The Schumpeterian Theory of Economic Growth and Development
THE SCHUMPETERIAN THEORY OF ECONOMIC GROWTH AND 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 saving, no investment and no involuntary unemployment. This equilibrium is characterized by what Schumpeter terms as “circular flow” which continues to repeat itself in the same manner year after year. In the circular flow, the same products are produced every year in the same manner. To Schumpeter, “a circular flow is a stream that is fed from continually flowing strings of labour, power and land, and flows in every economic period into the reservoir which we call income, in order to be transformed into the satisfaction of wants”. Development according to him is spontaneous and discontinuous change in the channel of the circular flow, disturbance of equilibrium, which for every alters and displaces the equilibrium state previously existing. These spontaneous and discontinuous changes in economic life are not forced upon it from without but arise by its own initiative from within the economy and appear in the sphere of industrial and commercial life. Development consists in the carrying out of the new combinations for which possibilities exists in the stationary state. New combinations come about in form of innovations.
Innovation: This may consist of, the introduction of a new product, a new method of production, opening up of a new market, conquest of a new source of supply of raw materials and carrying out of new organization of any industry like creation of a monopoly. According to Schumpeter, it is the introduction of a new product and the continual improvements in the existing ones that lead to development.
Role of innovator: Schumpeter assigns the role of innovators not to the capitalist but to the entrepreneur. An entrepreneur is the one who introduces something entirely new and is motivated by the joy of
Innovation: This may consist of, the introduction of a new product, a new method of production, opening up of a new market, conquest of a new source of supply of raw materials and carrying out of new organization of any industry like creation of a monopoly. According to Schumpeter, it is the introduction of a new product and the continual improvements in the existing ones that lead to development.
Role of innovator: Schumpeter assigns the role of innovators not to the capitalist but to the entrepreneur. An entrepreneur is the one who introduces something entirely new and is motivated by the joy of
References: 1. The Economics of Development and Planning: M.L Jhingan, 37th Edition.