacts are increasing in societys income and consumption. This

phenomena will lead the entrepreneurs to increase the new capital.

(a)induced investmentincreasing of investment because of increasing inincome , production and profit.

(b)autonomous investmentinvestments which determined by long-termdevelopment, such as new resources found and technology which can createreformation


12/16

TRENDS OF GROWTH IN THE

SCHUMPETERS MODEL

The economic development (booming period) will be followed byeconomic recession

Some entrepreneurs who cannot compete with those entrepreneurswhose 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 theentrepreneurs in terms investment and capital that are needed for

business development

Those entrepreneur who are able to create the new products andmarket 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.


13/16

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 willexpress 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".


14/16

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 ofindustrial concerns. Schumpeter further says that economic fluctuations occurbecause of inventions and innovations. But it is not true. They come into beingbecause of business expectations, psychological behaviour and monetary and fiscalmeasures.

Again, Schumpeter assigns top importance to inventions and innovations in respectof 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 isobjected by saying that in short run the Bank Credit may be helpful for industrialdevelopment. But in case of long run the bank loans will be inadequate for suchdevelopment. In such situation, the industrial development will be depending uponsale of shares etc.

According to Meir and Baldwin it is wrong to say that society, will eventually movetowards socialism. As if we analyse Europe and America like capitalist countries theyhave a higher degree of industrial development. They have a right to speak andwrite. But till now no possibility has emerged whereby the rich capitalist countrycould turn towards socialism. While the reverse has occurred and the socialistscountries are converting themselves into 'Market Economies', after the

disintegration of Soviet Union.


15/16

DIAGRAMATIC REPRESENTATION OF THE

SCHUMPETERIAN MODEL


16/16

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

Date post:	04-Jun-2018
Category:	Documents
Upload:	muntaquir
View:	217 times
Download:	0 times

schumpeterpresentation-120213195241-phpapp02-130222100513-phpapp02

Documents